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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Once more, with feeling
Let's start with the backstory. Two days ago, JPMorgan revised its rating on the U.S. auto parts retail industry, telling investors to buy shares of O'Reilly Automotive (Nasdaq: ORLY ) based on the growing popularity of "do-it-for-me" auto repairs, as well as expectations of future cost savings. For corollary reasons, JPMorgan rated Advance Auto Parts (NYSE: AAP ) "neutral" because it has already achieved targeted cost savings. Finishing up, JP left AutoZone (NYSE: AZO ) at neutral.
Fast-forward to today, and UBS seconds these emotions, but with a little more "oomph." Initiating coverage on the sector, UBS again gave O'Reilly the gold-plated buy rating. AutoZone is still idling in neutral. But this time, Advance Auto got the Wall Street booby prize, an initiation at sell. Ouch.
So far, that's all we know about UBS' opinions -- just the ratings, not the reasons. But one can surmise that its thinking parallels JPMorgan's. After all, the auto industry's troubles are pretty well known. Hometown heroes Ford (NYSE: F ) and GM (NYSE: GM ) lost $24 billion last quarter. (Did you look in the glove compartment? How 'bout the ashtray? I usually keep some loose change in there?)
Even the Japanese carmakers are knocking and pinging these days. Toyota (NYSE: TM ) sales were down 12% in July. Honda's (NYSE: HMC ) American car sales dropped 2%. When Americans stop buying Japanese cars, you know times are tough. It makes sense, then, that if people aren't tossing their old jalopies in favor of new cars, they're going to have to spend more money on auto parts to keep their existing cars running. Hence the revived interest in the ultra-sexy world of auto parts retailing.
So that explains the industry interest, but what about the analysts' relative enthusiasm within the industry? After all, of the three, O'Reilly with its 17.5 P/E ratio is arguably the most expensive. Advance Auto will set you back only 16.6 times earnings, while AutoZone looks like a steal at 14.3.
Why, then, do both JP and UBS give O'Reilly the thumbs-up? My guess is that it's O'Reilly's growth rate that's winning it the gold this Olympic season: pegged by most analysts at 16.2% per year over the next five years.
And that's it?
Basically, yeah, except for one more thing. Both JPMorgan and UBS boast sterling records on CAPS, ranking in the top 10% of our members. Don't be fooled by the simplicity of their analyses. These guys are smart.