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.
And speaking of the worst ...
Deutsche Securities started off the week on an up note ... and a down note on Monday. Taking a good, hard look at the global steel industry, the Teutonic megabanker gave its blessing to U.S. mill operator Nucor
After careful consideration, Deutsche decided it's been too optimistic up till now, and the time has come to reduce earnings forecasts for the coming year. No quick trim, this is a full-scale haircut -- a 44% reduction necessitated by "lower volume and steel price assumptions for all coverage companies" in the new year.
With profits under pressure, Deutsche Securities tells us that balance sheets will gain importance in the coming year. The earnings game will become less the race for fabulous profits of yesteryear, and more a contest for who can make enough money to simply service its debt. In this regard, Deutsche commended both "Nucor and AK Steel
Which, I have to admit, makes some sense. Reviewing the five named firms' financials, Nucor and AK Steel have the lowest debt-to-equity ratios of the bunch (0.42 and 0.46, respectively). They also have the strongest interest coverage ratios, with Nucor in particular earning 31 times more earnings before interest and taxes than it needs to keep up with its debt payments.
But note that I said "some sense." What Deutsche doesn't say is that in both respects -- debt-to-equity and interest coverage -- scorned U.S. Steel scores nearly as well as its esteemed rivals Nucor and AK Steel -- at 0.52 times and 16.7 times, respectively. Nor will you read in Deutsche's report any mention of the banker's record in this industry.
The fact is that Deutsche's January recommendation to buy ArcelorMittal (since rescinded) underperformed the market by 18 points before getting pulled, and that a similarly bullish stance on Russia's Mechel
Foolish takeaway -- and a bonus
Personally, I'm not impressed with Deutsche Bank's record. Certainly not enough to flee U.S. Steel on its say-so, and probably not enough to buy Nucor or AK Steel without taking a much closer look at the companies first.
That said, if you do want to listen to it -- and remember that there is at least a kernel of wisdom contained in today's ratings -- then here's another nugget that may prove useful: Cognizant of the laws of supply and demand, Deutsche Bank sees slack steel demand pulling down input prices this year. Specifically, the banker predicts as much as a 40% drop in iron ore prices in 2009, with coal prices dropping perhaps 60%. So if you own BHP Billiton
Just a few words to the Foolish.
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Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 835 out of more than 125,000 members. The Fool has a disclosure policy.