Jaguar Begins to Pay Off for Tata

03/03/2010 11:27 am EST


Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer, analyst with Schaeffer's Investment Research, argues Wall Street's hostility to the 2008 takeover is obsolete, and Tata is a buy.

[A recent] BusinessWeek article (“Jaguar Starts Making Money for Tata Motors,” March 3rd) discusses the ill-timed purchase of British luxury carmaker Jaguar Land Rover (JLR) by Tata Motors (NYSE: TTM) in 2008.

The $2.5-billion deal transpired "just before the subprime meltdown hammered demand for high-priced luxury names like Jaguar," the author notes, calling the purchase a "vanity play” by the Indian auto issue.

However, the luxury division is finally starting to make money for Tata, thanks to the firm's cost-cutting efforts, improved product line, and a global economy on the mend.

More specifically, the turnaround was reflected in TTM's [recent] quarterly earnings report, which revealed that JLR made a profit of 4.17 billion rupees, compared to a loss of 11.8 billion rupees a year prior.

Thanks, in part, to the rebound in demand for JLR, Tata's overall sales jumped 47% to $5.65 billion, with the company swinging to a quarterly profit of $141 million, compared to a $565-million loss [in the same quarter the previous year]. The earnings "were significantly ahead of our estimates," noted Morgan Stanley analyst Binay Singh, opining that Tata is "well placed to benefit from a volume recovery" in the luxury car and Indian commercial vehicle markets.

The column concludes by noting Tata's newest executives: Group chief executive officer Carl-Peter Forster, former head of GM Europe, and JLR CEO Ralf Speth, formerly with BMW. As such, "the new talent should help Tata keep the turnaround going overseas, too," states the author, pointing to the firm's 56% increase in India-based sales last month.

While the article notes that many Street dwellers are starting to take notice of TTM, the Indian car concern's bullish bandwagon is far from crowded. Short interest on the equity jumped by 6.2% during the most recent reporting period, and now accounts for 11.5 million TTM shares. At the security's average trading volume, it would take almost two weeks for all of these bearish bets to unwind.

Furthermore, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.72 ranks in the 74th percentile of its annual range. In other words, short-term options speculators have been more skeptically skewed toward TTM only 26% of the time during the past 52 weeks.

Technically speaking, the shares of TTM have advanced nearly 600% since flirting with the $3.00 level in mid-March 2009, guided higher by their ten- and 20-week moving averages.

From a contrarian perspective, a continued show of strength both fundamentally and on the charts could spook the lingering skeptics on the Street. An unwinding of pessimism in the options pits or a significant short-covering boost could act as catalysts even higher for the auto maker. (TTM ADRs—American Depositary Receipts—closed Tuesday at $17.50—Editor.)

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