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." Today, 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.
I'm back! (Did you miss me?)
Goldman Sachs gave a strong vote of approval to Nasdaq OMX
I believe this is a polite way of saying that the firm's 13.5% net profit margin trails those of every other equities exchange in the nation …
Net Profit Margin
CAPS Rating (out of 5)
… but if it's surprising to see Goldman endorsing a "worst of breed" player today, that's not the most surprising thing about Goldman's resumption of Nasdaq coverage. What's most surprising is that Goldman ever stopped covering of Nasdaq. Absent an item appearing on StreetInsider.com today, informing of the resumed coverage, we'd never have known Goldman abandoned its coverage in the first place.
Hey, Goldman! Where you at?
With Nasdaq shares rising 5% as of this writing, investors seem to be taking Goldman's "missing in action" report in stride, and even reacting favorably to the "news" -- which we never knew was news before today. On the one hand, that's understandable. According to our CAPS records, Goldman's been consistently right on both of its exchange-recommendations in the past, outperforming the market on both Nasdaq and NYSE.
But I can't help but think that investors would be less pleased if things had gone the other way -- if Nasdaq and NYSE had lost value … and we learned that Goldman had lost interest in them only after the fact. And only bothered to tell us about it after the damage was done …
Time to start paying attention
I know I'd be miffed. But this isn't the only objection I've got to today's news. I'm also less than impressed with the analysis Goldman applied to this stock, now that it's supposedly paying attention again. Consider: According to Goldman, the reasons for owning Nasdaq today are as follows:
- It's not going to go further into debt buying NYSE (that's Deutsche Borse's problem now.)
- It's got the second best growth history "in its group" at 23% CAGR, but costs only 10 times forward earnings.
- And last but not least, it's likely to "return most of its 10% operating cash flow yield to investors via niche acquisitions and buy-backs."
I only agree with one of these reasons.
One out of three is bad
Don't get me wrong, I'm right there with Goldman on the NYSE-issue. Nasdaq is already sitting on nearly $8.5 billion in net debt. The last thing it needs is to go further into hock buying NYSE. But as far as Goldman's argument that (I'm paraphrasing here) "Nasdaq is a buy at 10 times next year's earnings, because once upon a time it was growing at 23%" … well, that's just bunk.
Whatever Nasdaq's past growth may have been, the future looks much less certain for this company. Most Street analysts are of the opinion that Nasdaq will grow at only a 14% pace over the next five years. And while that may sound good when compared to the stock's 11.6 trailing P/E, and the 10 times ratio Goldman posits for next year, it fails to consider one crucial point: The very same debt load we were just talking about.
Factor Nasdaq's debt into the equation, and I think it's more accurate to say that Nasdaq is a company selling for 29 times its enterprise value (or for free cash flow aficionados, at an EV/FCF ratio of 21.7). Relative to the growth rate, neither of these numbers looks particularly attractive.
In short, while investors seem pleased to hear that Goldman's back in Nasdaq's corner, and still likes the stock -- I'm considerably less enthused. My advice: Go away again, Goldman. And don't come back until you've got some better ideas.