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...

2018 has not been a fun year to own WageWorks (NYSE:WAGE) stock.

In March, WageWorks filed a Form 12b-25 with the SEC advising that it was "unable, without unreasonable effort or expense, to file its annual report on Form 10-K for the year ended December 31, 2017." The company had discovered "a material weakness in its internal control over financial reporting," and subsequently clarified that the discovery of "certain issues, including revenue recognition" would require it to restate financial results for "the quarterly and year-to-date periods ended June 30 and September 30, 2016, the fiscal year ended December 31, 2016 and the quarterly and year-to-date periods ended March 31, June 30 and September 30, 2017."

Last month, this debacle cost WageWorks's CEO, CFO, and general counsel their jobs -- and has so far cost investors in the employee benefits manager 25% of their stock's value since the year began. If this seems an odd situation in which to be upgrading WageWorks stock -- well, it is. And yet, that's just what investment banker William Blair has decided to do, reinitiating coverage of WageWorks stock with a rating of outperform this morning.

Here's what you need to know.

Accountant auditing books

The auditors are still auditing WageWorks' books -- but this banker isn't waiting for an "all clear" to buy. Image source: Getty Images.

Time to buy WageWorks?

William Blair has historically been a strong defender of WageWorks stock, hosting the company's management at a "growth stock conference" last year and announcing back in March, in the middle of the accounting crisis, that "it is unlikely there was any fraud or illegal activities at WageWorks." As such, it's not a huge surprise to see the analyst signing back on to cover the stock today.

What may surprise you, though, is the extent of the analyst's optimism about this company, which administers such employee fringe benefits as flex spending plans, health savings accounts (HSAs), and commuter benefit services (such as free bus passes and parking benefits for employees).

William Blair argues that despite its accounting difficulties, WageWorks still boasts a "strong franchise in an attractive secular growth industry with clear positive operating leverage," TheFly.com reports. The analyst believes these advantages justify a target price of at least $60 a share -- roughly where WageWorks traded at the start of this year, and enough to hand new buyers about a 33% profit from today's price.

In Blair's view, this price is justified because WageWorks' stock valuation right now is "far below historical levels and peers."

The trouble with valuation

Is William Blair right about that? This is the exact problem investors face right now: trying to figure out not just what multiple to earnings WageWorks stock deserves, but precisely what those earnings are in the first place -- so that a multiple can be applied to them.

Nov. 8, 2017, was the last time WageWorks filed an audited 10-Q report with the SEC. Since then, we've been six months without seeing any reliable financials with which to gauge the health of the business. As a result, even if William Blair is right about WageWorks being worth "13 times forward EBITDA," we still don't know for sure what those earnings before interest, taxes, depreciation, and amortization are (much less what WageWorks' net profit is, or how much free cash flow it is generating).

Best guesses

If you ask me, William Blair is shooting in the dark here, hoping against hope that despite the accounting difficulties, WageWorks remains as profitable today as it appeared to be at last report, six months ago. And yet, I can't say I completely blame them for that -- because if WageWorks is as profitable as it once appeared, then the stock really is a pretty compelling buy.

According to data from S&P Global Market Intelligence, as of Nov. 8 last year, WageWorks was earning net income at the rate of $45 million a year, but throwing off free cash flow at the rate of more than $148 million a year. And of course, with so much cash pouring in, the company had no net debt -- actually, close to $650 million more cash than debt on its balance sheet.

If that's still true today, then WageWorks stock could be selling for as cheap as $1.1 billion in enterprise value. With $148 million in free cash flow, the stock's valuation could be as little as just 7.6 times enterprise value -- incredibly cheap for a company that Wall Street analysts still have pegged for 15% annualized profits growth over the next five years.

The upshot for investors

Last we heard from WageWorks management, as of May 10, 2018, the company had "not identified any material adjustments to its financial statements that would be expected to cause revenue or adjusted EBITDA for fiscal year 2017 to differ materially from the information disclosed on November 8, 2017." Or in other words, so far as we know right now, the valuation described above should be still pretty much correct.

If it remains so when WageWorks finally gets its accounting in order, William Blair will have found an incredible bargain for investors. But until we know that for sure, it's probably still best to wait and see. There will be plenty of time to buy in once investors have reliable numbers on which to base their decision.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.