This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on. Today, we'll be looking at new upgrades for Wells Fargo (NYSE: WFC ) and Starwood Hotels (NYSE: HOT ) , and find out why Wall Street is dropping ExxonMobil (NYSE: XOM ) down a deep, dark hole.
Bank on this
A rally in banking stocks over the past few days has depended heavily on less-bad-than-feared earnings reports from the likes of Citibank (NYSE: C ) and JPMorgan (NYSE: JPM ) . But as investment banker Sterne Agee reminded us this morning, there's a third big banking stock out there that's producing downright good numbers: Wells Fargo.
On Friday, Wells announced earnings that beat estimates by a penny. More importantly, the $0.82 per share that Wells earned last quarter was about 17% better than what it earned a year ago. In Sterne's opinion, that performance was good enough to earn Wells an upgrade to "buy."
That call looks right on the money. At a share price just 11.3 times the profit it's earned over the past 12 months, Wells looks bargain-priced for the 10% annual earnings growth it's expected to deliver over the next five years. Factor a beefy 2.6% dividend yield into the equation, and Wells just may be one of the best buys in banking today.
How hot is Starwood?
A second Street recommendation worth taking a look at is recent MKM Partners pick Starwood Hotels. Citing increased share repurchases and a "compelling" valuation, the analyst upped Starwood to "outperform" this morning, raising its price target to $65 in the process. Again, this looks like a good call.
Priced below 17 times trailing earnings, Starwood's a bargain if management succeeds in delivering its expected 18% annualized earnings growth. A 1% dividend yield adds to the stock's appeal. Nevertheless, Starwood shares are following the markets down this morning -- and for investors, this is great news. Not only do we get a chance to buy a great company at a great price, but today, this price is getting a little bit better, thanks to broader market pessimism.
Upshot: Starwood shares -- get 'em while they're "HOT."
Of course, it's not all good news on Wall Street today. With apologies for ending on a down note, let's now take a look at today's featured downgrade: ExxonMobil.
Bright and early Monday morning, analysts at Deutsche Bank clambered up on their ladders to change the price on Exxon shares, now rated a "hold." Warning of "weak" oil production volumes and "flat" profits versus Q1, Deutsche says its downgrade of Exxon is primarily a valuation call. And if that's the case, you can hardly fault the logic.
Sure, at 10 times earnings, Exxon may not look expensive. Problem is, Exxon's reported earnings vastly overstate the amount of actual cash profit the company produces. Free cash flow at this firm for the past 12 months amounted to a mere $26 billion, a number that sounds good, but not nearly so good as the $39.9 billion Exxon claimed to be earning under GAAP accounting standards.
With a price-to-free-cash-flow ratio that now exceeds 15, but long-term growth estimates of less than 9% per year, Exxon looks overpriced for its prospects. Long story short, Exxon shares have failed to outperform the S&P 500 over the past year. Based on today's share price, next year doesn't look particularly promising, either.
Fool contributor Rich Smith holds no position in any company mentioned, but The Motley Fool owns shares of Citigroup, JPMorgan Chase, and ExxonMobil, and Motley Fool newsletter services have recommended buying shares of Wells Fargo.
More Expert Advice from The Motley Fool
Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy
today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now
for instant access to this in-depth take on Wells Fargo.