This Just In: More 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." 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.

Fueling growth
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?

Misreading McDermott
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.

Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. He does, however, have public recommendations available on more than 50 separate companies. Check them out on Motley Fool CAPS, where he goes by the handle "TMFDitty" -- and is currently ranked No. 391 out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (7) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 13, 2012, at 3:58 PM, Teacherman1 wrote:

    Interesting post.

    So, what do you think Rich?

    Should I just go ahead and take my 82% profit in just over 4 months on FCEL and get out of them because they haven't yet reached profitability and some analyst with a poor track record upgraded them?

    It takes time to get from "here to there", and there is no indication that they are getting ready to go broke.

    If you feel that way about them, why not make a CAPScall saying so.

    I really mean that in a nice way, even if it doesn't sound like it.:)

    They are at a high enough price now that you could end up being right.

    In the mean time, I am long FCEL and intend to stay that way unless something "real" happens to make me change my mind.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On March 13, 2012, at 5:27 PM, Bitminer wrote:

    Fuelcell is getting ready to go back up to its 12 dollar a share range. Posco is a huge player and is not dumping money into a empty hole. You don't spend money like that and not know what you are doing. Thanks for also pointing out that Buffett owns over 4 PERCENT of Posco. I guess he probably knows where and what Posco does with their money too. I could care less about what Ardour says or does.....common sense should tell anyone that this will someday hopefully sooner than later be a top pick for everyone. Unless of course maybe you and Ardour Capitol steal the formula for Cold fusion from Elizabeth Shue. In the meantime........I am LONG ON FCEL and continue to add shares with every spare penny I get. Can't wait till it climbs 5 bux in one day and is all headlines. All the red thumbs will feel pretty bad about that . Too bad people can't figure out that sometimes there are just better ways to do things and using natural gas and biogas for energy makes sense and saves money.

  • Report this Comment On March 13, 2012, at 6:54 PM, linmoo wrote:

    Totally ridiculous commentary on FCEL. First, everyone who has given a negative CAPS rating within the last 9 months is down. Second, FCEL has been improving consistently towards net profitability by decreasing margins for the last 5 quarters and having positive gross revenue in Q4. Posco has also agreed to buy a larger stake in the company AND has purchased a one-time license so they can manufacture some fuel cell components themselves...further reducing margins to FCEL. With power hungry markets looking for viable green energy alternatives with a small footprint (aka Japan, Europe), FCEL has a LOT of upside. Look for them to be profitable by the end of the year.

  • Report this Comment On March 14, 2012, at 6:57 AM, Triller wrote:

    Keep napping and get some investing experience Rich.

  • Report this Comment On March 14, 2012, at 8:59 AM, Triller wrote:

    PS. what reputation?

    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.

    It's easy to base your reputation on the favorite. Get a life!

  • Report this Comment On March 14, 2012, at 10:05 AM, Teacherman1 wrote:

    Rich

    I disagree with some of the other posters here.

    You are certainly entitled to your opinion, just as others are to theirs, whether they disagree with you or not.

    What bothers me about these kind of comments is that the people posting them seem to want to hide in the shadows by posting from ID's that offer no information about them at all, other than they felt the need to post on your article.

    Don't get me wrong, I still disagree with your assesment of FCEL, but it is easy to see how I feel about them by clicking on my Fool username.

    Not trying to start an argument or fight with other posters, but I wish they would post with a Fool unsername to see a little more about them.

    JMO and worth exactly what I am charging for it.

    Hope everyone has a nice day and a successful investing career.

  • Report this Comment On March 14, 2012, at 1:28 PM, TMFDitty wrote:

    Teacherman1: Noted. On the plus side, though, even without knowing who a poster is, with CAPS you can at least confirm whether a poster knows what he (she?) is talking about.

    As you point out, many posters have no CAPS record to speak of. I'd humbly suggest that comments should be given weight in proportion to the authors' demonstrated record of knowing what they're talking about.

    TMFDitty

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