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 ...
In homes across America, the wheedling begins tonight. "Mom? Dad? Can't we open just one present tonight? I promise I won't even shake the others till morning!"

Fortunately for Schlumberger (NYSE:SLB) shareholders, no wheedling is necessary. Barclays Capital opened their present for them -- two days ahead of schedule -- when it upgraded the company's shares yesterday. Praising the company's skilled management, commending its financial strength, and arguing that Schlumberger will benefit from increased exploration activity over the next few years, Barclays advised investors to "overweight" the shares in their portfolios.

And you know the best part? When it comes to oil-stock upgrades, it doesn't get any better than Barclays.

Let's go to the tape
We'll start with the headline news: According to our records on CAPS, Barclays is literally one of "the best" Wall Street analysts out there, ranking in the top 6% of all investors we track. Roughly 55% of this banker's positive picks prove right on the money.

And Barclays is simply a wizard on oil and gas stocks, the single sector of the market where it focuses its greatest attention. In the "Big Energy" category, 61% of its active recommendations are crushing the market:

And difficult as it is to imagine, Barclays does even better on oil services stocks like Schlumberger, scoring stunning 81% accuracy on its active picks here:

Curiouser ...
Yet Barclays' superb record in this field has me wondering, "What in the world is Barclays thinking?" For the life of me, I just don't see what Barclays likes about Schlumberger.

Start with the most basic valuation technique, the PEG ratio. At 23 times trailing earnings, Schlumberger looks vastly overpriced relative to consensus expectations of just 7% long-term earnings growth. But the situation's actually even worse than that. Trailing free cash flow shows that Schlumberger today generates just $0.71 per share in actual cash profits for every dollar it reports as "net earnings" under GAAP accounting standards.

On the balance sheet, we see the company carrying only a modest debt load ($1.3 billion net), but key competitors like Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL) look just as good from this perspective. Heck, Baker Hughes even pays a slightly better dividend.

... and curiouser
The last fact worries me most. Barclays praises the quality of Schlumberger's management, and if you look at the metric that perhaps best puts a number to "management quality," return on investment, Schlumberger has done pretty well in recent years. Yet even here, I see cause for concern. After spiking to 22% amid Peak Oil fears in 2007, returns on capital have fallen back toward a more modest 12% lately (better than Baker Hughes; worse than Hally). Yet even this number is well above the returns on capital Schlumberger saw earlier in this decade.

Any investor looking at consensus growth rates, and betting that Schlumberger can better them by returning to its recent highs in returns on capital, had best think again. If Schlumberger does ever get back to "normal," its profits are more likely to fall than to rise.

Foolish takeaway
Overpriced if the analysts are right, and even more overpriced if they're wrong, I see little attraction in Schlumberger stock today. Looks to me like Barclays has finally called one wrong.