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, analysts are talking up the prospects for companies all over the board -- from Kodiak Oil & Gas (NYSE: KOG ) , to Walgreen (NYSE: WAG ) , to Kraft (Nasdaq: KFT ) . But is all the happy-talk worth listening to?
Kodiak crushes it
Investors in Kodiak Oil & Gas thrilled to last week's news that their company had beat earnings despite bringing in lower revenues than expected. Shares leaped 8% in response, and as a new week gets under way, Kodiak investors are starting this one off right, too -- with an upgrade from Global Hunter Securities.
Upgrading Kodiak from "neutral" to "accumulate" (a step short of "buy"), Global Hunter Securities appears to be taking a cautious stance on the shares -- and rightly so. On the surface, of course, Kodiak looks like everything an investor could want from a stock. The P/E is only 23, and drops below nine if you focus on forward P/E. Meanwhile, analysts continue to pound the table on this stock's growth prospects, which they estimate at roughly 50% per year... for the next five years!
On the other hand, Kodiak carries major risks in one less-noticed respect: It's generating no cash, and disturbingly similar to the situation with notorious trouble child of the oil and gas industry Chesapeake Energy (NYSE: CHK ) , is in fact accelerating the rate at which it burns cash. We've all seen how Chessie's inability to control spending, and disappointing performance on cash generation, has (with the help of several serious allegations) torpedoed the stock. Kodiak's performance -- more than $1.3 billion spent on capital expenditures over the past year, versus less than $120 million in operating cash flow -- risks delivering similar results.
Walgreen grows higher
A second stock getting a boost from Wall Street this morning is Walgreen. This morning, Mizuho Securities upped its price target on the pharmacy chain by $5, to $39. And while so far Mr. Market isn't reacting much to the news, this recommendation, to my Foolish eye, shows greater chance of paying off for investors.
Why? Because in addition to boasting an obviously cheap share price -- just 12.3 times earnings, with an 11.5% growth rate and a whopping 3.1% dividend yield -- Walgreen is generating nearly as much cash as it claims to be earning in GAAP income. Indeed, the $2.4 billion in free cash flow that Walgreen collected over the past year backs up fully 94% of reported GAAP profits.
Between the dividend, the growth rate, and the free cash, I'd say Walgreen has close to 14% profit potential ahead of it -- coincidentally, about the same amount as the Mizuho price target-hike.
A profitable cheese-like substance
And finally, we come to Kraft Foods, our third and final Wall Street flavor of the day. This morning, Jefferies upgraded the maker of Kraft Singles and Cheez Whiz to "buy," and furthermore upped its price target on the stock to $48. As Jefferies explains, a "sum of the parts analysis values KFT at $44-$48, with $12 attributed to the North American grocery business and $36 to Global Snacks."
If the analyst's right, this suggests an investor today stands to reap about a 17% profit once Kraft implements its planned break-up. But is Kraft really all it's cracked up to be?
Consider: It's not as if investors are punishing the shares of a low valuation pre-breakup. Indeed, at 20 times earnings today, you could argue (pretty easily, I'd say) that Kraft is actually over-priced for its 11% growth prospects. And that's before you even consider whether the shares should be punished additionally for Kraft's $30 billion-plus debt load ($25 billion net of cash on hand).
Investors might want to spend less time drooling over Jefferies' promise of profits, and more time worrying: After the company gets broken up, which half gets stuck with the debt?
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Whose advice should you take -- mine, or that of "professional" analysts like Global Hunter, Mizuho, and Jefferies? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.