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 ...
If you're a Suncor (NYSE: SU) shareholder and you're feeling a mite confuddled this week, I cannot blame you. Yesterday, Deutsche Bank upgraded your stock ... but only to "hold" ... and at least it went up ... but no one's quite sure why. It's a situation guaranteed to confound and befuddle, so let's shed a little light on Deutsche's thinking 'bout Suncor.

First and foremost: Deutsche doesn't hate your stock. That much is clear. According to the banker, Suncor got itself "financially very stretched" back in late 2008, but has since transformed itself into a "Canadian national champion" by buying PetroCanada. That's the good news. The bad news is that Deutsche isn't entirely certain that this transformation is a good thing.

Arguing that the "old" Suncor "was a pure-play high quality oil sands takeover candidate," Deutsche laments that "now it is neither." It is:

• Not pure-play, because it's at least as much a refiner as an oil producer;
• Not high-quality, because the refining biz is in the dumps;
• And last but not least, not a takeover candidate for oil sands aficionados, because of how bad the refining biz has gotten.

Yet despite the fact that Suncor today just ain't what it used to be, Deutsche notes that the stock "still trades at a premium valuation," and isn't at all convinced that Suncor's worth it.

So what?
Why should you care what Deutsche thinks about Suncor? Excellent question. After all, it's not like Deutsche is winning any awards for the consistency of its brilliance in picking oil stocks. To the contrary, over the past three years that we've been racking its performance, Deutsche has racked up a record of just 46% accuracy in the oil patch. But it has a number of big gains on individual picks:

You might be even less impressed by what Deutsche suggests you buy instead of Suncor. Noting that on top of the company's lessened attractiveness to potential suitors, Suncor has also "suffered operational issues, with recent fires damaging output and ... outlook for 2010 production weak," Deutsche thinks the better bet is to invest in its currently buy-rated Canadian Natural Resources (NYSE: CNQ). Canadian National Resources, says Deutsche, is enjoying "rapid growth and strong free cashflow generation, with a management reputation for almost obsessive behaviour regarding operational excellence."

Tromping 'round the oil patch
Which, I have to say, sets up a curious dichotomy. According to Deutsche, you should buy Canadian National because it's a smarter operator than Suncor, demonstrated in part by its superior free cash flow.

It's true that Suncor is currently $1.5 billion in the negative-free-cash-flow hole over the past 12 months, versus $1.1 billion in reported earnings. It's also true that, to its credit, Canadian National generated positive free cash flow over its last four reports. But the $1.4 billion that Canadian National generated still doesn't come close to matching the $2.7 billion it reported in GAAP earnings over the period.

Moreover, if you draw back a bit and look at the bigger picture, you'll notice that Suncor burned through $5.6 billion in free cash flow over the last five years, while Canadian National burned $3.1 billion, despite reporting "profitable" operations all the while.

Foolish takeaway
Does this make Canadian National a worse operator than Suncor? It certainly calls into question Deutsche's argument for buying one over the other. Fortunately, Fools don't have to choose between buying either of these companies. If you absolutely, positively must own an oil company, I suggest that the best choice here is also the most obvious.

From 2004 to 2008 -- the same period in which its smaller rivals were burning cash with abandon -- ExxonMobil (NYSE: XOM) generated nearly $174 billion in free cash flow, or enough to back up more than 90% of its reported earnings. This strong cash generation also enables Exxon to pay its shareholders a hefty dividend, now at 2.6%, which is twice what Suncor manages and more than four times as generous as Canadian Natural Resources.

Moral of the story: Sometimes the obvious choice is also the right one -- ExxonMobil.