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.
Score a goal with Petroleo Brasileiro?
After climbing as high as $22.63 a share on rising oil prices last month, shares of Brazilian oil major Petrobras
What's hurting Petrobras? It's hard to say for sure, but one thing that almost certainly failed to help was last week's confirmation that the company intends to spend $25.1 billion expanding its oil refinery capacity, part of an estimated $31.1 billion in projects now on the drawing board. Analysts at Morgan Stanley appear to like the idea, initiating coverage of Petrobras with an "overweight" rating yesterday. Investors, however, sent the stock the other way, bidding down shares by 2.2%.
Who's right about Petrobras? The experts on Wall Street, or Mom-and-Pop investors down on Main Street? Let's find out.
Bullish on Brasileiro
If you ask Morgan Stanley, Petrobras stock is a buy at $20-and-change, and could hit $29 within a year. And yes, that promise of a 28% profit sounds good. Problem is, the numbers Petrobras has been producing may not justify such optimism. Take a look at how Petrobras compares to its peers in the oil-and-gas space:
| P/E | Growth Rate | Dividend Yield | |
|---|---|---|---|
| Petrobras | 14.2 | 0.5% | 1.1% |
|
ExxonMobil |
9.2 | 8.2% | 2.6% |
|
Chevron |
8.3 | (0%) | 3.2% |
|
BP |
7.7 | 4.6% | 4.6% |
|
ConocoPhillips |
6.6 | (1.6%) | 4.6% |
All data courtesy of Yahoo! Finance.
What do these numbers tell us? Well, to begin with, at 14 times earnings, Petrobras' stock is more expensive than any other oil major out there. It's nearly twice as expensive as BP, and more than twice the cost of ConocoPhillips.
Growth-wise, the company's doing a bit better than Chevron or Conoco, both of which are expected to post mild declines in profitability over the coming five years. Still, Petrobras' predicted 0.5% annual earnings growth rate over the next five years is hardly tearing up the track. And it's far slower than either BP or Exxon -- both of which, lest we forget, are cheaper stocks than is PBR.
You like dividends, you say? Well, that's as good a reason as any to invest in a stock... unless the stock in question in Petrobras. Its 1.1% dividend yield is positively miserly, and dwarfed by the monster 4.6% yields at both BP and Conoco. Both of which are -- need we even say it? -- cheaper than Petrobras.
Bearish on debt
So far, so bad (for the Brasileiro bulls). But here's the real kicker: On top of being the most expensive, the weakest dividend payer, and only a middling grower, Petrobras is also the oil stock with the greatest debt load of all. Indeed, with more than $65 billion in debt (net of cash) on its books, Petroleo Brasileiro has a bigger debt load than the other four oil majors combined.
And now, on top of everything, this company (which hasn't produced a dime's worth of positive free cash flow in five years, by the way) says it plans to spend $30-odd billion more on infrastructure? Think that's going to make the debt picture look any better?
Foolish takeaway
I don't. In fact, it seems to me, any way you look at it, there's little reason to buy Petrobras -- and every reason to sell it to buy something better. (Hint: If you're looking for a better place to put your money, read our new, free report on the energy sector, and find out which stock is the only energy stock you'll ever need.)
