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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

A civil war in Dixieland
On Thursday, the news broke of FedEx's (NYSE: FDX) first quarterly loss in more than a decade, and Carolinian megabanker Wachovia promptly initiated coverage of two of its fellow Dixie corporations: Memphis-based FedEx, of course, but also Atlanta's favorite son, UPS (NYSE: UPS).

Gen. Robert E. Lee must be rolling in his grave, though, because Wachovia's showing precious little Southern unity. In twin initiations of coverage Thursday, Wachovia first panned FedEx but then turned around and praised UPS. Wachovia believes that the former has too "high operating leverage in a moderating economy." This is analyst-speak for saying FedEx has high fixed costs. When the economy is good and revenues flow freely, lots of profit drops to the bottom line. But if revenue begins to wobble, FedEx may struggle to cover its fixed costs. For this reason, Wachovia slapped a "market perform" label on FedEx.

In contrast, Wachovia thinks UPS is just peachy keen. (Get it? Georgia? Peaches? Oh, never mind.) Commending UPS' "balance sheet, reduced pension risk, improving supply chain and freight results, domestic market share gains in the small parcel market, as well as increased crossselling," Wachovia recommended that you pick up some shares at today's price.

Let's go to the tape
But enough with singing songs about the Southland. Is Wachovia right or wrong? Well, for just about the past two years, we've recorded and tracked just more than 400 ratings that Wachovia has assigned to various stocks. Sad to say, the analyst is slightly more often wrong than right with these picks -- it has scored just less than 50% for accuracy on CAPS.

Let me pull a few examples from our database for you, weighted toward the transportation industry, to illustrate:

So Wachovia has made a couple of bad bets in the transportation space -- but it's also made a couple of winning wagers:

In other words, Wachovia is about as accurate with its guesses as your average flipped coin -- within the transportation sector and without. Considering the analyst's directionless record, therefore, deciding whether it's more likely right than wrong on FedEx and UPS becomes, to me, a question of valuation.

So how's that work?
Like this. FedEx sells for a price-to-earnings ratio of 12.9 based on its trailing results, and it gets a 13 P/E based on forward earnings estimates. Weighed against what most analysts expect will be 11.7% profits growth over the next five years, that tells me the stock is pretty well fairly valued at today's price. In other words, Wachovia's right to call the stock a "hold."

Not so with UPS. Even if you discount the stock's sky-high trailing P/E -- a consequence of last year's $6.1 billion charge related to its exit from a pension fund -- UPS still looks significantly more expensive than FedEx. Big Brown's forward P/E sits at 14.7 -- about 13% higher than FedEx -- yet UPS carries approximately the same projected growth rate, 11.3%, as its rival. With the growth rates a wash, you're left with just the higher price tag to differentiate the two stocks. And to me, calling a cheap stock a "hold" while slapping a "buy" rating on a stock that's 13% pricier just plain makes no sense.

Foolish takeaway
I hesitate to call any member of a two-company oligopoly a "sell." But given its relative cost, the most I can say about UPS is the same as I say about FedEx: It's at best a "hold." And if Wachovia thinks differently -- well, it's just plain wrong.