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: Transocean
Raise the RIG
When you're in the oil drilling business, $100 oil is a wonderful thing. (When you're filling up at the pump, not so much.) And since getting at that $100 oil requires drilling, oftentimes in inconvenient places, high oil prices are ginning up a fair amount of enthusiasm for the oil drillers lately. Case in point: this morning's upgrade of Transocean.
Closing out the trading week with a bang, oil analyst Global Hunter announced Friday that it is upgrading shares of Transocean based on "strong macro fundamentals that should benefit RIG" (i.e., pricey oil). Quoth the analyst: "While there are still many rigs left to be cycled through the yard, we feel that incrementally the business will perform up to its previous standards. ... We are now confident in the call to own the stock as a true fundamental long-term holding and are thus upgrading to Buy."
But what "previous standards" are GH referring to? Transocean averaged about $2.5 billion a year in profits from 2006 to 2010. That's a whole lot better than the loss Transocean booked last year. Still, before you jump into the stock on Global Hunter's say-so, consider: Wall Street analysts expect Transocean to earn about $3 a share this year, and then to grow that number at roughly 20% per year over the next four years.
Twenty percent growth is good, no doubt about it. It's better than the average growth estimate for this industry (16%), and nearly twice what analysts expect for rival Noble Energy, at 11%. (Then again, Noble is already profitable, while Transocean isn't there just yet.) Even so, paying nearly 20 times this year's earnings for a company that hopes to return to historical form by growing at 20% seems like no more than a fair deal to me. I'd call this one a hold.
Seadrill in a hole
Speaking of fast growth and Transocean competitors, Noble may not have gotten a new rating today, but another of Transocean's rivals did -- and a downgrade, no less. Dahlman Rose announced Friday that it was knocking Seadrill down to hold.
I explained earlier this month why I'm no fan of Seadrill. But what about Dahlman? The write-up on this one, which you can find on StreetInsider.com, actually starts off sounding optimistic: "We expect SDRL will benefit in the near-term from further dividend increases and improved ultra-deepwater dayrates. Additionally, we expect the floating rig market's marketed contracted utilization to increase to over 99% in 2013 causing industrywide rig reactivations and dayrate improvement."
But the mood quickly sours when Dahlman turns to worrying about the "long-term sustainability of the dividend" and Seadrill's "risky ... capital structure." You see, like Transocean, Seadrill carries a pretty hefty debt load on its books -- nearly $10 billion, net of cash on hand. Unlike Transocean, however, Seadrill isn't generating any free cash flow to help pay down that debt and help support the dividend.
In short, sure, Seadrill's 8.5% divvy looks tempting. Just make sure to get it while it lasts. (And then get out quick -- because it won't last long.)
It's the Apple of their eye
And finally, the ratings news you've been waiting for -- and just knew in your heart of hearts was coming. Today is "New iPad Day," and on Wall Street, they're celebrating with hikes to price targets on Apple stock, courtesy of the analysts at ISI Group, Oppenheimer, and UBS. Enamored of Apple's new wunder-device, each analyst is adding about 23% to its target price for the stock, which they now predict will rise to anywhere from $650 to $700 by year end.
A lot has been written about Apple these past few weeks. In fact, just this morning, author and former hedge fund hero Andy Kessler penned a piece in The Wall Street Journal warning that Apple could come undone if its Chinese growth strategy succumbs to price-undercutting from Google's business model of giving away free Android licenses. (People love Apple, but they also love "free.")
Rather than reiterate all the arguments, I'll just remind you of one thing: Even at $586 a share, Apple still sells for less than 17 times earnings. If analysts are right about the company being able to grow at 19.5% per year over the next five years -- Google or no Google -- that's a bargain price. Yes, even at a $550 billion market cap, a bargain's still a bargain.
Whose advice should you take -- mine, or that of "professional" analysts like Global Hunter, Dahlman Rose, and UBS? Check out my track record on Motley Fool CAPS and compare it to theirs. Decide for yourself whom to believe.
Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. He does, however, have public recommendations available on more than 50 separate companies. Check them out on Motley Fool CAPS, where he goes by the handle "TMFDitty" -- and is currently ranked No. 379 out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy.
The Motley Fool owns shares of Apple, Transocean, and Google. Motley Fool newsletter services have recommended buying shares of Google, Apple, and Seadrill, as well as creating a bull call spread position in Apple.
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