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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Germany invades the industrials sector
Friday was a banner day for investors in the industrials sector, as Deutsche Bank burst on the scene with a full baker's dozen of new stock recommendations. Among the headliners, the German investment banker picked Emerson Electric (NYSE: EMR  ) to hold, while assigning new buy ratings to each of ITT Corp (NYSE: ITT  ) , Illinois Tool Works (NYSE: ITW  ) , Honeywell (NYSE: HON  ) , and General Electric (NYSE: GE  ) .

Why does it like the latter four, and what's it got against Emerson? Tackling the ratings in reverse order, StreetInsider.com says that Deutsche is predicting earnings growth pretty "significantly ahead of consensus" for GE -- $1.80 next year, followed by $2 a share in 2014. Honeywell's also pegged for about 10% earnings growth, as it rises from $4.95 per share next year to earn $5.55 in 2014. Illinois Tool -- $4.55 and $5.10. And ITT -- $1.93 and $2.22 per share.

Curiously, though, of the five stocks named so far, the one stock that Deutsche did not pick to outperform -- Emerson -- looks to be growing nearly as fast as ITT. The analyst predicts Emerson will earn $3.55 per share next year, followed by 14% growth to $4.05 per share the following year.

Industrials uber alles?
So what separates Deutsche's expected winners from its loser, Emerson? Actually, not a whole lot. Let's take a quick look at how the numbers break down:

 

P/E Ratio

Forward P/E

5-Year Forward Growth Rate

Emerson

14.7

13.1

10.2%

GE

18.1

13.0

12.0%

Honeywell

22.6

12.0

12.4%

ITT

n/a

11.1

8.2%

Illinois Tool

14.7

13.0

11.2%

*All data from finviz.com.

Viewed from this perspective, there doesn't really seem to be a lot of logic behind choosing the rest, but leaving Emerson behind. Sure, Emerson's growth rate isn't all that hot. But at least it's faster than ITT -- and ITT got a "buy" rating. Emerson is also tied (with Illinois Tool) for having the lowest valuation based on trailing P/E. On forward P/E, it's basically indistinguishable from the valuations at buy-rated GE and Illinois Tool.

Debt-wise, the company's similarly unremarkable, sporting a debt-to-equity level above those of ITT and Illinois Tool, but lower than what you'll find at Honeywell and, in particular, GE (whose 3.6 debt-to-equity ratio tops that of the next-worse balance sheet on the list, Honeywell, by a factor of five). Meanwhile, Emerson's generous dividend policy puts its industrial rivals to shame. Its 3.3% dividend yield is easily best-in-class here, and a good 10% more generous than what even GE pays its shareholders.

Best in show
Speaking of which, when you weigh both P/E ratios and dividend yields, and compare them to projected growth rates (a calculation that master value investor John Neff calls his "total return ratio"), both GE and Honeywell look at least as undervalued as does Emerson on a forward P/E basis, and Illinois Tool's numbers aren't too shabby either.

That's assuming, of course, that Wall Street's growth expectations pan out as planned -- a dangerous assumption. Investors more inclined to safety should resist the temptation to trust the strong growth predictions, and consequent low forward P/E valuations being placed on all five of these stocks. A safer approach is to consider each stock in light of the profits it's shown itself capable of producing today.

In this regard, Emerson's 13.5 "total return" of growth and dividends, and Illinois Tool's 13.8, currently make these two stocks the safest bets of the bunch. Neither stock is quite priced to buy just yet. But their best-in-class valuations -- current valuations, mind you -- suggest they're being given short shrift by investors, and have the most potential to surprise on the upside.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 277 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of General Electric Company. Motley Fool newsletter services recommend Emerson Electric Co. and Illinois Tool Works. Try any of our Foolish newsletter services free for 30 days. 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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