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." Here, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the best ...
2011 has not been kind to Ford Motor (NYSE: F). After starting out strong, by mid-January Ford shares embarked upon a months-long slump. Now priced at less than 80% of their highs, Ford is giving its shareholders a lesson in the less pleasant meaning of being "Ford tough."

But fear not, dear shareholder. Because according to the smart stock shoppers at Jefferies & Co., the good news about Ford's sell-off is that it's set up the shares for a 33% drive higher -- starting now. As StreetInsider.com reports, Jefferies sees Ford as offering "continued upside [leveraged] to industry sales volumes." At the same time, Jefferies sees "below-average downside risk due to the stock's reasonable 4.3x EV/EBITDA valuation." Muses the analyst: "Expectations appear to be low" for Ford today. All the company really needs to do, it seems, is maintain "flat market share" in the U.S., and every 1 million-car increase in the size of this market will yield $0.17 per share in additional earnings for Ford.

Automatic profits? Leveraged to a market that seems only destined to grow off last year's lows? Sounds too good to be true, but is it?

Let's go to the tape
Not necessarily. Meaning no offense to Jefferies, I'm not entirely convinced the analyst knows what it's talking about when it calls Ford an outperformer. After all, if you examine Jefferies' record on CAPS, it quickly becomes apparent that this banker has little experience working under the hood.

Over the five years we've been tracking it, Jefferies has made only two recommendations remotely related to the automotive industry: Westport Innovations -- a small Canadian maker of alt-energy engines, which has performed admirably, and Wonder Auto Technology -- a Chinese car maker which ... hasn't performed well at all:

Now, I admit that the valuation at Ford appears tempting. The stock sells for a lower trailing P/E ratio than either General Motors (NYSE: GM) or Toyota (NYSE: TM), and a lower forward P/E than Honda (NYSE: HMC). (What's more, these latter two stocks have encountered very specific difficulties these past couple weeks.) And if you look a bit farther afield, Ford's way, way cheaper than two-wheeled kin Harley-Davidson (NYSE: HOG), which today sports the simply absurd valuation of 64 times earnings.

Relative to the competition, I see why Ford's price of just 8.7 times earnings and 7.4 times free cash flow (my preferred metric) might appeal to Jefferies. When you consider that Ford more than doubled its previous year's earnings in 2010 (from $2.7 billion to $6.6 billion) and that most analysts expect Ford to keep on growing at a near-18% annual pace over the next five years, picking Ford to outperform seems a no-brainer.

Step 1: Fasten seatbelt. Step 2: Engage brain
But consider: At the same time as Ford's "earnings" were doubling, its actual cash profits dropped by $4 billion, falling from $11.4 billion in cash generated in 2009 to just $7.4 billion in 2010. Consider, too, that if you factor Ford's massive debt load into the equation, the enterprise value of this behemoth swells to 18.8 times FCF.

And that's where things really become clear: Viewed as an 18.8 times FCF stock growing at 17.8% projected growth, Ford no longer appears to be the screaming value that it looked at first glance. Honestly, about the nicest thing I can say about the stock is that it seems not terribly overpriced.

But a bargain? That's a "tough" case for Ford to make.