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While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Hercules Offshore (NASDAQOTH: HERO ) fell 4% today after Wells Fargo downgraded the drilling services company from outperform to market perform.
So what: Along with the downgrade, analyst Matthew Conlan lowered his valuation range to $5-$6 (from $8-$9), representing about 13% worth of upside to yesterday's close. While contrarians might be attracted to the stock's big plunge yesterday, Conlan thinks that Hercules' appreciation prospects remain limited given the recent concerns surrounding its Gulf of Mexico jackup business.
Now what: According to Wells Fargo, Hercules' risk/reward trade-off is pretty balanced at this point. "We and the market were definitely spooked by HERO's decision to abort the planned reactivation of a GOM jackup (as announced Wednesday night), showing management's concern about the strength and depth of HERO's most important cash-flow generating market," noted Conlan. "With this sudden market warning, especially considering the age of HERO's fleet, we have substantially reduced our target EBITDA multiple, down to just 3.5x from approximately 5.5x." When you couple those concerns with Hercules' hefty debt load and relatively weak market position, it's tough to disagree with Wells' downgrade.
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