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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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.)
So 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 shiny new buy rating for Sunesis Pharma (Nasdaq: SNSS ) , a pre-earnings switcheroo in the price target for Philip Morris International (NYSE: PM ) , and a smaller post-earnings price tweak for Google (Nasdaq: GOOG ) as well.
The real debate over health care
Last month, a Supreme Court review of the Obamacare health-care system sparked heated debate in Washington. This morning, a health-care debate of a different sort broke out: a debate over health-care stocks. Up on Wall Street, analysts have just initiated coverage of a trio of stocks, with Oppenheimer saying that MAKO Surgical's (Nasdaq: MAKO ) lofty valuation only justifies the equivalent of a "hold" rating, even as Cowen & Co. initiated former mo-mo stock MannKind (Nasdaq: MNKD ) with a similar "neutral" rating. While they don't hate these companies, necessarily, the analysts don't seem to think either MAKO or MannKind stands a good chance of beating the market over the coming year. But another company might.
At the same time as Oppy and Cowen were shrugging their shoulders, investment banker Cantor Fitzgerald was suggesting that investors can find a better opportunity in the shares of Sunesis Pharmaceuticals. According to Cantor, this $3 stock could easily reach $6 in the near term -- but why?
After all, while few would argue with the importance of Sunesis' work, investigating new treatments for cancer of the blood is an expensive task. The company's not profitable, nor is it expected to become so any time soon. It's burning cash hand over fist, yet at a price 26 times its own annual revenue stream, the stock trades at a pretty premium to the 2 times sales ratios more common at established drug shops such as Pfizer or AstraZeneca. But the negligible sales numbers skewing Sunesis' ratio skyward are the result of the company's status as a development-stage biotech.
Actually, chances are Cantor's not looking at valuation much here at all, but rather playing a game of press-release bingo. Sunesis, you see, is scheduled to make a presentation next Friday at a biotech conference in New York. Stock speculators can hope the analyst is right, and that Sunesis' speech will indeed move the stock significantly.
In other ratings news, it's earnings season on Wall Street, and analysts are shifting their price targets around to position themselves against the expected news. Case in point, this morning, Stifel Nicolaus upped its price target on globetrotting cigarette girl Philip Morris International. The company doesn't report earnings until next Thursday, but Stifel's not waiting for the news before applauding. Already, the analyst is raisng its price target on PM to $95 -- a number roughly 19 times trailing earnings, and 18 times what the tobacconist is expected to earn this year.
Is it worth it? I'm not so sure. Whatever news next week brings, few analysts expect Philip Morris to grow much faster than 12% per year going forward. Even with a "healthy" 3.5% dividend to help make up the difference, that seems a bit slow to justify putting an 18 multiple on this debt-laden, litigation-risk-vulnerable company. Assuming you've no aversion to investing in sin stocks to begin with, the better bet here might be PM rival British American Tobacco, which is growing almost as fast and doesn't cost much more in P/E terms but pays investors a dividend a full 2 percentage points higher.
Google me this: What's the opposite of a "googol?"
Considering all the news contained in Google's Q1 earnings release last night -- an earnings blowout, but significantly lower ad rates, and to top it all off a first-ever stock split -- it stands to reason that analysts would feel a need to update their valuations to try to incorporate all the new data. What's surprising, though, is how very little they seem to think things have changed.
Tweaking its price target on the stock this morning, Oppenheimer confirmed that while it still thinks Google is a "buy," all the revelations of the past 24 hours amounted to less than the proverbial hill of beans, in terms of valuation. Pre-earnings, Oppenheimer had estimated Google to be worth about $725 a share. Post-earnings, that number increased all of eight bucks -- to $733 a share.
Big whoop? Maybe. But the real news here may lie not in the amount the price target changed, but in the fact that it didn't change much, and that Oppenheimer remains convinced that Google is still significantly undervalued. Consider: At a market cap of $210 billion, but with $42 billion net cash on its balance sheet, Google currently sells for an enterprise value-to-free cash flow ratio of just over 14 -- even though analysts still expect it to grow at close to 18% per year going forward.
Plugging those numbers into my back-of-the envelope calculation, I get a fair value for Google of about $210 billion, plus cash -- or 20% upside from today's price. That's basically the same thing Oppenheimer has just told us ... twice.
Whose advice should you take -- Rich's, or that of "professional" analysts like Cantor, Oppenheimer, and Stifel Nicolaus? Check out Rich's track record on Motley Fool CAPS, and compare it with theirs. Decide for yourself whom to believe.