This Just In: Upgrade and Downgrade

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 ...
Is the Great Recession over? Is the American Consumer back? And is it time to buy credit card companies once again? These questions spring to mind following yesterday's startling initiation of coverage on MasterCard (NYSE: MA) by Argus Research.

It's been more than four months since Argus first ventured into the credit card space with coverage on Visa (NYSE: V). Since then, the analyst has achieved all of four percentage points worth of market outperformance on the pick. But perhaps emboldened by this modestly positive result, Argus is now dipping a second toe in the water, arguing that you should pick up a few shares of MasterCard while you're buying that stake in Visa.

What exactly has Argus feeling so bullish about MasterCard? News reports on the upgrade don't specify, but I suspect that last week's reports from the major card-issuing banks had something to do with it. Two giants of the plastic world -- JPMorgan Chase (NYSE: JPM) and Capital One -- reported declines in both the rate of delinquency among cardholders, and in charge-offs for bad debt. And after reviewing the data, market pundit Streetinsider.com concluded that broadly speaking, it looks like "fewer Americans are falling behind on credit card payments," which suggests that "the stress on consumers may be easing up."

Less stress means more spending, which means more revenue for the card industry. Good news, right?

Let's go to the tape
There's just one problem with Argus' recommendation to buy MasterCard: Argus itself. The firm's record in the banking space is flat-out disastrous:

And if Argus has been so wrong in the past, what might it be missing this time?

Glad you asked!
Bank of America, Discover Financial, American Express (NYSE: AXP), and Citigroup (NYSE: C), for starters. As JPMorgan and Capital One reported their glorious news of delinquency declines and fewer charge-offs, B of A and Discover posted similar declines in delinquencies -- but significant jumps in charge-offs for bad debt. That latter figure rose 26 basis points, to 13.51%, for B of A, and 53 basis points, to 9.11%, for Discover.

Citigroup and American Express fared worst of all. The former broke from the pack and reported an actual rise in delinquencies on its cards, while the latter reported no decline whatsoever in delinquency rates (although at 3.6%, they're still pretty low), and a 40-basis-point rise in charge-offs (to 7.4%.)

In other words, the news was actually more mixed than you'd think.

What (else) Argus might be missing
Has anyone noticed that MasterCard is not particularly cheap anymore? After climbing 59% in price over the past year, the stock now sells for 22 times earnings -- which seems a bit rich in light of consensus expectations for 18% long-term earnings growth.

Worse yet, free cash flow at MasterCard only backs up about 90% of what the company reports as its profits under GAAP. Divide the company's $1.3 billion in free cash flow into its market cap, and you get a valuation of 24 times free cash flow on the stock. Again, for an 18% grower.

Foolish takeaway
I like MasterCard as a company. It's got a great, tollbooth-esque business model, an incredible moat, and an indefatigable brand. No way would I sell a company like this short. But at this valuation, I wouldn't rush right out to buy it, either.

At least, not on Argus' say-so.