This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Did Kraft (NYSE:KFT) pay too much for Cadbury? A lot of Fools seem to think so, but up on Wall Street, a consensus is emerging that in fact, Kraft got itself a good deal.

Goldman Sachs (NYSE:GS) said as much when it bashed Hershey for failing to gorge on Cadbury's emerging markets exposure last week. And this week, the friendly analysts at Soleil Securities backed 'em up -- and advised you to back up the truck on Kraft.

And do you want to know the really great news? They're probably right. Kraft probably is a buy ...

Let's go to the tape
... if, that is to say, the disclaimers are wrong and "past performance" really is some indication of future success. Because when it comes to investing in Food Products companies, few analysts demonstrate the kind of stock market savvy that Soleil exhibits:

Although it's historically been better known as a picker of health care equipment stocks like Hologic (NASDAQ:HOLX) and Stryker (NYSE:SYK), Soleil actually does a whole lot better when it leaves the doctoring to the doctors, and focuses are more down-to-earth commodities like foodstuffs. It's here that Soleil really shines, scoring 78% for accuracy on its picks within the foods sector, and racking up a record of 77 percentage points worth of market outperformance on its recommendations.

And Soleil's analysis of how Kraft can churn profit out of Cadbury's milk chocolatey sweetness demonstrates an intimate knowledge of the foods business. Placing the companies side by side, Soleil notes that Cadbury's growth rate exceeds that of new owner Kraft. Cadbury also earns a much higher profit margin than Kraft does. Now, take this faster growth and higher profitability, stick it inside Kraft and allow it to comprise as much as 22% of the combined company's total sales in calendar year 2011, and Soleil thinks the whole of this equation works out to a whole lot more than just the sum of its parts.

Summing up the pluses of the new conglomerate, Soleil sees:

• 5%-plus annual sales growth -- a 20% boost over Kraft's pre-Cadbury rate
• Firmwide profit margins of from 9% to 11% (about a 25% improvement)
• "Substantial" free cash flow, and a 4.1% dividend yield.

All of which adds up to (in Soleil's view), a company that will outgrow the foods industry as a whole and earn higher profit margins than its rivals -- yet right now trades at a discount to the industry's valuation.

Foolish takeaway
Uncertainty still surrounds many of the terms of the Kraft acquisition. The shares-and-cash terms of the buyout offer, for example, make it unclear exactly how much more debt Kraft will need to pile atop its already sizeable debt load to make this deal happen.

Still, Soleil is positing only a 13.8 P/E being applied to its projected $2.28 per-share earnings estimate in 2011. Considering that Kraft today sells for 16.5 times trailing earnings, and that the Kraft of tomorrow looks to be a more profitable, faster growing operation, this appears to build a sizeable margin of safety into Soleil's "buy" recommendation.

I like the fact that Soleil's being conservative in its guessing -- and I'll just bet it guessed right.