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's top headlines include an analytical reprieve for Sprint Nextel (NYSE: S ) and a pretty optimistic prediction for Herbalife (NYSE: HLF ) as well. Meanwhile, on the downside of things, Dow Chemical (NYSE: DOW ) just got told.
Let's get the bad news out of the way first. Last week, Dow Chemical reported earnings that fell about $0.09 short of targets. If that wasn't enough to shake investors' confidence, the company's joint venture with Corning (NYSE: GLW ) , named (appropriately) Dow Corning, confirmed this morning that its profits were a little light as well. Oversupply in the polysilicon market plus economic turmoil in Europe combined to send sales down 5% in the first half of this year, while profits were nearly cut in half -- bad news for both of the joint venture's owners.
This news, apparently, was the last straw for analysts at Argus, who finally threw in the towel and removed their buy rating from Dow Chemical this morning. Sadly, they're probably right to do so.
While Dow's dividend yield is certainly high enough (4.4%), the stock itself looks woefully overpriced already, and unlikely to go higher. Eighteen times earnings is simply too much to pay for a company expected to grow at only high-single-digit rates over the next five years. Add in the fact that Dow has historically generated lower free cash flow than the profits it claims to be "earning" under GAAP, and the stock's arguably even more expensive than it looks.
Turning now to happier news, shareholders of Sprint are reveling in a new buy rating this morning, as Atlantic Equities upgrades the shares to overweight, and assigns a $6 target price, to boot. This follows on the heels of last week's earnings report that showed Sprint losing more money than planned, but on the plus side, booking greater revenue than expected. Adding to the enthusiasm, Sprint said it's not losing any business to Verizon's (NYSE: VZ ) new "shared data" smartphone initiative yet, and made even more positive noises about profits for the rest of this year.
But is this good enough reason to buy Sprint?
I don't think so. I mean, promises are all well and good, but Sprint did still lose more money than expected, and more than it lost in last year's Q2 as well. It's not expected to book a profit this year, or next. And its' still carrying some $14.5 billion in net debt -- more than its own market cap.
Things may be improving at Sprint (average revenue per user was up, for example, and churn was down) -- but when you get right down to it, the reason you invest in a business is to participate in its profits. So far, Sprint isn't earning any of those, and until it does, prospects for a "sprint" to $6 a share look hobbled.
A better idea may be the one that Caris suggested this morning, when the analyst upped its price target on already buy-rated Herbalife. Now set at $90, the new target implies a 64% profit potential in the stock, and while I'm not quite that optimistic about the shares, Herbalife does appear to hold some value for new investors.
Here we've got a P/E ratio just over 15, a growth rate just under it, and a 2.2% dividend yield to make up the difference. Free cash flow is strong, albeit not quite as strong as GAAP earnings suggest. And unlike the other ideas Wall Street has given us today (Dow and Sprint), Herbalife actually has more cash on its balance sheet than it does debt.
On balance, I'd say the stock is modestly underpriced. Herbalife is not nearly as good an idea as the stock we recently named "The Motley Fool's Top Stock for 2012," for example. Caris' contentions notwithstanding, it's also probably not going to be a "$90 stock" any time soon -- but at today's price, Herbalife not a likely loser, either.
Whose advice should you take -- mine, or that of "professional" analysts like Argus, Atlantic, and Caris? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.