This Just In: More 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 ...
On a pretty good day for the markets overall yesterday, shareholders of "500 free business cards"-hawker Vistaprint (Nasdaq: VPRT) were smiling wider than most. The reason: On Thursday morning, one of the best analysts in the business just upped the stock to "outperform," sending it up nearly 3%.

Barrington Research says it came away from Vistaprint's "Investor Day" last week feeling full of "confidence that the recent slowdown in [Vistaprint's] revenue growth can be stabilized or ... reversed." (Hopefully "reversed.") According to Barrington, Vistaprint has been a victim of its own success, as "rapid hiring to support growth" caused problems with execution to crop up, resulting in weaker-than-expected revenues. But international revenues have now "stabilized," and the company is starting to "gain traction."

While most folks on Wall Street say they expect Vistaprint to grow at about 21% annualized over the next five years, Barrington believes it could do even better, posting perhaps 25% earnings growth next year.

Is it right?

Let's go to the tape
At first glance, you might not think so. I mean, it's not as if Vistaprint fits the standard definition of a "cheap stock" that's got nowhere to go but up. Shares already sell for more than 31 times earnings. Even if Barrington's right about the 25% growth, that may not be fast enough to satisfy PEG investors.

There's also Barrington's record to consider. Over the five years we've been tracking its performance, Barrington has only picked just three stocks in the Internet Services industry. It was right about one of them, Liquidity Services (Nasdaq: LQDT), which has outperformed the S&P 500 by 37 percentage points since Barrington picked it. (Did I mention that Liquidity Data is a Motley Fool Stock Advisor recommendation?) But Barrington was wrong about its other two recommendations, DealerTrack Holdings and ... Vistaprint:

Hardly an inspiring record, I think you'll agree. And call me a pessimist, call me a Fool, but I think it bodes ill for Barrington's latest recommendation of Vistaprint. Here's why:

Valuation matters
The problem with Vistaprint's valuation begins with the P/E ratio of 31 that I mentioned before -- but it doesn't end there. Vistaprint bulls -- such as the friendly Fools at Motley Fool Rule Breakers, who have recommended the stock -- will undoubtedly point to the pluses at Vistaprint. The fact that it generates more free cash flow (about $80 million last year) than it reports as "net income" under GAAP, for example. Bears such as myself, however, will note that even this superior level of cash production -- which I applaud -- leaves the stock trading for a pretty high price-to-free cash flow ratio of 26.

Now, maybe this isn't too high a price to pay if Vistaprint manages to grow 25%, as it's predicted to next year. But to win my investment dollars, Vistaprint would have to then repeat the feat going forward (which even Barrington doesn't guarantee.)

There's also the competitive environment to consider. Here in the U.S., virtual printer Vistaprint faces a whole host of rivals with actual "boots on the ground." The competition begins with office supply stores Staples (Nasdaq: SPLS), Office Max (NYSE: OMX), and Office Depot (NYSE: ODP), but doesn't end there. Both FedEx (NYSE: FDX) (with which Vistaprint currently partners) and UPS (NYSE: UPS) have entered the printing fray.

Vistaprint is handling the competition pretty well so far, growing U.S. revenues by about 18% last year. But you can see the effect that stiff competition has on the business when you compare this performance with the 50% growth Vistaprint enjoyed internationally last year. At this rate, Vistaprint could be generating more revenues abroad than it generates here in the States within the year -- and we've yet to see what effect this will have, positive or negative, on overall profit margins.

Foolish takeaway
Maybe Barrington's right about Vistaprint this time. (It wasn't last time, but maybe ...) Maybe the real opportunity for this company lies outside U.S. borders. I'd feel a whole lot more comfortable gambling on that, though, if the share price was just a bit more reasonable.

As for me, if I were a betting man, I'd be putting my money on Vistaprint rival Staples. 15 times free cash flow, a 15% growth rate, and a tidy 1.7% dividend, where Vistaprint pays none? Print me a buy order on that one!