This afternoon we are making four ratings changes:
Raising our price target on MolsonCoors (TAP) from 59 to 69
The company continues to make progress with its new product development and its efficiency initiatives, and is likely to see additional volume growth as its geographic markets fully open following the pandemic. TAP shares still do not adequately reflect the company’s value and earning potential. We are raising our price target from 59 to 69.
Raising our price target on General Motors (GM) from 62 to 69
General Motors’ fundamentals remain robust, even as its core earning power (gas-powered trucks and cars) is suppressed due to the chip shortage. EV competition from start-ups is fading, although Ford is showing a renewed vigor. Given GM’s impressive management, earning power and its positioning to be a winner in the eventual EV future (we see the industry transition as gradual, and occurring slower than the consensus which implies an aggressive adoption rate for EVs), and its undervaluation on reasonably conservative metrics, we are raising our price target to 69.
Moving BorgWarner (BWA) from BUY to SELL
BorgWarner shares have essentially reached our 57 price target, closing the sharp valuation discount that was present when we recommended the shares in August 2016. We see the risk/return trade-off as unfavorable and are moving the shares to SELL.
Fundamentally, the company is executing reasonably well and is making progress with its strategic initiatives, including transitioning to a world that eventually will be dominated by electric vehicles (we see the industry transition as gradual, and occurring slower than the consensus which implies an aggressive adoption rate for EVs).
However, the company will likely continue to drive its transition by acquiring new-tech and e-tech companies, and these acquisitions will likely absorb much of BorgWarner’s free cash flow and borrowing capacity. This requires investors to put a high value on the company’s 5-year-out strategic and financial position. As the company is not likely to be price-sensitive or return-sensitive in pricing its acquisitions given the strategic (survival) imperative of its transition, we have little confidence that the 5-year-out value will be worth the wait.
At mid-day prices, the BWA investment produced a total return of about 70%.
Moving Mosaic (MOS) from BUY to SELL
With the shares trading at or slightly above our 35 price target, we are moving MOS shares from BUY to SELL.
Conditions are exceptionally healthy in Mosaic’s markets: supply is tight, demand is strong and customers (farmers) are flush with cash from high corn, soybeans and other agricultural prices. However, we are starting to see producers nudge up their output, and we see the ideal conditions as ripe for further production increases as well as eventual capacity additions. The cycle could extend for another year, but the risk/return is not favorable enough to warrant a higher target price for MOS shares.
Despite the sharp 250% price gain since the March 2020 lows, and the shares now reaching nearly 6-year highs, the investment was essentially break-even, after dividends, from the September 2015 initial recommendation at 40.55. In hindsight, our outlook at our purchase was too optimistic, particularly with the onset of major fertilizer production in China. As such, we paid too much for MOS shares. Not every investment works as initially expected, of course – we’d rather recognize the error and take a break-even outcome now than hope for a better outcome when the odds don’t favor it.