This Just In: Upgrades and Downgrades

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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 ...
MasterCard (NYSE: MA) owners may have been pleased to learn that stockpickers from Susquehanna tagged their stock to outperform yesterday -- but if so, they're not showing it. The stock actually ticked down on the new "positive" rating, basically tracking the rest of the market into the red.

Why the null reaction to Susquehanna's bullish prognosis? I see a couple of reasons, but Susquehanna's iffy record in picking winners tops the list.

Let's go to the tape
There are certain market niches on which Susquehanna has a lock. For example, three times out of four, if Susquehanna tells you an emerging-market Internet stock will beat the market, it will:

Stock	Susquehanna Says:	CAPS says:	Susquehanna's Picks Beating S&P By:
MercadoLibre (Nasdaq: MELI)	Outperform	***	46 points
NetEase.com (Nasdaq: NTES)	Outperform	****	239 points
Baidu.com (Nasdaq: BIDU)	Outperform	**	304 points

In contrast, Susquehanna's reputation in plastic prognostication looks significantly less solid:

Stock	Susquehanna Says:	CAPS says:	Susquehanna's Picks Beating (Lagging) S&P By:
Heartland Payment (NYSE: HPY)	Underperform	****	24 points
Visa (NYSE: V)	Outperform	***	(11 points)
Global Payments	Underperform	*****	(30 points)

With a reputation like that, I think you'll agree that investors are right to be skeptical of Susquehanna's MasterCard endorsement -- especially when you consider the logic behind it.

According to the banker, the bull thesis for MasterCard rests on a three-legged stool:

1. Europe. "The average European still only has 1.2 cards, lower than the U.S. with 3.7, England with 2.5, Canada with 2.3, and Brazil with 1.4." Susquehanna thinks that as the European Central Bank phases in its "Single European Payment Area," Europe will close the plastic gap, and that this "should lead to more issuance of MasterCards."
2. Canada. To a lesser extent, Susquehanna sees 2.3-card-carrying Canadians fattening their wallets with added layers of plastic, because of country-specific structural changes in 2010.
3. Margins. Most importantly, Susquehanna sees MasterCard trimming its cost structure next year. Combined with greater card issuance, the banker thinks this will help boost operating margins "400 basis points from 2Q09 to reach 47.6% in 2010."

Since I've just conceded Susquehanna's expertise in matters international, I won't quibble with its predictions of added card growth in Europe and Canada. In particular, I won't point out that even if Susquehanna is right on the macro trend, there's no guarantee the extra card business will go to MasterCard, rather than to Visa or American Express (NYSE: AXP) -- or that customers will use newly issued cards any more than the ones they've already got.

What concerns me is Susquehanna's major premise -- that increased card issuance plus decreased costs, even if it does result in 400 points of margin expansion, would bring this stock down into value territory.

Let's consider that a 400-basis-point margin increase from today's level would at best boost net profit 9%. Yet MasterCard is already selling for 35 times it trailing annual profit, in part due to legal settlements. However, the forward P/E sits at around 15.8, so a 9% improvement in earnings would change the forward P/E by less than 2, to about 14. While this multiple certainly makes the stock look much more attractive than it did at 36, a lot of the investing thesis rests on the assumptions listed above. And MasterCard has to contend with the debt currently stinging consumers around the world.

Foolish takeaway
Up on Wall Street, they keep telling us that "past performance" is irrelevant to future success. (Maybe if their past performance were a little better, they'd change their tune ...) As things stand, however, I look at Susquehanna's mediocre record on card providers, and the uncertain investment thesis, and come to only one conclusion: Be dubious of MasterCard -- especially on Susquehanna's say-so.