This Just In: More 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.

Today, Wall Street's talking up the fortunes of Pfizer (NYSE: PFE  ) and Transocean (NYSE: RIG  ) , but talking down prospects at United Technologies (NYSE: UTX  ) . Let's find out why, beginning with...

The bull case for Pfizer
It's looking like a pretty "red" day for Mr. Market. Shareholders of big pharma standard bearer Pfizer, however, are sidestepping (most of) the carnage this morning. And for this, you can thank the friendly analysts at BMO Capital Markets, who initiated coverage of Pfizer this morning with an "outperform" rating and a $30 price target. But are they right? Is Pfizer due for a 20% pop?

Hardly.

Sorry to burst your bubble, Pfizer pfans, but while I agree Pfizer isn't quite as expensive as its price to free cash flow ratio of 19 makes it look, the stock's not the bargain BMO makes it out to be, either. Pfizer, you see, generates $14.9 billion in free cash flow annually, which is a nice premium to the $10.2 billion in GAAP earnings that it reports. It's still only enough cash, though, to give the stock a 12.4 price to free cash flow ratio. And with Pfizer projected to average only 2% annual earnings growth over the next five years, that's simply too high a price to pay.

In short, while Pfizer has done well for me in the past (witness its 29% gain since I recommended the stock late last year), today's valuation shows little promise of continued outperformance. So taking BMO's endorsement as my cue, I'm officially pulling my own "outperform" rating on Pfizer today, and closing out my CAPS recommendation at a profit. So long, and thanks for all the pfish, Pfizer.

Oil drillers -- swimming in profits?
Two other stocks receiving some analyst love this week are Atwood Oceanics (NYSE: ATW  ) , upgraded to "buy" this morning at Guggenheim, and Transocean, which got a nod and an upgrade to "strong buy" at Oracle Investment Research just yesterday. Of the two, Atwood appears to offer the more compelling bargain, if for no other reason, then simply because its P/E ratio of 12 looks a whole lot cheaper than the "infinity-times-earnings" multiple on Transocean's nonexistent GAAP profits.

But the situation's not really as simple as it appears. Dig a little deeper into the numbers and what you'll find is that while Transocean reported a pretty sizable loss ($6.5 billion) under GAAP accounting procedures for the past year, it actually churned out nearly $1.1 billion in positive free cash flow -- real cold hard cash profits. In contrast, Atwood burned $301 million over the past year, even as it claimed to be "earning" $250 million in GAAP "profits."

Interestingly, Atwood's total cumulative free cash flow for the past five years has also been negative -- $218 million burnt over five years' time, while Transocean has been generating cash profits at an average rate of close to $2.1 billion over the same time span.

As a result, while Atwood may look cheap today, I think Transocean is actually a better bet. While even its free cash flow number looks weak based on trailing-12-month results, over the longer term, Transocean has proven itself a winner. Priced at just 12 times its historical average annual cash earnings, and pegged for 23% long-term growth on Wall Street, Transocean is priced to move.

Untied Technologies?
Am I the only one who continually mistypes this company's name? Maybe I am, but the sentiment expressed in the typo appears pretty common. Take today's downgrade of United Tech by Oppenheimer for example.

This morning, Oppy hit UTC with a downgrade to "perform," warning that its "industrial businesses are stuck in the funk in China and Europe." According to StreetInsider.com, the analyst cites headwinds in UTC's "commercial-aero businesses," and also in the Pentagon budget as additional difficulties, and argues there really aren't any "catalysts" visible that would justify paying a "premium to the current market multiple."

But that's just the thing: Does United Tech cost a premium to the rest of the market? I mean, sure, at 16.3 times earnings, UTC looks a bit pricey. But that's only until you notice that with $6 billion in trailing free cash flow, the firm is actually generating $1.38 in cash profits for every dollar of GAAP earnings it reports. Seems to me, the company's 12 times price to free cash flow ratio is actually pretty reasonable for a 10% grower paying a 2.7% dividend yield. Meanwhile, archrival General Electric (NYSE: GE  ) is making some pretty optimistic noises about the global economy, and its prospects therein.

If what's good for the goose is also good for the gander, investors (and Oppenheimer) just might be surprised at how well UTC does in the year to come.

And speaking of GE, the recent financial crisis hurt the company, sure, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's infrastructure leader. At the same time, you need to be aware of the threats to GE's portfolio. To help, we're offering comprehensive coverage for investors in a premium report on General Electric, in which our industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE, and you'll receive continuing updates as major events unfold during the year. To get started, click here now.

Whose advice should you take -- mine, or that of "professional" analysts like BMO, Guggenheim, and Oppenheimer? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.

Fool contributor Rich Smith is neither long nor short any stock named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 281 out of more than 180,000 members. The Fool has a disclosure policy

The Motley Fool owns shares of Transocean and Atwood Oceanics. Motley Fool newsletter services have recommended buying shares of Atwood Oceanics.

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


Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 28, 2012, at 3:08 PM, slowtrain79 wrote:

    This author wrote a similar piece back in 09. Below was my response at the time. My position hasn't changed at all. In fact, I would suggest the author follow his own advice and "dig a little deeper"

    "This analysis of ATW is awful. It is obvious to me that the author has little knowledge about the deepwater drilling industry or ATW in particular. This is a perfect example of why you can't make an investment decision solely on the basis of glancing at the balance sheet. It is crucial that you KNOW the business. This company does, in fact, generate lots of cash. They have, however, spent over 400 million dollars in the last ten years on upgrading it's fleet. They also have a new rig coming online next year, the Atwood Osprey, which total cost to mobilize will come in around 600 million. They already have a 3 yr contract in place once the rig is completed with a dayrate of 450,000-470,000). This is a 3yr contract with an option for 3 additonal years. The company has top-flight management. They have used the boom over the last several years to upgrade their fleet and position the company for long-term growth. There is way more upside to this stock than downside, in my opinion."

  • Report this Comment On September 28, 2012, at 4:38 PM, TMFDitty wrote:

    And you may be right. As my CAPS record demonstrates, I get about 30% of my calls wrong -- and Atwood could be one of the 30.

    That said ... if this is the article you are referring to ... http://www.fool.com/investing/general/2009/10/05/rocket-stoc... ... then I can't help but notice that the stock is up 20% in the three years since I wrote it.

    The S&P500, in contrast, is up 34%.

    Foolish best,

    TMFDitty

  • Report this Comment On September 30, 2012, at 8:46 PM, slowtrain79 wrote:

    yes, if you go back one day to Friday close 10/2 (article published Monday10/5 before markets closed), then ATW beats the S&P to date. I couldn't help but notice.

  • Report this Comment On October 04, 2012, at 10:45 PM, TDRH wrote:

    Slow train, The Atwood condor Begins it's contract with Hess this month. Not sure of the duration of the contract. This is ATW's first DP vessel. Two of the three new jack ups are under contract and they

    just announced a contract in2013 for the Drillship Advantage. Some of this good news is already factored in, but percentage wise ATW growth will exceed RIG if there are no serious issues or downtime issues.

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