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.

Who ever knew something so big could move so fast?
Did you see that? It's not often you catch a glimpse of one of the biggest corporations on the planet shifting its market cap 6% in a day -- but that's just what happened on Friday. As the trading week drew to a close, two separate analysts slipped under the wire to post upgrades on megaconglomerate General Electric (NYSE:GE). Result: About $9.6 billion in market cap gained over the course of less than 9.6 hours of trading.

Who do GE investors have to thank for their good fortune? Glad you asked. The first round of applause should go to Oppenheimer, who argued Friday that GE's worth about 20% more than what investors are currently shelling out for it. Oppenheimer reaches the conclusion in the following manner:

• If you value GE Capital at one times book value, this subsidiary is worth $38 billion.
• GE's 80% stake in NBC-Universal should be worth another $25 billion (and today's report from The Wall Street Journal, which cites credible estimates putting NBCU's valuation at $30 billion, tells us Oppenheimer was off by only about $5 billion here).
• Meanwhile, GE's Infrastructure division appears to have an enterprise value of $160 billion. Subtracting debt attributable to the division,  that makes for a market capitalization on this division (were it stand-alone) of roughly $95 billion -- or as Oppenheimer puts it: "6x EV/EBITDA, compared to 8.5x for industrials average."

I'll see your 20%, and raise you some intangibles
Meanwhile, next door at Bernstein, the analysts were taking a different approach to valuing GE -- but coming to much the same conclusion. Embracing a valuation technique made famous by Gordon Gecko, Bernstein hypothesized what GE might look like were a well-meaning capitalist to take control of it and start chopping off (and selling off) underperforming parts.

Under such benevolent rule, Bernstein argued, we could quickly see GE pass 51% ownership of NBC Universal to Comcast (NASDAQ:CMCSA), and divest itself of the rest over time (the Journal postulates installment sales of GE's remaining stake stretching over seven years). Next would come a sale of the appliances division, followed by divestitures of unwanted bits and pieces of GE Capital. In all, Bernstein expects to see businesses generating $25 billion to $30 billion of revenue escape GE's grasp over the next few years. GE would then take the monies raised by selling off said spare parts, and redeploy them to pay down debt and invest in a newly rediscovered "core" infrastructure business -- the one that Oppenheimer says is being valued at six times EBITDA.

Who knows when to hold 'em, and when to fold 'em?
Are the analysts right? I wish I could answer you with an unambiguous "heck, yeah!" But in fact, these two bankers sport exceedingly ambiguous records on CAPS. Oppenheimer, for instance, ranks in only the 27th percentile of investors we track, getting fewer than half its picks right overall. But it does seem to show proficiency in aerospace -- a big part of GE's business:

In contrast, our records show Bernstein as by far the better analyst generally ... but not so hot on aerospace or other industrial conglomerates:

Foolish takeaway
Regardless, it's Bernstein's argument that sways me in GE's favor today. Describing its upgrade as: "a bet on [GE's] ability to reinvest proceeds in enterprises that add value for shareholders," the analyst predicts that once it has the divestiture-raised cash in hand, GE management can be trusted to pick "the right core/adjacent strategic properties and integrat[e] them successfully."

Me, I'm not quite that confident in GE's investing acumen (if management is so smart, and we can trust them to make the right decisions, I wonder why they haven't made them already). That said, I'm an advocate of the "simpler is better" investing method. The more GE does to unwind its over-complex business structure, streamline it, and make it more understandable, the more attractive the stock becomes.

Maybe not "20%" more attractive, like Oppenheimer says. But more attractive for sure.