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FP Trading Desk submits: Shares of both General Motors Corp. (GM) and Ford Motor Co. (F) have seen healthy gains since late last year, but Merrill Lynch analyst John Murphy thinks they are now heading in opposite directions. He upgraded his recommendation on GM shares to “buy” from “sell” with a US$50 price target, representing upside of more than 35%.
This optimism is partly due to the possibility of a favorable retiree health care deal with unions as well as the company’s largest-ever US$17-billion U.S. pension plan surplus, Mr. Murphy said in a research note, adding that he considers GM to be a at much better point in its product cycle than Ford.
He downgraded his rating on Ford shares to “sell” from “neutral” following their gain of almost 30% since hitting a low in mid-December.
“Although Ford, as are many other auto stocks, is trading on headline driven sentiment, valuation does matter and by our estimates it is stretched," Mr. Murphy said, adding that the market seems to be anticipating a significant earnings recovery by 2009 or 2010, but is failing to price in shorter-term risk and the possibility that this rebound will not occur.
On the upside, he thinks Ford CEO Alan Mulally is making progress and could announce a new restructuring plan in the near term.
Ford shares could also stand to gain if the company’s new union contract in September is beneficial or if the automaker sells additional assets beyond its Aston Martin division.
However, as recent history has shown, it may be wise for risk-averse investors to avoid both of these companies.