This Just In: Upgrades and Downgrades

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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Salesforce.com (NYSE:CRM) just can't get a break. On Monday, All-Star analyst Kaufman Bros. upped its price target on the cloud computing company. The stock dropped regardless. One day later, Soleil Securities contradicted Kaufman's rosy view -- and salesforce dropped even more.

Who said what?
Bad news first. According to Soleil, an "even tougher pricing and renewal environment at the low end of the market" will constrict salesforce's revenue and earnings in 2010. Short-term catalysts are also lacking, as Soleil predicts deferred revenue will be "choppy" and overall IT spending "weak."

While this seems to conflict with news out of Intel (NASDAQ:INTC) earlier this month, it does echo what the bankers at Goldman Sachs (NYSE:GS) and UBS have been telling us -- that IT spending will remain weak in 2009, gathering strength only next year. I'd also point out that the Soleil racked up 19 percentage points worth of market outperformance on salesforce before ending its pick this week. So I wouldn't discount its concerns lightly.

But now here's the good news: As fine an analyst as Soleil is, an even better stock-picker says it's wrong. Kaufman Bros. polled multiple "CEOs and senior sales executives of privately held [Software as a Service (SaaS)] vendors, CRM implementation partners and small CRM rivals, as well as independent consultants serving various SaaS vendors" to get their read on the IT market as it currently stands. On balance, the consensus says the market has now bottomed, and Q2 numbers are "solid." This reassured Kaufman enough to maintain its buy rating on the stock, and upped its price target (to $50 a share, if you're interested).

Let's go to the tape
Just how much better an analyst is Kaufman than Soleil? The numbers tell the tale:

Among the 135,000 investors we track on CAPS, Soleil ranks in the 83rd percentile among rated players. Which is not bad ... except that it is, relative to Kaufman's rank in the 92nd percentile. Even more telling, I suspect, are the analysts' respective records in the related spheres of Software and Internet Software and Services stocks. Based on their current recommendations, Soleil is scoring just 38% for accuracy on its recommendations in this sector. And Kaufman? It's right twice as often as it's wrong: 67% for accuracy.

Now, I'll grant you that Kaufman pulled the trigger too soon on salesforce.com when it recommended the stock back in August 2008. Kaufman "bought high," and its pick remains underwater today, underperforming the market by 12 points. But far from being discouraged by its bad timing, Kaufman is maintaining its advice for the long haul. Pricing pressures and tight IT wallets in 2009 notwithstanding, the analyst believes that salesforce remains a viable investment for the long term. I agree.

Salesforce.com is a cash-rich company, boasting $500 million in net cash on its balance sheet. Over the last 12 months, through the maelstrom of this recession, salesforce has only added to its cash hoard, generating $193 million in trailing free cash flow. Divide that into the company's market cap, and you'll find the stock selling for less than 28 times its currently weak cash profits.

Short-term concerns notwithstanding, most analysts believe that the company can continue growing these profits at nearly 30% per year over the long term. If they're right, then 28 times cash profits seems a very reasonable price to pay for that kind of growth.

Foolish takeaway
Is it scary to see an analyst like Soleil pan your stock? Sure it is. But take reassurance in the knowledge that a better analyst still thinks salesforce is a great investment -- and has the numbers to back it up.