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 ...
Has Genzyme finally put its quality control "issues" behind it? Is now the time to buy the stock, and ride the rally to riches? Wall Street seems to think so.

In the wake of yesterday's earnings report, which included details of Genzyme's (Nasdaq: GENZ) efforts to reach an amicable agreement with the FDA to settle charges that Genzyme let quality controls slip at its Allson plant, not one but two separate stock shops chimed in with buy ratings on the company.

Both Piper Jaffray and Morgan Joseph spend a good deal of their workdays studying the biotech industry. Biotech's the third most actively watched sector for each analyst, and within this sector, both Piper and Morgan like Genzyme quite a lot. According to Piper, which upgraded the stock to "overweight" this morning, the consent decree that Genzyme hopes to sign with the FDA "sets achievable milestones for the company to avoid future disgorgement of profits." What's more, Piper sees Genzyme as priced attractively at only about 15 times forward earnings, relative to the 13 times multiples more common among larger, but far slower growing rivals in biotech.

Similarly, Morgan Joseph sees Genzyme selling for about 14 times estimated 2011 earnings and suggests this low multiple is reflective of investor doubts "that Genzyme will return to higher profitability levels despite a resumption of sales growth." Morgan begs to differ with the assessment, predicting that sales growth and earnings growth will soon return, leading to "share outperformance over the next 12 months." For this reason, MJ reiterated its own buy rating on Genzyme.

But are they right?

Let's go to the tape
I'm not so sure. I mean, Piper's a pretty good analyst, all things considered. At least, it ranks in the top 15% of investors we track on CAPS and has made a fair number of winning bets in this industry:

However, the fact remains that although Piper has picked a few fabulous performers in biotech, the majority of its picks in this sector actually go awry -- only 46% of Piper's biotech recommendations actually outperform the market.

But the really bad news is about Morgan Joseph, Piper's partner in Genzyme-puffery this morning. With only 42% accuracy in biotech, Morgan is actually a worse biotech picker than its analytical compadre. Oh, and did I mention that both of these analysts have recommended Genzyme in the past, and are down more than 50 points versus the market on their respective recommendations. It's true. They are.

And they will be again
You've seen how the analysts' records don't support their bullish stance on Genzyme. Now let me show how their reasoning doesn't hold water, either. Piper and Morgan Joseph both think Genzyme is undervalued relative to its biotech rivals, right? Something about a 14 forward P/E, and 20% long-term growth estimates offering a better PEG ratio than the peers?

Well, let's take a look at a few of those peers, starting with Amgen (Nasdaq: AMGN). This one sells for 10.5 times forward estimates, and has analysts projecting 9% growth over the long term. On Amgen, it would appear that Piper and MJ are right on the money. However, if you look farther, Teva Pharmaceuticals (Nasdaq: TEVA) sells for only 12 times forward estimates, with 14% long-term growth prospects. And Gilead Sciences (Nasdaq: GILD) sports a 10.4 multiple to next year's earnings, versus a similarly speedy 14% growth rate. To me, it looks like Genzyme's actually valued right in line with its rivals -- rivals who aren't busy fending off FDA investigations, I might add.

Foolish final point
Taken all together, I think we've already got more than enough evidence to discount and disregard the analysts' bullish thesis on Genzyme. But just to give this horse one more kick, let me point out that even the PEG ratio being cited in support of Genzyme may not be all it's cracked up to be. Forward estimates are lovely, of course, but they're still just guesses, not facts. The fact about Genzyme, though, is that this stock trades for 28 times the amount of free cash flow it generated last year, yet is expected to grow actual profit at only 19% per year over the next five years -- which sounds pretty pricey to me.

And that's before we consider the effect of the FDA requiring Genzyme to "disgorge" $175 million in past profits. And before the FDA's desired future disgorgement of 18.5% of future sales (should Genzyme miss certain production deadlines) has a chance to bite into the growth rate.

In short, Genzyme's not nearly as healthy as it looks. And not nearly as good a buy as the analysts are trying to make it appear.