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 ...
Nanotech. Cloud computing. Genome sequencing. When you're talking about technologies that sound like they belong in a new Star Trek movie, almost anybody can see the future. They're obviously going to grow. But it takes a special kind of investor to see the potential for profit in a circa-19th century business like business-card printing.

Fortunately, CAPS member Kaufman Brothers is just that kind of investor. And last week, just before everyone slipped off to enjoy the last big holiday weekend of the summer, Kaufman snuck in one last big buy rating -- on Vistaprint (Nasdaq: VPRT), a company that (you guessed it) prints business cards.

Let's go to the tape
Why should you care what Kaufman thinks about Vistaprint? Oh, no reason really. Other than the fact that Kaufman ranks in the top 10% of investors we track on CAPS. And the fact that its No. 1 area of focus is Internet Software and Services stocks like Vistaprint. And of course, the fact that within this area of focus, Kaufman is right nearly twice as often as wrong:

As the list of its successes above illustrates, nearly 60% of Kaufman's recommendations in this sector are currently outperforming the market. And this record has held up pretty well over time. (In fact, over the four years we've been monitoring this analyst, it's maintained a record of 60% accuracy.) But will Kaufman be proven right about Vistaprint as well?

Well, let's consider. According to Kaufman, the three key reasons to own Vistaprint are:

• Vistaprint possesses proprietary technology, which insulates the business from competition by both traditional printing operations at the likes of Office Depot (NYSE: ODP) and FedEx Office (NYSE: FDX), and online printing threats from UPS (NYSE: UPS).
• The company's recent growth stumble is temporary in nature and will be fixed as the company expands internationally, with growth accelerating into fiscal 2012.
• In which case, the company's stock price of 13 times expected calendar-year-2011 pro forma (Latin for "I'll believe 'em when I see 'em in GAAP") earnings looks cheap relative to a short-term, next-two-year growth rate of 21%.

Which all sounds pretty optimistic, I have to say. There's just one thing with Kaufman's analysis: I think they're dead wrong about Vistaprint.

Dead letter office
Oh, not the proprietary advantages, the growth rate, or the international prospects -- I'll grant you Kaufman could be right about all of those. Where Kaufman makes its fatal error, however, is in overemphasizing short-term hopes and failing to look at Vistaprint's failure to grow fast enough over the long term to justify its premium price.

Consider: At first glance, Vistaprint doesn't look too unreasonably valued based on Kaufman's 21% short-term growth prediction. Problem is, in the longer term, most analysts on Wall Street doubt Vistaprint will grow at much more than 18%, which makes the company's 23 times trailing PE valuation problematic.

It gets more so when you observe that no matter how ready Kaufman is to simply swallow pro forma profits as if they were GAAP, Vistaprint remains sorely lacking in the single, crucial area of generating cash from its business. Actual free cash flow at the company amounts to just over 75% of reported earnings, with the result that this "23-multiple-stock" actually costs closer to 28 times free cash flow.

Foolish takeaway
Admittedly, not everyone finds these numbers worrisome. To the contrary, our very own growth investing team at Motley Fool Rule Breakers likes the stock so much that they've suggested investors buy it. But speaking for myself, I simply see no sense in paying 28 times free cash flow for a company that might grow at 21% for two years and that could very well slow down to less than 19% growth shortly thereafter. And not even as fine an analyst as Kaufman is going to convince me otherwise.