BusinessWeek, on Tuesday, broke a story about the company's channel stuffing, or flooding of dealers' inventory to goose profits. Betting on a strong rally in SAAR, or the seasonally adjusted annual rate, for cars, some dealers now have excess inventory, presenting risk to GM, which may have difficulty maintaining its sales and profit levels.
For investors, or potential investors, in GM, this isn't news. Bears have been touting this practice for months as a reason to avoid the stock. Along with souring economic data, channel stuffing is a relevant counterargument to the bulls. Nevertheless, savvy investors know to build positions amid negative news flow because once it dissipates, stocks tend to rise.
Regardless of channel stuffing, GM remains a compelling long-term value, selling for a 2011 price-to-earnings ratio of 7.8 and a free-cash-flow multiple of 8.3, 49% and 75% automobile-peer discounts. Yesterday, Morgan Stanley added GM to its Best Idea List, which comprises just a handful of the bank's favorite risk-adjusted investments. It also upgraded its auto-industry view to "attractive." GM replaced Ford (F) as the bank's "top overall pick."Still, Morgan Stanley rates Ford "overweight." It says GM "offers a powerful combination of positive near-term earnings revisions and negative investor sentiment, held up by open-ended questions surrounding the U.S. Treasury hangover, UAW
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