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...

TPI Composites (NASDAQ:TPIC) stock got rocked earlier this month -- down 21% in a day after reporting a sizable earnings beat for fiscal Q2 2019, but disturbing guidance for the rest of this year.

Analysts had expected TPI to post a loss for the quarter, but the company reported an adjusted profit of $0.13 per share instead, alongside a $0.05-per-share GAAP profit. Unfortunately, management undid all the good that news might have done it by proceeding to predict a loss for the year of $0.18 to $0.23 per share, despite forecasting revenue that would be ahead of consensus estimates. Result: TPI stock kept on falling, and is now down a good 30% from its pre-earnings price.  

And therein, investment banker Raymond James spies an opportunity.

View of a windmill from below

Image source: Getty Images.

How do you "upgrade" a buy rating?

Already a fan of TPI Composites before the post-earnings drop, Raymond James upped its rating on shares of the windmill turbine blade maker from outperform to strong buy this morning, and raised its price target to $32, implying a somewhat staggering 80% profit potential over the next 12 months.

Why did Raymond James do this? "[T]he clean tech index ... is up 38% YTD," explains the analyst in a note covered on StreetInsider.com. Yet TPI, a component of that index, is "down 29% YTD," making it a cheap way to capitalize on the strength of green energy stocks in the U.S.

It's "the stock's rerating to its lowest-ever EBITDA multiple," therefore, that is prompting Raymond James to upgrade TPI shares "for the first time ... since its IPO in 2016."

What "lowest-ever" multiple is Raymond James talking about?

TPI Composites generated earnings before interest, taxes, depreciation, and amortization (EBITDA) of $38.5 million over the past 12 months. Weighed against the company's $840 million enterprise value, that means shares are selling for about 16.2 times EBITDA today.

Curiously, however, this does not in fact appear to be the lowest the stock has "ever" traded. In fact, according to data from S&P Global Market Intelligence, TPI was trading for EV/EVITDA ratios below 12 as recently as just a couple of quarters ago.

Accordingly, it seems to me Raymond James must not be valuing TPI on what it's actually earned over the past year, but on what management says it will earn at some point in the future. For example, in last quarter's update, management predicted that its full-year "adjusted EBITDA" will range between $80 million and $85 million in 2019. If you take the higher number, and apply it to the company's current enterprise value, then yes indeed, that works out to an EV/EBITDA ratio of less than 10 -- one of the lowest valuations we've seen on TPI in a while (if perhaps not precisely "ever").

What's more, if you look farther out, the forecasts for TPI's EBITDA only get better over time -- $148 million in 2020, $195 million in 2021, and $299 million in 2022, according to analysts polled by S&P Global.

That represents pretty strong growth over the next 3.5 years.

Hope springs eternal for TPI investors

As an investor in TPI Composites myself, I admit that I'm more than a little discouraged to see the company reporting neither positive trailing GAAP net income nor positive free cash flow over the past 12 months. That being said, I do agree that the trends in EBITDA forecasts look positive. If they prove accurate, Raymond James may well be proven correct in recommending the stock today.

And that's not the only reason this analyst may be right about this stock.

In addition to hopes that forward EBITDA numbers will look good, TPI shares also look attractive when valued on the revenue the company is already producing today. At $1.2 billion in trailing sales, the stock currently sells for an EV/revenue ratio of about 0.7 -- a valuation we haven't seen in more than a year at the most recent, and close to the "lowest-ever" EV/R it has ever seen. Moreover, analysts believe these sales will nearly double over the next 3.5 years.

Meanwhile, recall that the reason for TPI's reduction in EBITDA guidance this year is because it needs to transition seven of its 50 production lines to manufacturing a new design of turbine blade for its customers, even as 13 more lines are still in "startup" mode.  

The result of all this activity is that currently, TPI Composites is only operating at about 70% of capacity. As this year progresses, management hopes to juice that number up toward 80%, and as it adds and begins operating more and more lines, revenue will grow, and profits should grow even faster.

Long story short: There are a lot of reasons to be discouraged about TPI's performance so far. But Raymond James is right to point out that at its present depressed valuation, the risks to this stock now look "fully priced in." With its valuation in the dumps, now might be a good time to buy some TPI Composites shares.

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.