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.

Fire in the hole!
By now you've heard the news: Wisconsin-based heavy industrialist Oshkosh (NYSE:OSK) won the right to build upwards of 2200 All-Terrain MRAPs for the U.S. Army yesterday -- a contract valued at anywhere from $1 billion for the initial installment, to $2.5 billion if the full complement of 5244 vehicles gets built, to perhaps as much as $12 billion if the program is expanded even further.

Tuesday's bombshell echoed along Wall Street, where the same analysts who argued that Force Protection (NASDAQ:FRPT) would win the contract earlier this month played a madcap game of duck-and-cover yesterday. Dougherty & Co. ditched its buy rating on the stock in a hurry, and yanked its recommendation on Spartan Motors (NASDAQ:SPAR) motors for good measure (on the theory that Spartan had been hoping to build MRAP chassis for Force if its bid had won the day -- and now won't.)

Collins Stewart, which had gained notoriety for its abrupt changes of position on Force Protection previously, pulled its buy rating on the stock once again, saying it no longer sees any "catalysts" that could push the stock higher. (A point on which I differ, as I'll explain in a moment.) Meanwhile, a third analyst that had previously stayed out of the Force debate, Sterne Agee, made the logical choice to upgrade the contract's winner, Oshkosh.

Discretion is the better part of investing
But I don't mean to mock Sterne Agee for stating the obvious -- fact is, this analyst is developing a decent reputation in the heavy industrial space. Not only does Sterne Agee's Oshkosh optimism seem sound, but it's also racking up a 57% win-record in the "Machinery" sector. A few representative picks:

Sterne Agee's record makes a lot of sense to me -- and it's also worth mentioning that of the three analysts who shifted their ratings around yesterday, Sterne has the best record by far, boasting 53% accuracy on its recommendations overall, and outperforming 90% of the investors we track on CAPS. But what about the folks downgrading Force Protection?

With them, I politely beg to differ. Collins Stewart (rated 45% accuracy) and Dougherty (outperforming the market less than 40% of the time) both seem to think that absent a clear win in the "M-ATV" competition, Force is not worth owning. Collins in particular laments the lack of a catalyst that could send the shares shooting higher ...

Of catalysts and valuation
... which is fine by me. Thanks to yesterday's sell-off, Force Protection shares are selling for rock-bottom prices today. The last thing I want to see -- and the last thing you should want to see if you're looking to buy into this company -- is for these shares to rocket in price on a "catalyst" before we have a chance to buy them on the cheap. Valuation matters.

You see, over the past 12 months, Force Protection generated $34.9 million in free cash flow. It did this without the benefit of an M-ATV contract. In fact, according to CEO Michael Moody, it did this without making any "significant number of MRAP vehicle sales" at all.

Even lacking such "catalysts," most analysts believe that Force can grow its profits sustainably over the future. Force's CEO agrees, arguing that Force's "ability to ... generate growth and value for our shareholders was not dependent upon winning the M-ATV program," and that the firm will continue growing through:

• "service, support, spares, and training ... with regard to our fleet of deployed vehicles."
• continuing to sell "Buffalo and Cougar-based family of vehicles" both in the U.S. and abroad.
• creating "an international customer base for the Cheetah Mk. II vehicle" (that's the one that the Pentagon rejected for M-ATV).

Foolish takeaway
Will all this amount to Wall Street's expected 20% growth? I honestly don't know. Fact is, we don't know what factors were baked into this growth rate. We'll have to let the dust settle to see how much recurring service and support revenue Force can generate in coming quarters and whether it gets subcontracting work from M-ATV winner Oshkosh. But with the stock selling for less than 11 times its annual cash profits after yesterday's sell-off, the analysts could be wrong (again) -- and this stock would still be fairly priced at half that expected growth rate.

So my response to the analysts is this: Keep your catalysts. Me, I'd rather have the cheap stock.