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 ...
With just five months (max) remaining before Boeing (NYSE: BA) begins delivering shiny new 787 airliners to its customers 'round the globe, a lot of investors think now's the time to pile on to Boeing stock. Maybe that's the right call, but according to the smart folks at UBS, there's an even better way to profit from the Dreamliner Revolution, and its name is Spirit AeroSystems (NYSE: SPR).

According to UBS, the contract Spirit recently signed with its machinists union removes a "major risk" from the stock. Meanwhile, "higher production" rates for aircraft parts generally, and a settlement with Boeing regarding design changes to certain 787 parts that Spirit produces, promise to grow revenue and earnings at Spirit. Yet despite these pluses, observes the analyst, "SPR has pulled back more than its aero peers."

Investor spirits soar
Result: On Wednesday, the Swiss megabanker came out with an upgrade to "buy" for Spirit. Investors, responding to the call, have sent the shares up almost 7% as of this writing. But is that the right move to make?

By all indications, it should be. After all, aerospace investors better than UBS come few and far between. Over the past four years, we've watched in wonder as the banker skywrote itself a winning record up in the great blue yonder:  

Yet, the rest of the news isn't quite as bullish for Spirit shareholders.

UBS ... grounded
Let's start with the obvious. Has UBS done well with certain of its airplane industry picks? Indubitably. But has it made some really boneheaded calls as well? Unfortunately, yes. More unfortunate still, UBS' mistakes in aerospace concern precisely the two stocks upon which this week's upgrade hinges: Boeing and Spirit. 

On Boeing, UBS recommended selling the shares in September 2006, and has lagged the S&P 500's performance by nine percentage points in consequence. On Spirit, the analyst has already proven itself doubly wrong; recommending that investors buy the stock in March 2008 (for 11 points behind the S&P) and then sell it in February 2009 (for a further 51-point shellacking).

That's hardly a record inspiring confidence, but it's not the only reason to distrust UBS' advice this week.

Failure to launch
According to UBS, the confluence of "good news" items in Spirit's flight manual will be enough to raise the company's earnings to $1.75 per share this year, and perhaps $2.05 next year. If that were all to the story -- $20 stock, about $2 a share in earnings, and a consequent 10-ish forward price-to-earnings ratio -- I suspect I'd be willing to forgive UBS' past failures and agree that the stock is a buy. Unfortunately, it is not the whole story, and I am not interested in owning Spirit.

Why not? Not to put too fine a point on it, but whatever UBS thinks about Spirit's profitability, the cash simply isn't there to back it up. Not on Spirit's balance sheet. Not on its cash flow statement.

I mean, sure, Spirit has reported beaucoup profits for years. And yes, the analyst says it will earn more next year and even more the year after. But when I look at the company, I see more than $700 million in net debt, four straight years of negative free cash flow, and $218 million worth of cash burn over the past four quarters alone. None of which makes me particularly optimistic about wanting to own the stock today.

Foolish takeaway
Analysts on average expect Spirit to grow 14% per year over the next five years. UBS is even more optimistic, projecting 32% growth this year, 17% next year, and maybe even more in years to come, as Boeing first ramps 787 output, and churns out 737s at ever faster rates. Maybe they're right. But there's more than one way to ride Boeing's golden goose. Rather than invest in debt-laden, cash flow-poor, struggling Spirit, I'd suggest you look instead for airplane parts makers with proven ability to produce cash in good times and bad.

UBS itself has already identified a pair of such companies, as its successful picks of United Tech and Precision Castparts demonstrate. TransDigm isn't too shabby there, either, despite being much smaller. You might also consider such consistent cash producers as Titanium Metals (NYSE: TIE) or General Electric (NYSE: GE). Any updraft that Boeing contributes to Spirit, you can expect will flow their way as well.