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.

And speaking of the best ...
What do you do when two of the biggest names in investment banking take opposite positions on one of the icons of American manufacturing? Personally, I listen up -- and this week, I need to do so with both ears, to hear Wells Fargo singing Harley-Davidson's (NYSE: HOG) praises on one side, as Deutsche Bank bangs the pans of discontent on the other.

Taking these two bankers in reverse order, we open with Deutsche, which warned that after multiple rumor-floatings of a takeover at Harley, the shares are starting to look a bit richly valued. Absent an actual buyout offer, and a generous one at that, Deutsche believes the only way to justify paying today's prices for Harley would be if the company:

1. Demonstrates improvement at its finance division.
2. Fetches a higher price (than Deutsche expects it to get) from its spinoff of MV Agusta.
3. Sees "meaningful recovery" in motorcycle sales.

Three "ifs" to hurdle, therefore, before we can get to a "then" ("Zen"?) conclusion that Harley is worth buying. Consequently, Deutsche downgraded the stock to "hold" yesterday.

Is that bad?
It could well be. After all, Deutsche Bank ranks in the top 10% of investors in this market. It also has a disturbingly high rate of accuracy when forecasting prospects for companies in the auto-sphere, where it has picked such winners as:

59% of the time Deutsche has predicted a stock would rise (or fall) in this industry, it's proceeded to do just that. So if Deutsche's sweeping the kickstand out from under Harley this week has investors feeling nervous, well ... perhaps they should be.

Zen and the art of motorcycle valuation
But then there's Wells Fargo. The way Wells tells it, Harley investors should be just as happy as pigs in ... a pit. A money pit, that is to say. Pointing to reduced inventory clearance at competitors like Honda (NYSE: HMC) and Polaris, and "stable/improving" resale value on used Hogs, Wells says that two of its three worries heading into 2010 have now been laid to rest. Wells further emphasizes a developing "supply/demand gap" as Harley progresses toward cleaning up its balance sheet, notes a "decoupling" of price trends between Harley and its competitors, and a "positively skewed HDFS profit profile."

Assuming that last point is just analyst-speak for "Harley's Finance division is earning money again," all of this sounds pretty bullish for Harley -- and has Wells not only reiterating its buy rating on the stock, but tweaking its 2011 earnings estimate upwards by a nickel, to $2.22 per share.

More bullish still, as great a forecaster of auto-fortunes as Deutsche has proven to be, Wells is even better. Like Deutsche, Wells correctly predicted the rise at Johnson Controls. But it also got Tenneco (NYSE: TEN) right back in March on a bullish call and Magna International (NYSE: MGA) on the same day -- and Harley-Davidson, with its still-active "buy" recommendation beating the market by 18 points.

And yet ...
So why do I disagree with Wells today, and ally myself with Deutsche and its Hog-o-skepticism? Simply put: The numbers don't work.

Consider: Unprofitable today, Harley trades for a P/E of infinity. If consensus estimates are correct, next year's $1.83 per share in profits would have the stock trading for 18 times such forward earnings -- which seems a bit rich considering that most analysts doubt Harley will grow these profits at much more than 10% per year over the next half decade.

Of course, Wells believes these estimates are conservative. But even if we take its optimistic near-term numbers at face value, $2.22 in 2011 earnings would still leave this stock trading for nearly 15 times earnings -- somewhat of a premium when compared to Harley's longer-term prospects.

Foolish takeaway
Listen, Fools. I'm as big a Harley fan as the next red-blooded American. I'm thrilled to see Harley taking its place in the winner's circle with Ford (NYSE: F), as American industry resurges, and American motor companies regain their place in the hearts of consumers (and investors.) Most importantly, I'm encouraged as I watch Harley implement its turnaround, and see every prospect that the company will indeed right itself and return to profitability in short order.

All I'm saying is that now that the recovery's evident to all and sundry, the turnaround has been priced into the stock (and indeed, more than priced in.) The time to profit from Harley was months ago -- and trying to hop aboard a hard-charging Hog could be hazardous to your wealth.

Harley-Davidson's stock has nearly doubled over the past year. How do you know when "the train has left the station" and it's too late to buy? Here's how.