GM Is a 'Best Idea,' Morgan Stanley Says

BOSTON ( TheStreet) -- General Motors ( GM) stock has rebounded 11% from its 52-week low, but remains in deep-discount territory, even as analysts boost their earnings forecasts.

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 labor negotiations and the deployment of GM's fortress balance sheet." Morgan Stanley isn't alone. Three-quarters of analysts rate GM's stock "buy." But, Morgan Stanley has the highest 12-month price target, at $50, suggesting a 60% return. The next-highest target, at $49, is offered by Credit Suisse.

Morgan Stanley predicts that four catalysts in the second half of 2011 will attract investors to the stock: (1) Positive earnings revisions. Strong demand growth, offset partially by high inventory, has led Morgan Stanley to estimate $5.20 of 2011 earnings, giving the stock a current-year multiple of just 5.9. (2) Uncertainty stemming from the Treasury's additional half-a-billion share sale and a new United Auto Workers' contract will be alleviated by mid-September. (3) The European Opel unit may gain more market share than currently expected. (4) A product cycle revival is going to coincide with a higher SAAR, elevating sales.

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