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?
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.
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.