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.

Bah humbug ... Not!
Every so often, you see something on Wall Street that makes you go "hmm." Yesterday was one of those days for me.

Out of nowhere, a quartet of high-powered bankers -- Lazard Ltd., Stifel Financial, Morgan Stanley, and Barclays -- simultaneously initiated coverage on a single company: recent IPO Booz Allen Hamilton (NYSE: BAH). Surprising? Not necessarily, because as it turns out, all four of these bankers underwrote the IPO.

Of the 14 million shares Booz floated in its public offering in November, Lazard and Stifel laid claim to equal 4.75% stakes (at least 665,000 shares apiece). Barclays and Morgan Stanley, the two bankers leading the underwriting, tied their fortunes even more tightly to the success of this IPO, each agreeing to take on 24.6% of Booz's initial share offering (3.4 million shares each), in hopes of selling the shares to the public at higher prices. At today's prices, those latter stakes amount to roughly $68 million of "skin in the game" for both MS and Barclays.

So I guess it comes as no surprise that, when these four bankers issued their first public pronouncements on Booz Hamilton, they came down in favor of the stock -- each and every one of them. MS and Barclays recommend "overweighting" the stock, while Lazard and Stifel call Booz a "buy." All four think Booz shares are worth more than they sell for today -- about $23 or $24 a stub, claim the bankers.

Tossing a life vest to a floundering IPO
Why such full-throated optimism in support of Booz Hamilton -- a stock that's barely tread water since IPO day? Well, before I start casting aspersions, let's take a look at the shares, and see if there's anything truly worth buying here.

According to its most recent financials, Booz earned $49 million over the past 12 months. With a market cap sitting north of $2.5 billion, that works out to roughly 50 times earnings -- a bit ambitious, I think you'll agree. On the other hand, if you value the company on its free cash flow, things look a bit better. Booz generated $258 million in free cash flow over the past year. Factor in the cash from the IPO, and the debt with which Booz was laden when it returned to the public markets, and the enterprise value-to-free cash flow ratio works out to a more reasonable 13.6 times valuation. But is that good enough?

What shall we do with the drunken valuation?
I say "no." While Yahoo! Finance does not have growth rate estimates posted for Booz, we do know that the management consulting industry as a whole isn't expected to burn any barns for growth. Tiny LECG Corp., for example, is credited with the ability to grow 16% per year over the next five years. But the closer you get to companies with actual name recognition, the slower the growth rates get:

  • CRA International -- 12%
  • Accenture (NYSE: ACN) -- 11%
  • Corporate Executive Board (Nasdaq: EXBD) -- less than 9%.

And so I ask you: If these cash-rich rivals aren't able to grow faster than 12% or so, what are the chances that heavily indebted Booz is going to stagger past them to the finish line? Personally, I think the chances are slim. And valuation isn't even my only concern.

You gotta be drunk to love Booz
If the most recent earnings report out of Cisco (Nasdaq: CSCO) is any guide, the actual numbers could be even worse than Booz's rivals' estimates suggest.

If you recall, a slowdown in government spending was blamed for Cisco's savage sell-off last month. And while the immediate effect of the knock-on news was to knock down share prices at tech rivals like Juniper (Nasdaq: JNPR) and Brocade (Nasdaq: BRCD), my fellow Fool Eric Bleeker recently opined that the real victims of a slowdown in government contracting business could be firms that derive significant parts of their business from consulting for the government. Firms like General Dynamics (NYSE: GD), Maximus ... and Booz.

Put it all together, and what have you got? I submit that the upshot is this:

  • An iffy valuation ...
  • on an indebted company ...
  • facing stiff competition in a throttled market ...
  • that's being recommended by bankers with a vested financial interest in your ignoring all the above.

My advice: Stay sober. Don't hit the (buy button on) Booz.

Fool contributor Rich Smith does not own shares of (nor is he short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 650 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Juniper Networks is a Motley Fool Big Short short-sale recommendation. Accenture is a Motley Fool Inside Value pick. The Fool has created a bull call spread position on Cisco Systems. Motley Fool Alpha has opened a short position on Juniper Networks. Motley Fool Alpha owns shares of Cisco Systems.

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