But is Tata Motors a good investment today?
This morning, analysts at Credit Suisse answered the question with a resounding "yes," announcing they are upgrading Tata Motors stock from neutral to outperform, and assigning a 720 Indian rupee ("Rs720") price target to Tata Motors stock. That works out to $10.81 per share, which -- according to Credit Suisse -- represents about "40% upside" from the stock's price today.
Here are three things you need to know about this rating.
Luxury car brands -- from India. Image source:
1. India is not America, and a "share" is not an ADR
Tata Motors stock trades on the NYSE as an American Depositary Receipt, which is an instrument that bundles local Indian shares and sells them as a group to American investors. Specifically, every one Tata Motors ADR bundles five shares of Tata Motors common stock for investment -- so buy an ADR, and you will own five shares.
That being the case, when Credit Suisse says it thinks Tata Motors stock is worth the equivalent of $10.81, what it's really saying is that the Tata Motors ADRs listed by your discount broker are worth $54.05 -- or about 38% more than what those ADRs cost today. And voila, there's Credit Suisse's promised "40% upside."
2. Tata evolves
Why does Credit Suisse think Tata Motors stock -- best known as a maker of Indigo sedans and even tinier Nano hatchbacks -- worth such a luxurious price tag? Primarily because of its luxury brands, Jaguar and Land Rover.
After all, according to
3. How big of a deal is this for Tata?
Credit Suisse believes that the falling value of the British pound has the potential to boost those profits even more -- in fact, by as much as 50% per car sold. Even with flat sales, therefore, this company that earned just under $3 billion in operating profit last year could earn as much as $4.5 billion if things play out as Credit Suisse expects them to.
The most important thing: Valuation
Does all of this make Tata Motors a buy? Well, let's consider: $3 billion was Tata's operating profit last year, but on the bottom line, the company's net earnings have amounted to just $1.2 billion over the past year. On a $26 billion market capitalization, that works out to a 21.7 price-to-earnings ratio, which seems pretty pricey for an automaker. (Ford, the company that Tata bought JLR from eight years ago, costs only 6.3 times earnings, for example.)
Furthermore, according to S&P Global estimates, most analysts expect Tata Motors' profits to grow at 21% annually over the next five years. That sounds good -- paying 21.7 times earnings for 21% profits growth, with the potential for even more growth if Credit Suisse's predictions pan out. It's a fair price to pay.
But once you notice that these same analysts are looking for 15% annualized profits growth at Ford, I have to say that paying 6.3 times earnings for 15% growth is even more attractive. Long story short, I agree with Credit Suisse that Tata Motors has potential, but I still think Ford stock is a better deal.
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