This Just In: More Upgrades and Downgrades

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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 moves on Wall Street. First up, a pair of opposing moves in the trucking industry as CH Robinson (Nasdaq: CHRW  ) gets an upgrade, while Arkansas Best (Nasdaq: ABFS  ) gets kicked to the curb. Next, new ratings in gambling for Wynn Resorts (Nasdaq: WYNN  ) and Las Vegas Sands (NYSE: LVS  ) . And finally, a straight-out upgrade for Inergy (Nasdaq: NRGY  ) . Let's drive right in.

Truck ... stop
It was earnings season for the nation's truckers this week. Intermodal specialist CH Robinson reported an 8% bump in quarterly earnings and an equivalent rise in revenues. Zack's Research praised the company for preserving a "cash-rich balance sheet with no debt" and predicted that it will continue to "benefit from its freight transportation business." But Stifel Nicolaus looked at the same numbers and decided they merited a downgrade to "sell."

Why? Maybe for the simple reason that the stock just costs too doggone much. Strong balance sheet notwithstanding, it's hard to justify a share price of 23 times annual earnings when Robinson is supposed to grow only 15% per year over the next five years ... and managed to grow only half that fast last quarter.

Still, not all truckers are created equal. At 70 times earnings, Arkansas Best, downgraded at KeyBanc for missing earnings this morning, looks even more overpriced that Robinson on the surface. Lift the hood, though, and the stock looks much more fundamentally sound. For one thing, Arkansas Best trades below book value, which limits its downside. It also generates strong free cash flow. I'd wager that at just 6 times trailing free cash, but with a 15% growth rate ahead of it, Arkansas Best will live up to its name. In fact, I have such a strong hunch on this one that I'm going to go ahead and publicly recommend buying it on Motley Fool CAPS right now.

Want to see how the pick works out? Add Arkansas Best to your Watchlist.

Black or red?
In a second tale of two cities, analysts at Imperial Capital anointed Wynn Resorts an "outperformer" this morning, while reserving judgment on "in-line" rival Las Vegas Sands. LVS reported earnings just yesterday, crushing the estimates Wall Street had put forward. But Wynn isn't expected to report its own numbers for a few weeks. So does this give it more time for upside?

Of the two, LVS looks to have more optimism priced into its stock at 36 times earnings, while Wynn's 28 P/E shows that it's high-profile board dispute is still keeping a lid on the shares. Still, even if Wynn looks a bit cheaper, it's curious to see Imperial favoring the stock, which is pegged for much slower growth (14% annually over the next five years) than Wall Street expects to see at LVS (28%). Plus, while the disparity between reported income and actual free cash flow at Wynn is already shrinking (bad), LVS is only just now starting to show free cash close to the levels of its claimed net income (good). This suggests to me that the value proposition at Wynn is starting to deteriorate, while that at Las Vegas Sands is growing.

Honestly, neither stock looks particularly attractive to me at today's prices. Wynn used to, but analyst growth estimates on that one have come down so far, so fast, in recent months that I'm now seriously considering canceling my own "outperform" recommendation on the stock. Could be it's getting close to time to start placing bets on Las Vegas Sands instead.

Inergy powers up
Last but not least, we come to propane supplier Inergy. I warned you about this one last summer, when the stock looked overpriced at $35 and change. It's since lost nearly half its market cap and fallen to sub-$20 levels. This, however, according to Raymond James (which was also down on the stock), is as bad as things are going to get.

The company just accepted an offer from Suburban Propane to sell off its retail propane business for $1.8 billion -- well over half of Inergy's current market cap. And while some investors argue that this strips Inergy of its reason for being (propane operations making up three-quarters of pre-spinoff-Inergy's annual revenues), it's interesting to note that the midstream operation Inergy will be keeping is by far its more profitable business, boasting a 35% gross margin.

Like my fellow Fool Travis Hoium, I'd take a wait-and-see approach to this one and suggest delaying any purchases until we have a better view of what Inergy's business will look like going forward. But on balance, selling a lower-profit margin business, keeping a higher-margin business, and getting 75% of your own market cap back for the lower-quality business sounds like a smart move to me.

Looking for somewhere to reinvest your Inergy spinoff profits? Read the Fool's new report and discover what we've named The Motley Fool's Top Stock for 2012.

Whose advice should you take -- Rich's, or that of "professional" analysts such as Stifel, Imperial, and Raymond James? Check out Rich's track record on Motley Fool CAPS and compare it with theirs. Decide for yourself whom to believe.

Fool contributor Rich Smith owns no 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. 349 out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (4) | Recommend This Article (5)

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 April 27, 2012, at 9:57 PM, Ryanbusch wrote:

    LVS is trading at a p/e of 35? Not so. That may be a trailing p/e, but LVS is on track to do at least $3.00 this year, which puts the p/e at less than 20. It's PEG is less than 1.0. This is a value stock at current price, and most analysts have a mid 60's price target as a result. Your facts are wrong and distorted purposefully to try to make an (invalid) point.

  • Report this Comment On April 27, 2012, at 10:54 PM, jazshore wrote:

    It is good to read an article questioning the logic of analyst rating inline today. With outstanding earnings, I find it unbelievable that LVS did not 'pop'. The selloff is illogical and painful for investors such as myself. Makes one skeptical of investing in this market.

  • Report this Comment On April 28, 2012, at 11:30 AM, cp757 wrote:

    WYNN's "disparity between reported income and actual free cash flow at Wynn is already shrinking (bad)," Very bad but my question is why the upgrade ? WYNN was at 101 a few months ago and income will not be higher now it will be lower. LVS had the biggest quarter in the history of the gaming sector ( 1.07 billion ) with next quarter coming up reported to be an even bigger quarter. Analysts should be hammering on the table and I am sure we will hear more on this soon . WYNN on the other hand will have less income and I think they moved back the conference call to give the stock time to run. They pump the stock up with news on building in Cotai Central in 4 to 5 years but when will the income be on the bottom line. I think this is a pump and dump on WYNN and we will see how it plays out in two weeks. I like WYNN but the figures don't add up. They need to beat on the top and bottom line and they need to announce the approval from the government in China for the Cotai Central project. Miss on one of those and watch what happens.

  • Report this Comment On April 29, 2012, at 2:55 PM, cp757 wrote:

    In 2010 the revenue for Las Vegas Sands was 7.3 billion and the high for the stock that year was $ 55.47. Two years later, in 2012 revenue will be 12 to 13 billion, should the stock be at 55.87 on April 27 2012 ? Why ? The analysts' are increasing the estimates. They said $68 at Stern Agee by David Bain, he rated it a Buy on 4/26/2012 and said " Expect Market Share Ramp,from Cotai Central". Then you have $68 with a Buy from Deutsche Bank on 4/26/2012 they said LVS Beat any way you look at the ER. Credit Suisse gave an Outperform rating to $68 LVS is Raking In The Chips, UBS AG rated a Buy to $67 on 4/27/2012. Brean Murray said $65 and a rating of a buy on 4/26/2012. These are just some of the upgrades and more will come next week .

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