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 we're off!
Earnings season starts with a bang this evening, as Alcoa reports its first-quarter numbers after the bell, and Wall Street analysts are doing they're darnedest to stay ahead of the curve.

The trading week opened with a whole host of upgrades and downgrades as the Street's best and brightest lay odds on who will surprise-to-the-upside, and who disappoint -- and good news for Caterpillar (NYSE: CAT) shareholders: Your company made the cut. According to ace stockpicker Robert W. Baird, Caterpillar (and also fellow heavy-equipment-makers Parker Hannifin, Ingersoll-Rand (NYSE: IR) and Joy Global (Nasdaq: JOYG)) is poised to exceed the market's returns as the "macroeconomic landscape" improves, and the construction industry gets its groove back on.

But is Baird on the right track with Cat?

Let's go to the tape
Maybe ... but don't bet on it. Oh, I know that Baird is a fine analyst on many subjects. Big wins on financial stocks like MasterCard and JPMorgan Chase have helped lift Baird into the investing elite, giving it a CAPS score just a whisker away from entering the top 10% of investors we track. And yet ... while many of Baird's picks are doing well, the analyst still gets barely 52% of its recommendations right. And would you like to guess which one of Baird's sectors does even worse than 52%?

You guessed it: Machinery stocks. Like Caterpillar:


Baird Said


Baird's Picks Beating (Lagging) S&P by

Illinois Tool Works (NYSE: ITW)



17 points

Bucyrus (Nasdaq: BUCY)



(18 points)

Terex (NYSE: TEX)



(52 points)

So when Baird tells you that it foresees a "sustainable global recovery through 2013," and predicts that companies in the Machinery sector "can attain mid-cycle, normalized financial performance" by then (and presumably, coast even higher as the cycle moves toward its crest), well, I'd suggest you take that with a couple grains of salt.

Watch that first step, because ...
According to Baird, a global boom in heavy industry will increase machinery production rates, lifting Caterpillar and its peers as they ride "an expected 20 percent or more increase in global mining capital expenditure."

Yet, selling for nearly 47 times trailing earnings, Caterpillar looks priced for perfection -- a perfect world of profits growth that Baird assures us is surely forthcoming over the next few years.

Granted, if Baird's right, and Caterpillar does indeed grow at, say, 20% (as opposed to the 14.2% 5-year growth that most analysts project), the stock could be fairly priced today. Reviewing the company's performance over the last 10 years, we find that Caterpillar has earned, on average, about $2 billion a year from its business. And if it can regain that level of profitability, then the resulting price-to-long-term-earnings ratio of 21 seems not unreasonable when weighed against 20%.

But what happens after that growth starts to peter out, toward the cycle's peak?

... it could be a doozy!
Even worse, I fear Baird may be missing a crucial point about Caterpillar: Even when things were going good for this company, they weren't nearly as good as they looked. Over the same 10-year timespan in which Cat "earned" $2 billion per year, you see, the company racked up a total free cash flow deficit of roughly $5.2 billion. Over this entire decade-long span, the company failed to generate even a penny's worth of cold, hard cash. Rather, the contrary was true.

Were Caterpillar generating free cash flow at anywhere near the rate it was reporting GAAP earnings, I doubt we'd be looking at a company burdened with nearly $30 billion in net debt today. That being said, maybe they wouldn't have grown as fast either. It's just too hard to tell.

Unfortunately for Caterpillar shareholders, facts, like cats, are stubborn things. And no matter how you try to herd this Cat, the fact remains:

Cat is a stock that only a dog person could love.

The Fool owns shares of Terex, but Fool contributor Rich Smith has no position in any of the stocks named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 760 out of more than 160,000 members. The Motley Fool has a disclosure policy.