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 this, 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.
Today, we're going to take a look at three high-profile ratings moves on Wall Street: A downgrade for Molycorp (NYSE: MCP), followed by upgrades for Disney (NYSE: DIS) and Procter & Gamble (NYSE: PG). Let's dive right in.
Bad news first
Might as well get the bad news out of the way first. Last week, rare-earth enthusiast Molycorp revealed that it had earned $0.41 in "adjusted earnings." That should have been good news, but Moly also warned that costs are rising at its main California mine, threatening future profit margins. The news sparked a panicked sell-off in the stock Friday morning. Today, the damage done and the looters gone, analyst Piper Jaffray -- a former backer of the stock -- snuck back into the room and quietly took down its buy rating.
Should investors be worried? Perhaps. This morning, Bloomberg reported that China plans to double its export of rare-earth materials in 2012. And as fellow Fool Travis Hoium pointed out last week, expanded production at Molycorp and rival Lynas will also double China's 2011 production levels in 2013. It doesn't take a math wizard to see that this adds up to a quadrupling of the rare-earth supply in a very short time span. It doesn't take an economics Ph.D. to surmise that so much extra supply will depress prices... and profits at Molycorp.
Investors in rival rare-earth plays Rare Element Resources (AMEX: REE) and Avalon Rare Metals (NYSE: AVL) take note -- you got off lightly last week, suffering far less than Molycorp did. But the high-price party may be drawing to a close for you, too -- especially when you consider that neither company is even profitable, unlike Molycorp.
Disney does the happy dance, but should it?
In happier news, Disney shareholders received an upgrade this morning -- all the way to "conviction buy" -- from the analysts at Goldman Sachs. According to StreetInsider.com, Goldman is predicting that "accelerating ad growth [and] more NBA games" will "benefit ESPN." Meanwhile, Disney's parks business is expected to see double-digit growth in revenues and operating profit.
Goldman sees all this adding up to a share price of $51 within a year, or about 21% profit from today's $41 levels. But that seems a bit aggressive. Already, Disney shares fetch 16 times trailing earnings, and the consensus on Wall Street is that the company will be lucky to maintain 13% profit growth over the next five years. Disney is already generating about 7% less annual free cash flow than its reported net income would suggest ($4.6 billion in total). To top it all off, the House of Mouse is mortgaged to the hilt, with more than $10 billion in net debt.
Doesn't sound like a recipe for family fun to me.
P&G slims down
And now for something completely different. In a better reasoned analysis, ace analyst BMO Capital Markets told investors to get back into Procter & Gamble today based on the company's plans to shave $10 billion off its annual cost structure by 2016. Most folks on Wall Street agree P&G will be mired in single-digit earnings growth for years, but BMO tells its clients that P&G is "going on a diet," reducing the "complexity" and "sluggishness."
Far from the sub-9% levels of growth Wall Street foresees at P&G, BMO predicts this company will hit 13% earnings growth as early as the second half of 2013, or three years before the full effect of the cost-cutting kicks in. What's more, if management succeeds in reducing costs by $10 billion, without hurting sales in the process, that could translate into a potential doubling of corporate profit over the next five years -- $20 billion in annual profit, from a multinational megacorp currently valued at just more than $184 billion.
Can P&G do it? Actually, I think it just might. Ten billion dollars sounds like a big number, but P&G already shows more than $66 billion in annual costs on its income statement. Slimming down by $10 billion, therefore, would only really require trimming costs by about 3% a year over the next five years, which seems to me an achievable goal. And if investors have the chance to buy this leaner, meaner company at a price of just nine times those future profits today, maybe that's an idea worth looking into.
And Procter & Gamble isn't the only major America megacorp on the upswing, either. If you like what you're hearing about the P&G story, click through and let us tell you about "3 Other American Companies Set to Dominate the World."
Whose advice should you take -- mine, or that of "professional" analysts like Piper, Goldman, and BMO? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.
