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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the worst ...
As the rest of the stock market gained a bit of altitude yesterday, Boeing (NYSE: BA  ) investors sat out the rally, grounded by a downgrade from investment banker Wachovia. Pointing to "declines in traffic, financing and overall aircraft demand," Wachovia predicted that Boeing will cut back on commercial jet production next year, adding that the reductions could even be on the order of a 30% decline, which would cause a "cash flow/EPS impact ... far more significant than current Street expectations."

How "significant"? Wachovia's looking for as little as $5.20 per share in profits this year, followed by a decline to $4.80 in fiscal 2010, with the descent continuing to $4.45 in 2011. And the damage doesn't even stop there. Based on its pessimistic predictions for the airplane builder, Wachovia downgraded Boeing suppliers Goodrich and Precision Castparts (NYSE: PCP  ) in tandem -- all three stocks now rate "market perform" in Wachovia's estimation. But just how accurate is Wachovia's stock radar in the aerospace, er, space?

Let's go to the tape
Not so accurate, as it turns out. Fact is, you'd have to look far and wide to find an analyst with a record much worse than Wachovia's. While Wachovia gets the odd pick right ...

 

Wachovia Says:

CAPS Says (out of 5):

Wachovia's Pick Beating S&P By:

SAIC (NYSE: SAI  )

Outperform

****

27 points

Orbital Sciences (NYSE: ORB  )

Outperform

*****

1 point

... over the two-and-a-half years we've been watching this banker on CAPS, we've confirmed that more than half of its recommendations go awry. For example:

 

Wachovia Says:

CAPS Says:

Wachovia's Pick Lagging S&P By:

General Dynamics (NYSE: GD  )

Outperform

****

7 points

KBR (NYSE: KBR  )

Outperform

*****

13 points

BE Aerospace  (Nasdaq: BEAV  )

Underperform

****

26 points

Result: Wachovia underperforms more than three out of every four investors we track, and on average, any given stock Wachovia recommends tends to lag the S&P 500's performance by a fraction of a point or so. (That's right, folks. You know that old statistic you heard way back when, about how 80% of professional investors underperform a plain vanilla index fund? They were talking about folks like Wachovia.)

Banning Boeing
So here comes this i-banker, fresh off a string of losses (including, by the way, its November 2007 recommendation of Boeing itself -- which underperformed the market by 15 points through yesterday's downgrade), and tells you to sit on the stock. Not buy it. Not sell it. Just hold it a while and see how things play out. Is that good advice?

Well ... maybe. Listen, folks, I'd love to be able to tell you that Wachovia's a lousy analyst, that Boeing's a superb profits generator, and you should definitely buy Boeing stock -- but I can't.

Fact is, I've got a pretty lousy record on Boeing myself -- not quite as bad as Wachovia's, but bad enough (review the carnage here). Fact also is, my own Boeing-buy thesis is well and truly busted. Predicated on strong free cash flow that went up in smoke under the heat of last year's two-month-long strike, I'm now left with no way to gauge whether Boeing's still a buy. I do continue to see several factors working in its favor:

  • It's one of only two major large-plane builders in the world.
  • The other one -- Airbus -- fumbled its A380 airliner as badly as Boeing blew the 787.
  • Meanwhile, on the defense side of the business, Airbus parent EADS has made a real fiasco of its attempt to build a military transport to challenge Boeing, handing Boeing's C-17 transport total air superiority.
  • Plus -- and perhaps most important of all -- Boeing has inked long-term contracts with two of its biggest union bodies, quelling the risk of further "strikes" to its income statement.

That said ...
With Boeing selling for a 10 P/E today, versus long-term analyst estimates of only 8.4% growth, and with free cash flow now gone missing, I simply don't see a compelling reason to buy the stock anymore. Maybe Boeing can pull out of its tailspin someday. But I fear that day is still far off.

Sad to say, whether you should own Boeing today probably depends on one thing and one thing only: whether you like the dividend. If 4.7% returns on your investment aren't enough to buy your patience while this company relearns how to fly, I'd think about cutting my losses, selling Boeing, and looking elsewhere for profits.

SAIC is an Inside Value selection. Orbital Sciences is a Rule Breakers pick. Precision Castparts is a Stock Advisor recommendation. Try any of these free for 30 days.

Fool contributor Rich Smith owns shares of Boeing, but wishes he didn't. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 370 out of more than 130,000 members. The Fool has a disclosure policy.

 


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