While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Eagle Rock Energy Partners (NASDAQ: EROC ) slipped almost 1% in pre-market trading Friday after Wells Fargo downgraded the natural gas processor from outperform to market perform.
So what: Along with the downgrade, analyst Praneeth Satish lowered his price target to $5-$6 (from $7-$8), with the midpoint representing about 9% worth of upside to yesterday's close. While contrarians might be attracted to the stock's steady slide over the past year, Satish thinks that Eagle Rock's upside remains limited given the company's seemingly lackluster growth prospects and worrisome trend of rising costs.
Now what: According to Wells, Eagle Rock's risk/reward trade-off isn't too attractive at this point. "Although we continue to expect EROC's balance sheet to improve meaningfully following its transaction with RGP and the partnership to re-lever its balance sheet with a debt-financed acquisition, we now anticipate accretion from this acquisition would be used to bring EROC's coverage ratio back to approximately 1.0x rather than support a distribution increase (i.e. our prior thesis)," noted Satish. "Consequently, as a low-to-no growth, natural gas-focused upstream MLP, we believe EROC could trade at an 11.5% yield (implies a valuation of approximately $5.20 per unit)." With Eagle Rock already off more than 50% from its 52-week highs and boasting a near-12% dividend yield, however, now might not be the most opportune time to bail.
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