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.
And speaking of the best ...
Wall Street went wild for -- and against -- credit-meister MasterCard (NYSE: MA ) Monday, as analysts broke into warring camps arguing the company's merits.
Deutsche Bank lined up on the pro side, arguing that: "[MasterCard's] 35% discount to Visa [is] too steep ... [MasterCard] can approach +20% (constant [foreign exchange]) EPS growth this [year]," and positing a $205 price target on the stock. No sooner had it said so, than rival megabanker Citigroup countered: "[W]e believe slower net [revenue] growth from the global consumer pullback will drive multiple contraction. ... the US consumer will not snap back as strong as some expect, as many are overextended and credit availability is constrained. Prefer Visa (NYSE: V ) due to debit." Citi then set its price target on MasterCard at barely two-thirds Deutsche's -- $140.
Playing Switzerland in this war is Goldman Sachs (NYSE: GS ) , which hedged its bets on MasterCard, removing the stock from its "conviction buy" list Monday, but keeping the stock at "buy."
So who's right here, Fools? Is it bullish Deutsche, bearish Citi, or that hedging hybrid of the two, Goldman Sachs?
Let's go to the tape
Since everyone seems to be hanging their theses on the indomitable U.S. consumer, let's focus on the analysts' respective picks in this sector. Goldman is, as ever, impossible to say much of. For better or worse, it continues to keep most of its ratings to itself, so we don't track it in CAPS. But the other two bankers are more forthcoming, so here's what we know.
Thus far this year, Deutsche has a mixed record on stocks tied to the U.S. consumer.
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Stock
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Deutsche says:
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CAPS says (out of 5 stars):
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Deutsche's Pick Beating (Lagging) S&P By:
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Starbucks (Nasdaq: SBUX )
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Underperform
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**
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(19 points)
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Best Buy (NYSE: BBY )
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Outperform
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**
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42 points
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Citi, however, has been struggling:
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Stock
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Citi says:
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CAPS says:
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Citi's Pick Beating Lagging S&P By:
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Unilever (NYSE: UL )
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Outperform
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*****
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(25 points)
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Under Armour (NYSE: UA )
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Underperform
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****
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(31 points)
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Fool for the Citi
Call me a Fool for the Citi if you like, but I actually think we're going to see Citigroup turn its consumer-stocks record around a bit on the back of its Master downgrade. Here's why: Over the course of the two years-plus that we've been tracking these bankers, Citigroup has consistently scored better than Deutsche Bank for accuracy. Citi's still batting sub-.500, granted, but panning MasterCard this week just might be the call that puts it above water.
Now, MasterCard didn't do half so bad as a lot of people seem to think last quarter. Fact is, the firm generated more cash profit in the first three months of 2009 than it did in all of fiscal 2008. Yet even so, the firm's free cash flow over the trailing 12 months still amounts to just $530 million. At today's price, the stock sports a nosebleed-inducing price-to-free cash flow ratio of 43, and relative to consensus expectations of just more than 16% long-term profit growth, that's a rich multiple indeed.
Foolish takeaway
To my way of thinking, MasterCard would have to repeat its first-quarter performance each and every quarter of this year in order to bring its stock price down to some approximation of "fairly valued." And as far as Deutsche's assertion that it's a bargain -- whether relative to Visa or just a plain out-and-out good deal -- I just don't see it. The just isn't there.
On the other hand, Citi's assertion that there's real risk of a consumer pullback as this recession drags on -- now that's a risk that looks all too real. Between it, and the fact that the stock is priced for a perfect world that's unlikely to appear in 2009, I have to agree with Citi today. Put MasterCard back in the icebox till this recession thing blows over.
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