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." 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.

B. Riley, "A" for effort
Today we'll be looking at a small-cap industrialist that just caught an upgrade from the analysts at B. Riley & Co.: Remy International (NASDAQ: REMY  ) . Remy's an interesting little company, a remainder of the old Delco Remy division of General Motors (NYSE: GM  ) , and now majority-owned by Fidelity National Financial (NYSE: FNF  ) . Based in Pendleton, Ind., it manufactures and sells primarily electrical components for automobiles, light trucks, tractor-trailers, and other vehicles.

The company last reported earnings earlier this month, on May 1, and the news wasn't good. Q1 2013 sales slipped 4% against the year-ago quarter. Earnings plunged 85% (largely because of severance benefits paid when CEO John Weber stepped down back in February), leaving the company with barely $0.04 in per-share profit earned, versus $0.28 the company had earned in last year's Q1. Regardless, B. Riley resumed coverage of Remy on Friday with a buy rating and a $23 price target.

But does Remy deserve it?

First, a word from our sponsor ...
I actually think the answer to this one could be "yes." But before I tell you why, let me make one quick disclosure right up front: My wife works for Remy. She doesn't own stock in the company (although I admit -- one motivation I have in writing up this Remy rating is to decide how I'll answer her if she's offered stock options at some point and asks me whether she should take advantage of them). But she does draw a paycheck.

Anyway -- while I don't think this employment relationship is affecting my evaluation of the company, I could be wrong, and you should be able to factor this possible bias into how you read the rest of this article. That's part and parcel with the Motley Fool disclosure policy.

Now let's get back to B. Riley, and its endorsement of Remy.

Let's go to the tape
One of the better-ranked analysts we follow here on Motley Fool CAPS, B. Riley has a strong record of picking strong stocks for its customers. It ranks, in fact, in the top 5% of analysts we track. This broker boasts 57% accuracy on its picks over the past few years, with its average stock recommendation outpacing the S&P 500's returns by more than 12 percentage points. As such, a B. Riley endorsement of Remy should not be taken lightly.

As for the stock it's endorsing, Remy has some pretty impressive numbers, too. Its poor performance in Q1 notwithstanding, cumulative earnings for the past 12 months still come to $131 million -- giving the stock a temptingly low P/E ratio of just 4.3.

Now, the company's cash flow statement shows us that Remy isn't quite as profitable as it looks. But even so, the $35 million in cash profits that Remy generated over the past year still give the company a fair-seeming price-to-free cash flow ratio of 16, and a not-unreasonable enterprise value-to-free cash flow ratio (factoring in the company's net debt) of about 22.

Given that S&P Capital IQ currently has Remy pegged for earnings growth of more than 41% per year over the next couple of years, the high multiples to today's profits seem appropriate. That's assuming that the company achieves what analysts are promising it will achieve and doesn't fall closer to the average growth rate projected for the auto parts industry -- a much more modest 13%.

Foolish takeaway
Remy is not a company without blemishes. Last quarter's performance was frankly quite disappointing. Forty-one percent annual growth, even if achieved over the next two years, cannot be maintained indefinitely. And the company's $310 million debt load ($217 million, net of cash), is a bit higher than I'd like to see as well. But overall, the stock's valuation still looks attractive.

So far, only one analyst (B. Riley) is following Remy on Wall Street. But to my Foolish eye, this is a growth story that bears watching. It might even be one worth buying, before the rest of Wall Street catches on to what B. Riley has discovered.

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