U.S. Steel
In a column last week, I laid out the reasons I don’t think U.S. Steel stock is “cheap enough to deserve your hard-earned investing dollars.” Yet if you recall, USX fared pretty well in comparison with the other steel stocks that got upgraded last week. Coincidentally, it also compares pretty favorably with Navistar International Corp (NYSE:NAV).
USX, after all, sports a similar market cap ($3 billion) to Navistar. It also boasts faster growth (8%), free cash flow nearly twice as great ($412 million), and a 0.33 enterprise value-to-sales ratio. Although carrying a somewhat higher debt load, USX’s ability to generate cash profit at nearly twice the rate Navistar does gives the stock a much better price-to-free cash flow ratio (7.3 versus 13.5). USX’s faster growth rate and modest dividend yield of 1%, where Navistar pays nothing, add up to a pretty strong case in favor of the stock: Simply put, if Wall Street thinks Navistar deserves an upgrade, USX deserves it more.
Ford Motor Company (NYSE:F)
Last but not least, we come to a bit of an odd man out: Ford Motor. At first, Ford appears to fail our screen for low enterprise value-to-sales ratios. At an even 1.0 EV/S, Ford appears to cost fully twice as much as Navistar International Corp (NYSE:NAV) — but looks can be deceiving.
As Ford is quick to point out, the key reason its stock looks expensive when valued on “enterprise value” is that the company’s hybrid nature — half manufacturer, half bank — means financial websites count debt held by the company’s auto finance division as debt of the whole company. If you buy this argument, therefore, and agree not to hold Ford Credit’s debt against it, then the company’s EV/sales ratio rapidly drops below 0.6 — not significantly greater than what Navistar costs.
For the record, I’m still not sure I do buy this argument. To my mind, debt is debt, and Ford Credit debt is, by definition, Ford debt. That said, when viewed in the light most favorable to it, I admit there’s a case for arguing that Ford is attractive at 9.1 times earnings, an 11% growth rate, and a 3.2% dividend yield. So yes, I guess you can call Ford cheap, too … so long as you don’t mind an $80 billion debt load.
Foolish takeaway
Which company will be next to score an upgrade after Navistar? Will any of them? There’s no way of knowing, because, to be perfectly blunt, Wall Street’s not always consistent in how it hands out “buy” ratings. But one thing’s for sure: These companies all seem to meet the test that Jefferies laid down for Navistar International Corp (NYSE:NAV). Any one of them could be next to win the Wall Street lottery.
The article This Just In: Upgrades and Downgrades originally appeared on Fool.com and is written by Rich Smith.
Fool contributor Rich Smith has no positions in the stocks mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he’s currently ranked No. 331 out of more than 180,000 members.The Motley Fool recommends Ford and owns shares of Ford and JPMorgan Chase.
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