Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope.

One month after trouncing analyst estimates for its first-quarter 2017 earnings, ManTech International (NASDAQ:MANT) stock is on the move again -- this time, because of an analyst upgrade. This morning, analysts at Cowen & Co. announced they are upgrading shares of the small defense contractor to "outperform," and assigning the stock a $45 price target.

Here are a few reasons why.

Man touching shield/lock icon

Tiny ManTech is a big force in government cybersecurity. Image source: Getty Images.

A boffo Q1

StreetInsider.com has the highlights from ManTech's the first-quarter report: Sales for the first quarter of the year grew 7% year over year, with operating margins improving and driving operating profits up 11%. Likewise, earnings per share grew 11%, to $0.39 per share.

Best of all, ManTech reported a simply superb book-to-bill ratio of 1.7, meaning that the company won 170% as much new business as it transformed into revenue in the quarter -- a strong sign of future sales (and hopefully, profits) growth in quarters to come.

What Cowen likes

Reviewing the trends at ManTech, Cowen observed that the company appears to be gaining "momentum" in its business. TheFly.com reports that organic sales growth is expected to be positive in 2017, a possibility supported by the company's strong book-to-bill ratio in the first quarter. And that's not all Cowen likes about ManTech.

On top of the sales, Cowen sees the company improving its profit margins on those sales. The analyst also argues that ManTech has "above-average M&A potential."

Reality check

Is Cowen right about all that? Well, let's see here. First quarter's book-to-bill strength certainly supports the thesis of rising sales. As far as profit margins on those sales go, ManTech is currently lagging many of its larger defense contracting peers with an operating profit margin of only 5.8%. By the same token, though, Cowen is right that this does leave room for improvement if ManTech can find a way to make its business more efficient.

In that regard, it's worth pointing out that S&P Global Market Intelligence data show operating profit margins improving for two years straight at ManTech already (in 2014, the company's operating margin was only 5.4%). And this improvement in profitability extended into first-quarter 2017, with margins growing to 5.8% -- 20 basis points better than ManTech recorded in first-quarter 2016.

With regard to ManTech's "M&A potential," there are two ways of looking at it. Cowen seems to be focusing on the company's strong balance sheet, which boasts $92 million in cash on the books, and no long-term debt whatsoever. This balance sheet strength, argues Cowen, is a weapon that ManTech can "deploy" to finance its acquisition of smaller (probably private) defense companies.

At the same time, it's worth pointing out that with a price-to-sales ratio of less than 1.0, ManTech is itself one of the few remaining "cheap" stocks in the defense industry today. This, combined with the stock's relatively tiny market capitalization of only $1.5 billion, makes ManTech a potential acquisition for one of the larger players in the industry as well.

Valuing ManTech

Buying a stock in hopes that it will later be acquired at a premium, of course, can be a dicey proposition. If no acquisition materializes (or if it takes longer to materialize than you expected), you could end up owning a stock you never really wanted to own in the first place and for a lot longer than you are comfortable owning it.

So the real question investors have to ask themselves is: Would ManTech be a good investment in its own right, even if its "M&A potential" is never realized?

I think there's a case to be made that ManTech is such an investment. Consider: At 26 times trailing earnings, ManTech stock looks, at first glance, to be rather richly priced. If you value the stock on its free cash flow, however, instead of its GAAP earnings, the stock begins to look more affordable.

Over the past year, ManTech generated positive free cash flow of $95 million, or more than 60% above its reported net income of $58.2 million. Thus, while its price to earnings may be steep, ManTech sells for a more reasonable price-to-free cash flow ratio of only 16. What's more, if you adjust the company's $1.5 billion market cap to account for its $92 million in cash, ManTech's debt-adjusted value (its enterprise value or EV) is an even cheaper-sounding $1.4 billion -- giving the stock an EV/FCF ratio of just 15 times.

That's a pretty cheap price, folks. Whether or not a larger defense contractor notices this fact and decides to buy ManTech, the stock looks inexpensive enough to me to justify Cowen's "outperform" rating. You might want to give it a look yourself.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.