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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
Today, we're going to take a look at three high-profile ratings moves on Wall Street: a price-target hike for BE Aerospace (Nasdaq: BEAV ) , followed by an upgrade for FuelCell Energy (Nasdaq: FCEL ) and a downgrade (sort of) for McDermott (NYSE: MDR ) . (More on that in a moment.)
Beginning with BE
Wall Street's all a-twitter this morning over the news that Boeing (NYSE: BA ) won (or did it lose?) its World Trade Organization dispute against Airbus. The WTO ruled that Boeing received $5.3 billion in illegal government subsidies. That sounds bad, but is actually a whole lot less than the $19.1 billion in illegal subsidization that Airbus alleged. It's also more than the $18 billion that the WTO says Airbus received. Net-net, it looks like a victory for Boeing. In response, analysts are tweaking their valuation models to see how this ruling might help Boeing, and its suppliers -- like BE Aerospace.
Armed with the WTO news, and new data just out from BE's investor day, Goldman Sachs raised its price target on BE to $60, while FBR and Jefferies both upped their targets to $55. Ace stockpicker KeyBanc looks to be the most conservative BE-backer today, upping its target to only $52. But even Jefferies predicts that BE will "benefit from all aspects of the commercial aerospace cycle, making it one of the more unique plays in the sector."
KeyBanc is right, but that doesn't necessarily make BE a buy. At 21 times earnings, the stock looks richly priced for 16.5% long-term growth estimates. Free cash flow is strong -- but not strong enough to make the stock a bargain.
It is, however, a better bargain than the actual upgrade on today's list. FuelCell Energy's stock went up more than 4% this morning on several pieces of positive news. The company landed a contract to supply Korea's Posco with 120 MW fuel cell units and will receive a $30 million capital infusion from the company. FuelCell also lost less money than expected in Q4. Adding fuel to the fire was an upgrade from Ardour Capital.
Excited yet? Don't be. Because according to our CAPS records, Ardour is actually one of the worst analysts on Wall Street, with a record of getting nearly twice as many of its stock picks wrong as it does right. Ardour thinks FuelCell is worth $2.50 a share, versus the $1.70 its shares cost today. But the company's history of losing money and burning cash (and Ardour's history of picking dogs) puts that opinion in doubt.
Sure, Posco may be putting money in FuelCell. If it's hoping to buy fuel cell units from the company, Posco wants to make sure that FuelCell has the money it needs to fill the order (and not go broke before it delivers the goods). But what's your excuse?
And now, an excerpt from the financial "News of the Weird." Two weeks ago, oil platform builder McDermott disappointed investors with an earnings report that -- and I quote fellow Fool Seth Jayson here -- "missed estimates on revenues and whiffed on earnings per share." Revenue came in $80 million light, and the company swung from last year's Q4 profit to a $0.04 loss for Q4 2011. Two weeks later, oil analyst Howard Weil finally got around to downgrading the stock (to market perform). Yet strangely, at the same time, Weil upgraded McDermott's target price (to $16).
What explains the disconnect? Apparently, Weil is letting investor sentiment get the better of it. Despite its revenue loss and lack of earnings, investors bid up McDermott stock in the wake of last month's earnings news. Although the shares have slumped since, Weil seems to think the shares' surge to near-$15 levels post-earnings is a portent of things to come.
I'm not so sure. At 23 times earnings (and negative free cash flow), McDermott shares seem awfully pricy for the sub-13% long-term growth analysts predict for it. If I were looking for a bargain in oil infrastructure, I'd be more inclined to favor McDermott competitor Chicago Bridge & Iron (NYSE: CBI ) . It's got:
- a P/E much more in line with growth estimates (18 P/E and 17% growth),
- a better balance sheet, boasting $630 million net cash,
- and a cash flow statement showing nearly 50% better free cash flow than Chicago Bridge claims as reported net earnings.
In other words, a much better stock pick than McDermott. In fact, I'm so convinced Chicago Bridge is a better bet than McDermott that right now I'm willing to stake my reputation on it, and publicly rate Chicago Bridge & Iron an "outperform" on CAPS. Think I'm wrong? Follow along.
Whose advice should you take -- mine, or that of "professional" analysts like KeyBanc, Ardour, and Howard Weil? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.