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.
Hot new trend on Wall Street: trucker hats
For the second time in as many weeks, Wall Street is singing the praises of America's trucking industry. Pointing to the reviving U.S. economy, and predicting that logically, this will mean more goods traveling by truck, and more trucks being sold to trucking companies, JPMorgan announced yesterday that it's upgrading shares of Paccar
It's not an uncommon view -- in fact, the Fool's own Motley Fool Stock Advisor newsletter recommended Paccar back in 2005. But it's not one I agree with.
How to lose money on a trucking renaissance
Oh, not about the analysts' major thesis, of course. Why, just last year I was saying much the same thing myself, pointing out how September 2010 was "the 10th consecutive month of year-over-year increases in tonnage moved by U.S. truckers." How, the notable basket case that is YRC Worldwide
- The good news was already baked into the trucking stocks' prices.
- The better way to play the trend was to buy shares of companies that build trucks for the truckers.
- But that in doing so, the one stock you should avoid is Paccar -- which simply cost too doggone much.
Fact is, what was true back then is still true today, as the American Trucking Association's just reported a 3.8% rise in trucking tonnage for January, and most truckers spent February reporting fourth-quarter revenue gains ranging from the upper single digits to the midteens. (Why, Old Dominion Freight
The case for Navistar
At the risk of honking my own horn, I have to say that it looks like I was right about the trucking stocks, and the stocks of the companies that supply them, back in October. I'm pretty sure I'm right again today -- and that RWBaird and JPMorgan will be proven wrong to recommend Paccar. Here's why:
Priced at 39 times earnings, versus the 20-times-earnings price at Navistar, Paccar already looks expensive at twice its rival's valuation. But in fact, the gap between these stocks' valuations is even greater than that. Navistar, you see, generates way more free cash flow than Paccar, with the result that while Navistar costs only 5.3 times the amount of free cash it generates in a year, Paccar costs almost 27 times free cash flow -- a five-times disparity in valuation.
True, Navistar also carries more net debt than Paccar does. But even if you toss that into the mix, you're still comparing a company with an enterprise value of 10 times free cash flow (Navistar) to one with an EV/FCF multiple of more than 30 (Paccar). With both companies expected to grow at about 13% per year over the next five years, it's not hard to see which stock is the better bargain. (Hint: It's not Paccar.)
Long story short, while I certainly understand why JPMorgan and RWBaird are trying on trucker hats this week, I do wish they would take more care with their picks. Paccar, while a fine company, sports a stock that's simply too expensive for its prospects. Navistar, in contrast, is stylin'.
Which truckmaker do you prefer: Paccar or Navistar? Pick your favorite, or pick 'em both, and add 'em to your watchlist here. As a special bonus, we'll give you immediate access to a new special report, "Six Stocks to Watch from David and Tom Gardner.
PACCAR is a Motley Fool Stock Advisorrecommendation, but 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. 565 out of more than 170,000 members. The Motley Fool has a disclosure policy.
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