This Just In: Why Goldman Sachs Downgraded the Boeing Company

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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
In the world of stock upgrades and downgrades, few investment bankers have a more immediately recognizable name than Goldman Sachs. Goldman ranks in the top 15% of investors we track on CAPS, with recommendations that tend to outperform the broad stock market by close to four percentage points per pick.

So when Goldman Sachs issues an unexpected recommendation -- such as this morning's decision to downgrade shares of Boeing (BA -0.16%) to hold -- that tends to get investors' attention. But should it?

Let's go to the tape
After all, despite its famous (infamous?) name, Goldman Sachs' record on stocks is far from perfect. In fact, over the eight years we've been tracking its recommendations, Goldman has actually called more stocks wrong than right and racked up a record of only 48% accuracy on its picks. Among its more grievous errors from the aerospace and defense sector in particular:

Of course, in the analyst's defense, one stock Goldman Sachs has been right about so far is Boeing. Consistently bullish on the stock since rating it a buy back in May 2010, Goldman's recommendation has outperformed the rest of the stock market by a good 27 percentage points. That lends some reason for confidence that when Goldman tells us today (as related by StreetInsider.com) that "expectations for both the legacy OE cycle and [for Boeing's] 787 program appear elevated," the banker may know what it's talking about.

According to Goldman, the fact that Boeing is now expected to produce "2X the amount of aircraft it did in 2008" makes "incremental growth in the medium-term difficult." Or put another way, Boeing's got a great business going right now -- but that very fact leaves little room for improvement.

Valuation matters
Not all analysts see things this way. On average, consensus estimates call for Boeing to keep growing its profits at 10% annually over the next five years. Problem is, even this respectable rate of growth may not be enough to prove Goldman Sachs wrong this time -- or to make Boeing a stock worth buying.

Priced at 21 times earnings today, Boeing shares appear richly valued for a mere 10% growth rate. Indeed, even with free cash flow running nearly 33% ahead of reported "GAAP" net income, the stock sells for a none-too-cheap price-to-free cash flow ratio of 15. Taking 10% growth as a given, a 15x multiple to FCF is no great bargain.

Long story short, while I don't see Boeing shares as so ridiculously overvalued as to justify "shorting" the stock, Goldman Sachs is right: It's not cheap enough to go "long" on, either.