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 ...
Taking its rightful place in this quarter's parade of strong earners -- including DuPont (NYSE: DD ) , Dow Chemical (NYSE: DOW ) , and Caterpillar (NYSE: CAT ) -- tractor titan Deere (NYSE: DE ) plowed right past Wall Street estimates last week. In addition to churning up pro forma earnings more than $0.20 ahead of estimates, Deere hauled in a bumper crop of analyst upgrades.
Hardly waiting to digest the pre-Thanksgiving news, both Wells Fargo and JPMorgan upgraded the stock this morning (to "outperform" and "neutral," respectively), while Goldman Sachs chimed in with raised earnings estimates. So Deere went three for three ...
But should investors scream "Whee!?"
It depends. These pile-on upgrades tend to attract all sorts of analysts -- good, bad, and just plain opaque.
For example, Wells Fargo has essentially no record on industrial stocks like Deere, and has historically gotten most of its stock predictions wrong. In contrast, Goldman probably has a record ... if only anybody could figure out what it is.
The best analyst of the three, with a record of 55% accuracy on its publicly disclosed Machinery picks, is JPMorgan:
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Company
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JPMorgan Says:
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CAPS Says:
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JP's Picks Beating
(Lagging) S&P by:
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ITT (NYSE: ITT )
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Outperform
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****
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21 points
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Bucyrus International (Nasdaq: BUCY )
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Underperform
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*****
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8 points
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Eaton
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Outperform
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****
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(10 points)
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Joy Global (Nasdaq: JOYG )
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Underperform
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*****
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(7 points)
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And of course, JPMorgan seems to be the most pessimistic of the three analysts weighing in on Deere today. It warns that "agriculture equipment sales are likely to remain under pressure in 2010, and the implied EPS of $2.12 is in-line with our low-end $2.10 estimate, but well below prior consensus of $2.70."
That's a much more sobering take on Deere than the one worse-rated Wells voiced. Wells Fargo argued that although "DE guided beneath consensus with a relatively conservative outlook," this means "the guidance risk [is now] behind the stock," and therefore "Fiscal 2010 will be the earnings trough for DE." Wells believes Deere will beat its own goal for 2010, earning $2.50 per share as profits ramp back up in 2010 and 2011. (And in case you're interested, Goldman likewise posited $2.50 earnings for 2010, and $3.60 in 2011.)
Who's right?
That's the question of the hour, of course. So let's perform a little logic check here, why don't we? Assume Goldman and Wells are right, and Deere will produce more than it's promised next year -- $2.50 per share in profits.
This still leaves the stock valued at 21 times forward earnings, which seems like quite a lot for a stock that most analysts don't expect to grow much faster than 9% per year over the next five years. Plus ... have you taken a look at Deere's balance sheet lately? This buck is looking a mite bottom-heavy, with nearly $21 billion in net debt -- not the position you want to be in in an economy like this one.
Foolish takeaway
Wall Street seems to think that Deere's rich valuation, debt-laden balance sheet, and reasonable dividend yield of 2.1% all add up to a compelling buy thesis on this stock. I look at the same numbers, and see no reason you should buy Deere today.
But I do see great reasons to sell.
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