A Good Long Term Bet

Sheetal is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

All is not well with Tata Motors (NYSE: TTM). The company posted a decline of 29.50 percent in its total vehicle sales in January 2013, while its cumulative sales (including exports) witnessed a 5 percent decline from April 2012 to January 2013. If such news was not enough for investors, the automaker also said that its EBITDA will be around that of the last two quarters and that its capital expenditures will contain “greater percentage of its revenue,” thereby resulting in a negative cash flow for the fiscal third quarter ended Dec 31.  This has definitely slashed the hopes of many, which become evident when ADRs dropped 9.9% to $26.99 during that time.

The situation is definitely not the same as that of other players in the market. Toyota Motor Corp (NYSE: TM) regained it No. 1 position from General Motors Company in sales by selling 9.75 million vehicles globally in 2012. It also reported a 22.2% rise in EPS in the third quarter of fiscal 2013 ended Dec. 31, 2012.  Ford Motor Company (NYSE: F) reported a 17.6% rise in EPS to 40 cents in the third quarter of the year, from 34 cents a year ago.

The question comes down to if Tata Motors is still a good pick?

With the revival of two money-losing British Luxury brands, Jaguar and Land Rover, after their acquisition in March 2008 from Ford, Tata Motors has dispelled the fears of many who believed that this Indian automaker would tarnish the brand name. Despite all doubt, Tata not only successfully completed the acquisition when the world’s economy was crippled with recession, but over the past three years its American depositary shares also gave a return of 26%, compared with 14% for the S&P 500.The company made an investment of $3.2 billion in the Jaguar Land Rover division. The profits quintupled to $2.8 billion from 2012 to 2012, and it alone generates more than three-quarters of Tata's EBITDA. Furthermore, it is likely to bring in sales of $39.8 billion, which is two-thirds of the total expected amount for fiscal 2013.

Tata Motors has affirmed plans to introduce six new products in the domestic passenger car market by the end of 2013, which will enable the company to refurbish its present vehicle portfolio. In the JLR division, Jaguar recently introduced a special edition of the XKR. The company also has plans to launch the XJ Ultimate and XF S 2.2 by December or the start of next year. The assembly of the XF S will also start soon. For the 3 Series competition, the company has already started the testing and will launch soon in a couple of years. These plans are expected to improve its profitability and sales growth.

Financial Outlook

Tata Motor’s capital spending is likely to be about 2.75 billion pounds in 2013, compared to 2 billion pounds last year. The unfavorable exchange rate is yet another cause of worry. Tata also announced that in order to develop products, meet the tougher requirements of emission regulations, and to increase its capacity in China, it would spend $4.3 billion, which is $1.2 billion more than expected. Altogether the company’s cash flow is likely to be negative in 2014 and its EBITDA is expected to get cut by 7%-10% due to increased debts. To add to this, the analysts have also predicted that profits will fall by 10%, to $2.6 billion, i.e. $3.29 per American depositary share.

For Ford, total profits rose 15.6% to $1.6 billion from $1.4 billion a year ago.  As for Toyota, the consolidated revenue projection for fiscal 2013 reflects an expected increase of 17.3% from previous fiscal. The operating income guidance is expected to be up by 223.4% and net income by 203.3% for the fiscal year.

Bottom Line

Tata Motors, like many other automakers, made a comeback since the recession, with its stock showing a double-digit increase of 15%, whereas its competitor, Toyota, is up by 30%. And despite all setbacks, it is expected that Tata Motors within the next 18 months could narrow its gap with the likes of BMW and Daimler, offering 25% upside in the stock. Hence, Tata Motors may not be a safe short term bet, but definitely a very good long term bet. The short term trader should exit immediately, as the share price may fall down due to expected negative cash flows and reduced EBITDA. Regarding Toyota and Ford, both have shown great results. But, for the short term, both the companies retain a rating of Sell.

sheetal11 has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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