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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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 ...
Take it as a whole, or buy a piece -- when it comes to Weatherford International
Investors, you see, had sold off the stock en masse after the oil drilling equipment maker warned of a discovered "material weakness" in its tax accounting. But as FBR points out, changing how Weatherford calculates its taxes has "no material bearing on cash flow or day-to-day operations." It'll subtract $500 million in reported profits for the past four years, true. It may affect the rate at which Weatherford calculates its taxes due this year. But as far as the amount of actual cash coming in the door? Not a big deal (at least, according to FBR).
To the contrary, FBR says now's a great time to buy into booming oil prices, and buy Weatherford. Is FBR right?
Let's go to the tape
By all rights it should be. FBR certainly spends enough time trying to marks the ins and outs of the oil industry. It's scored some big wins within the No. 1 industry it covers, Oil, Gas & Consumable Fuels, advising investors to buy shares of Chesapeake
FBR's Picks Beating
|Chesapeake||Outperform||****||42 points (picked twice)|
|Anadarko||Outperform||*****||71 points (picked thrice)|
But before you get too impressed by these numbers, it's worth pointing out that FBR is really just flipping coins here. While it's true that many of its oil picks have won big, it's also true that only about 50% of the 97 (!) recommendations it's made in the industry over the past five years have actually outperformed the market. Moreover, as you wander across the oil patch from drillers to equipment makers and oil services providers, there's a notable falloff in FBR's accuracy. Fact is, this analyst actually gets the majority of its picks in the Energy Equipment and Services industry (Weatherford's home turf) wrong.
And call me a pessimist, but I think that in picking Weatherford this week, FBR has goofed again.
Profit from panic?
According to FBR, there's every reason to view yesterday's sell-off as an opportunity to buy Weatherford on the cheap -- and this applies equally well (again, in FBR's opinion) whether you're a small time investor or a major, multi-billion-dollar oil services provider like ... Halliburton
You see, FBR thinks Weatherford is just the kind of company Hally would love to own. As specialist in building artificial lifts (equipment that helps pump more oil out of a weakening well), Weatherford would make a good fit for Halliburton, which currently lacks an artificial lift business of its own. Hally tried to buy such a business from the U.K.'s John Wood Group recently -- but General Electric
And maybe they're right. When you consider how actively GE has been beefing up its oil services business lately, and how it's challenging incumbent providers like Halliburton, Schlumberger
But that's just the thing -- the price is not right. Not the way I look at it, anyway. Thanks to the accounting snafu, it's hard to say exactly how profitable Weatherford today (the company's delayed filing its 10-K with the SEC while it checks its math). What we do know, though, is that:
- Judging from its performance over the past four quarters, the company's carrying a triple-digit P/E ratio.
- And valued from the more generous perspective of the average annual profits it's reported over the past five years, Weatherford costs 19 times earnings today -- with most analysts predicting long-term growth of about 16% annually for the company, that's hardly a bargain price.
Worse -- that was the good news. The bad news is that over the same period, from 2005-2009, when Weatherford was reporting $4.1 billion in cumulative profits, the company actually consumed $3.1 billion in negative free cash flow. It burned cash. Now, maybe FBR thinks that's good business, and a reason to own the stock. I doubt Halliburton will be so naive -- and neither should you.
Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 614 out of more than 170,000 members. The Motley Fool has a disclosure policy.
Chesapeake Energy is a Motley Fool Inside Value pick. Motley Fool Alpha owns shares of Chesapeake Energy. The Fool owns shares of Schlumberger.
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