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.
Take two pharmacy stocks and call me in the morning
First, the good news. Up on Wall Street, the analysts at Cantor Fitzgerald have taken a close look at the rivalry between CVS and Walgreen -- who have been dueling of late over who will control the market for consumer prescriptions -- and come to a surprising conclusion: They're both buys.
As StreetInsider.com confirmed this morning, Cantor has just initiated coverage of both stocks. The analyst thinks several years of "streamlining" its pharmacy benefits management business has positioned CVS to reap 15% operating income growth in 2012. 2013 looks pretty good, too, with a projected savings of $225 million to $275 million from the cost-cutting initiatives, which could add another 6% or 7% to the bottom line.
Similarly, Cantor is looking past the "transition year" at Walgreen to a brighter 2013. The analyst argues that next year, Walgreen should be able to recapture about 50% of prescriptions lost to the kerfuffle with Express Scripts (Nasdaq: ESRX ) . Add in new international revenues, increased cost savings from the sale of generic drugs, and other benefits, and Cantor sees $0.30 per share in extra profit next year -- about 10% of current earnings.
In both cases, Cantor appears right on the money. Walgreen is the most obvious value candidate here. 12.3 P/E ratio, 11.5% growth rate, and a 3% dividend -- cheap! But as I pointed out last week, CVS looks attractive, too, boasting superior free cash flow and a nice 1.4% dividend yield that pushes the stock down into value territory.
And speaking of bargains...
Dolby Laboratories is doing its darndest to make me look good, too.
Last week I argued that the stock had been sold off too hard following the company's disappointing earnings. To recap: "At 12 times earnings, and less than 10 times free cash flow, the stock's a steal of a deal." Happily, Dolby has bounced 8% off the price it was fetching before that article came out. But is it still a bargain?
Actually, yes -- just not as big a bargain as it was last week. This morning, Barrington Research announced that while it still likes the stock, it has decided to roll back its old price target ($50) to something a bit more achievable ($42). And believe it or not, that sounds about right.
Listen, Fools: I still like Dolby. I still own it. But last quarter was a bit of a disappointment, and Dolby's prospects don't look as bright as they used to. At 13 times earnings today and a 14% growth rate, the stock's still clearly underpriced -- the more so when you notice that it's selling for only about 10 times free cash flow and sitting on $1 billion net cash. But I don't see it hitting $50 anytime soon. My price target's somewhere in the mid-40s, or right in line with Barrington's estimate.
Finally, we come to Thompson Creek Metals, subject of a downgrade to "hold" from BB&T Capital. The molybdenum miner beat expectations on both revenue and earnings last week. Yet revenue still dropped, margins contracted, and Thompson Creek ended the quarter with a loss.
Bulls say this doesn't matter; with a P/E ratio of just 12 -- and dropping into the single digits based on forward earnings estimates -- Thompson appears cheap. But appearances can deceive.
Take a close look at Thompson's cash flow statement, and you'll notice that despite reporting "profits," Thompson is actually burning cash, resulting in about $778 million worth of negative free cash flow over the past 12 months. With a balance sheet that shows it to be already $200 million in debt, this trend is unsustainable. Eventually, Thompson must either start producing cash from its operations or cease to operate. Long story short, I'd rather be short this one than long. However, for a better bet on mining, consider instead the gold miner we recently discovered and profiled in this new Fool report: "The Tiny Gold Stock Digging Up Massive Profits."