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 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.
A most remarkable day
After writing about Wall Street's daily upgrade/downgrade moves for nearly three years now, it's not often I come across a newsflash that totally throws me for a loop. By now, I know most of the big names on Wall Street by heart, the upgrad-ers and the upgrad-ees alike. Not so yesterday.
Yesterday, midday, the news came down: Craig-Hallum has initiated coverage of A123 Systems (Nasdaq: AONE ) at "buy."
Who? Upgraded what?
That's basically the reaction I had. I mean, A123 -- yeah, I've heard of it. Fellow Fool Toby Shute introduced us to the company in a series of articles last year. Basically, it's one of several tiny startups that aim to revolutionize the auto industry as it transitions over to electric, and hybrid gas-electric, vehicles. In furtherance of this effort, A123's attracted backing from industry heavyweights such as General Electric (NYSE: GE ) , ConocoPhillips (NYSE: COP ) , and Qualcomm (Nasdaq: QCOM ) . I can see why GE and Conoco would want to get into this area -- after all, they're both in the energy business -- but it's always puzzled me why Qualcomm, a communications company, is playing. Be that as it may, A123's biggest headline to date was when it was unceremoniously dumped by GM in the contest to build batteries for the new Electric Volt.
Meanwhile, Craig-Hallum is almost a complete unknown, at least to me. A firm comprised of self-proclaimed "experienced professionals who have significant knowledge and expertise in each of our lines of business," it's also an investment banker that's just 13 years young -- a veritable babe in the Wall Street woods. Yet here comes Craig-Hallum telling us that, in its opinion, A123 is the real deal in rechargeable batteries, and a stock destined to trade for $15 a share within 12 months' time. What, pray tell, is a Fool supposed to make of a buy rating like this one?
Just the facts, ma'am
Me, I'm an agreeable Fool. Until I find Craig-Hallum developing a record as an untrustworthy analyst, I'm inclined to give it the benefit of the doubt. So let's look at the facts. Is there reason to believe Craig-Hallum's right about A123? Could this company really be a contender?
There is, and it could. The day before Craig-Hallum made its bullish prediction, you see, A123 had some good news of its own to report. It just inked a deal with Navistar (NYSE: NAV ) to supply lithium-ion battery systems for a line of Navistar "eStar" electric delivery vehicles -- the same ones that FedEx (NYSE: FDX ) is putting to use in its delivery fleet. (Nice move, FedEx.)
According to our eagle-eyed Foolish community, this is big news. Commenting on it last week -- before the news was even officially out, it appears -- Fool member 60Chevy described the deal as comprising "600 trucks with batteries from A123, at $150K a piece. We are talking about a fifty-thousand dollar truck with a hundred-thousand dollar battery. "
According to 60Chevy, "Spending sixty million dollars on batteries is something ... And next year FedEx is planning another purchase of a thousand electric trucks. Soon to follow will be [United Parcel Service (NYSE: UPS ) ] and every other company that delivers bread and soda pop and potato chips and beer, and the US Post Office, and all the taxi cabs, and so on and so on."
Blinded by the electric light
News like this is exciting. News that a professional analyst thinks there's good reason to get excited, even more so. But before we get too carried away, a word of caution is in order.
Is A123's future bright? It sure is starting to look that way. But, here in the present, we're still talking about a company that's never earned a profit in its life. A business that has, to date, done nothing but rack up losses under GAAP ($227 million over the past five full years -- and more than $96 million over the past 12 months alone), and burn cash on its balance sheet.
Foolish final thought
On the plus side, cash-burn (that is, negative cash flow from operations) hasn't been as significant as the GAAP net income numbers would suggest, amounting to just 75% or so of reported losses over both the 5-year previous term, and the last 12 months. But that doesn't change the fact that it's exceedingly difficult to stick an accurate valuation on a stock that's yet to prove itself capable of earning a profit.
My advice: Caveat investor. At least until we get a better idea of just what it is we're being asked to buy -- and how much it might be worth.