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.
Wall Street goes big on big caps
As investors turned eyes toward the extended weekend, Wall Street issued a final flurry of ratings on stocks such as Abbott Labs (NYSE:ABT), Emerson Electric (NYSE:EMR), and in a paired trade, Procter & Gamble (NYSE:PG) and Colgate-Palmolive (NYSE:CL). So what did the analysts have to say? Let's take 'em in order, beginning with...
Ace stock picker Stifel Nicolaus (ranked in the top 5% of investors tracked on CAPS) initiated coverage of Abbott Labs with a buy rating and a $40 price target Friday. Stifel argued that having spun off branded drugmaker AbbVie (NYSE:ABBV) last month, what remains of Abbott -- Similac, generic drugs, and medical devices -- is getting short shrift from investors.
Yet according to Stifel, Abbott is still capable of producing mid-to-upper-single-digit sales growth going forward. Most analysts agree that when you add in some price hikes, a bit of inflation, and profit margin expansion, Abbott is quite capable of generating 12% long-term earnings growth from its business. At a P/E ratio of less than 10, a price-to-free cash flow ratio that's even lower than that, and paying a 1.6% dividend yield, the stock really does look cheap.
In short, AbbVie may be the apple of investors' eyes right now, scoring an 8% gain post-spinoff. But with little financial data available about AbbVie on most financial data sites (take a look, for example, at how little Yahoo! Finance knows about AbbVie so far), Abbott Labs looks like the better -- and more reliable -- bargain.
Next up: Emerson. The company's catching a bit of flack today, from a Wall Street Journal story that ran Monday and poked fun at CEO David Farr for his "salty talk" and threats of physical violence against analysts who "haven't figured out" the company. Nonetheless, analysts at RBC Capital seem inclined to give Mr. Farr a pass, and on Friday resumed coverage of the industrial equipment maker at "outperform."
RBC thinks Emerson, priced at $58 and change today, is good for about a 20% gain in stock price over the course of the coming year, to $70. Add in a generous 2.8% dividend yield, and that's quite a nice profit the analyst is promising us. But is it realistic?
Remember: At 21 times earnings, Emerson currently costs more than twice the P/E ratio of Abbott, yet with a projected growth rate of barely 9%, Emerson is actually growing slower than the stock Stifel recommended.
Granted, like Abbott, Emerson is a free cash flow powerhouse, generating $2.6 billion in real cash profits over the past year, even as its GAAP accounting says the company only earned $2 billion. But even so, the stock's slow growth rate and 16 times free cash flow valuation don't appear to offer a compelling bargain.
Procter & Gamble or Colgate-Palmolive? (Do we really have to choose?)
Last and least, we come to a pair of well-known consumer brands -- that one analyst has decidedly mixed feelings about. Canaccord Genuity likes Procter & Gamble a lot. In a research report published Thursday, Canaccord called Procter's plan to cut $10 billion from its annual budget the "most significant transformation the company has ever attempted" -- and worthy of a buy rating. The analyst also praises Procter's "strong portfolio of brands," "good track record on cash generation," and its position as the "largest household and personal care products company by sales" anywhere in the emerging markets.
Unfortunately, this analysis just doesn't hold up to examination. Sure, on one hand, I agree with Canaccord that PG is a better bargain than Colgate-Palmolive (which the analyst initiated at "sell," citing a too-high valuation last week). At 21 times earnings, Colgate simply costs too much for its single-digit growth rate to justify.
On the other hand, though, while I prefer Procter & Gamble in comparison to Colgate, that doesn't mean I'd buy Procter on its own merits. Strong as its brand portfolio and market share may be, the company's record on turning market heft into cold hard cash is far from enviable. At last report, Procter was still generating only about $0.83 in real free cash flow for every $1 it reported as GAAP "profit." Procter's also lugging around a good $26 billion or more in debt, net of cash.
Factor these two numbers into your valuation, and you'll soon realize that at an enterprise value-to-free cash flow ratio of more than 22, Procter & Gamble is actually just as overpriced as Colgate. Granted, Procter pays a slightly better dividend yield than its rival -- 2.9% versus Colgate's 2.3%. But honestly -- 0.6 percentage points worth of dividend yield hardly seems a big enough difference to justify Canaccord's rating one stock a buy, and the other a sell.
If you ask me, neither one of 'em is worth owning.
Fool contributor Rich Smith has no positions in the stocks mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 339 out of more than 180,000 members.
The Motley Fool recommends Emerson Electric and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.