This Just In: Upgrades and Downgrades

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 ...
What do you do when one of the biggest names in investment banking suddenly upgrades the biggest name in bottled happiness? That question faces investors this week, in light of Credit Suisse's bullish prognosis for Coca-Cola (NYSE: KO).

As you've probably heard by now, Coke's in the middle of a major operational restructuring. The company sealed the deal on its acquisition of North American operations from bottler Coca-Cola Enterprises (NYSE: CCE) Tuesday, selling its own Norwegian and Swedish bottling operations to CCE in the process. Coke tells investors it will reap "synergies" of at least $350 million from the restructuring, and after crunching the numbers, Credit Suisse declared itself officially "impressed with the high level of system alignment, clarity of purpose, marketing capability, and depth of support for bottlers."

According to Credit Suisse, the new Coke is likely to earn $3.80 per share next year, and proceed to grow sales at least 7% annually from here through 2020. But is that good enough to justify the analyst's "outperform" rating on the stock?

Let's go to the tape
Judging from Credit Suisse's record of outperformance on past picks, I'm inclined to say "yes." Ranking in the top 10% of investors we track on CAPS, Credit Suisse has consistently raced past the S&P 500's returns, with fully 80% of its current "Beverages" recommendations outperforming the market:

Credit Suisse has also done itself proud when delving into big-time purveyors of these companies' tasty carbonated products. It's currently batting .778 in the Hotels, Restaurants and Leisure business, racking up gains on recommendations such as McDonald's (NYSE: MCD) and Yum! Brands (NYSE: YUM) alike. That suggests a strong understanding of the beverage business's supply chain.

There's just one problem, though. The one Beverages stock that Credit Suisse has recommended, and which has not outperformed the market, is Coca-Cola itself.

Buy these numbers?
Coke is an impressive franchise, and I have little doubt it'll survive to see 2020. But I find little to encourage me in Credit Suisse's valuation argument for Coke.

If the company hits Credit Suisse's targeted earnings for 2011, its stock would be currently selling for nearly 16 times forward earnings. (On a trailing earnings basis, meanwhile, the stock's trading for nearly 19 times earnings.)

If the analyst is also right about the growth rate, 7% revenue growth alone would bring the company close to consensus targets for 8.5% long-term earnings growth at Coke. But even with a strong 3% dividend yield to support the stock price, I'm not sure how this all adds up to a 16-times-earnings valuation on the shares.

Foolish final thought
Historically, Coke has enjoyed a strong P/E ratio in return for investors' acknowledgement of the company's nearly impenetrable business "moat." Investors have been more than willing to pay P/Es in the high-teens and low 20s -- or even more -- to own a piece of this superb franchise. It's entirely possible that this will remain the case this year, next year -- even through 2020.

But just because investors have "always" been willing to pay up for Coke doesn't necessarily mean that's the right decision to make. It doesn't make the stock a bargain. And if at some point investors decide to demand real value for their money, I doubt Coke shareholders will be smiling.