This Just In: Upgrades and Downgrades

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.

Forecast cloudy, with a chance of rust
Amgen
(Nasdaq: AMGN  ) shareholders received an early Christmas present last month, when their company reported second-quarter earnings... and just plain blew out da box. Beating on revenues and exceeding earnings estimates by a full dime, Amgen reported $1.61 in second-quarter profits, and increased its earnings 29% in comparison to last year's Q2. This week, a second gift arrived in the mail, when investment banker Lazard Capital upgraded the shares to "buy."

In fact, yesterday was a very busy one for Lazard in the field of biotech. In rapid succession, the analyst rushed out an upgrade of Vivus (Nasdaq: VVUS  ) ahead of last night's earnings (click here to see our coverage on that news), downgraded Gilead Sciences (Nasdaq: GILD  ) , and assigned new buy ratings to Discovery Labs (Nasdaq: DSCO  ) , Vertex Pharmaceuticals (Nasdaq: VRTX  ) , and Questcor -- among others. The analyst's upgrade of Amgen stands out from all the rest, however, for its very abruptness -- just 24 hours before recommending that investors buy Amgen, you see, this same analyst had been telling folks to sell it.

See analyst. See analyst spin on a dime. Spin, analyst, spin!
It gets an investor to wondering: What changed? Why was Amgen a sell one day, but a buy the next? Such an abrupt change of heart might have made sense if, for example, Amgen had just delivered new earnings news that changed the valuation picture on the stock. But remember -- Amgen reported its earnings nearly two weeks ago. That's quite a delayed reaction.

Then again, Lazard has rarely been accused of being the sharpest knife in the drawer, or the quickest recognizer of the obvious. According to our statistics on Motley Fool CAPS, Lazard only ranks in about the top quartile of investors we track -- and in biotech, the majority of its current recommendations are losers. (Indeed, only 32% of Lazard's active picks in this industry are actually outperforming the market.)

The fact that Lazard is slow, however, and often wrong on its picks, doesn't detract from the fact that this time, it's right on the money. Lazard says Amgen is a buy today, and Lazard is right.

Analysts come and go, but value is always a winner
Here's why: At first glance, Amgen does look modestly overvalued. From a plain-vanilla PEG ratio perspective, the stock's 18 P/E ratio divided by its 11% projected growth rate does look a bit expensive. (It's perhaps for this reason that Lazard stayed fooled for so long about the stock's "expensiveness.")

But if you look a little closer, what you'll soon notice is that Amgen isn't really as expensive as it seems. While trailing earnings at the company are only $3.8 billion, Amgen actually generated about 37% more "cash profit" over the past year than it was allowed to report as "accounting profit" under GAAP standards: $5.2 billion in positive free cash flow, to be precise. And when you divide this bigger number into Amgen's market cap, what you get is a quite reasonable price-to-free cash flow ratio of 12 -- not at all expensive for 11% growth, especially once you factor the firm's modest 1.8% dividend yield into the calculation.

Long story short, Amgen may not be the cheapest stock on our shopping list here at the Fool (to see our favorite bargain-basement stock pick, download our free report: "The Motley Fool's Top Stock for 2012"). It is, however, quite fairly priced, and Fool-y worthy of the buy rating Lazard now assigns it.

Even if Lazard's a little late to the game in realizing it.

Motley Fool newsletter services have recommended buying shares of Gilead Sciences and Vertex Pharmaceuticals, but Fool contributor Rich Smith holds no position in any company mentioned. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 306 out of more than 180,000 members. The Fool has a disclosure policy

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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