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.
There's best, there's worst, and then there's Macquarie
We're going to take a bit of a detour from the ordinary this morning, Fools. Ordinarily in this column, we profile the highest of the high-profile stockbrokers, and their orations on the market. That's not Macquarie. In fact, unless I miss my guess, you've probably never even heard of Macquarie Research. The Australian equities and debt researcher rarely makes headlines stateside, and it doesn't submit its ratings to Briefing.com for wide dissemination to U.S. investors.
Still, the companies it chose to upgrade this morning are just too big to ignore:
-
Boeing
(NYSE:BA) - Goodrich
-
Honeywell International
(NYSE:HON) -
Spirit Aerosystems Holdings
(NYSE:SPR) -
TransDigm Group
(NYSE:TDG) -
Triumph Group
(NYSE:TGI) -
United Technologies
(NYSE:UTX)
Pointing to improved passenger and freight traffic in the airline biz, Macquarie upgraded each and every one of 'em to "outperform" (analyst-speak meaning "buy the stocks"). While Macquarie doesn't love the sector unequivocally -- Northrop Grumman
So what?
Fair question. For most analysts -- those who report their ratings to Briefing.com, from which we can track them in CAPS -- it's become pretty easy to spot-check their performance. Click on over to Motley Fool CAPS, type in the name of the bank that issued the rating, and CAPS will tell you whether its record is good, bad, or indifferent.
Not so with Macquarie. All we really have is this analyst's announcement to go on. But that's not necessarily a bad thing. Fact is, crunching the numbers on Wall Street's performance over the past two-plus years has taught us that most analysts are no better than 50-50 stock pickers in any case -- and quite a few of them are less accurate than a coin flip when it comes to outperforming the market.
Which is, incidentally, about how Mr. Market seems to be viewing these new ratings. Of the eight aerospace stocks mentioned above, four are beating the market so far today, while four more (including the lucklessly downgraded Northrop) are trailing. Generally speaking, investors seem to be heeding Macquarie's advice more than ignoring it, but not by much.
Is that the right call?
Given the analyst's lack of a record on CAPS, and the minimal detail that the mainstream press has provided on the ratings thus far, you may be surprised to hear me say this, but: "No." Fact is, there's some method to Macquarie's madness in that the valuations in this sector really do appear to be too low relative to the companies' prospects.
A quick look at the PEG ratios on offer for these aerospace leaders shows that while Northrop's valuation seems speculative (no profit recorded over the past year), Boeing looks overvalued, and even United Tech and Honeywell are priced (at worst) at fair value, everyone else seems to be selling for a discount:
- Goodrich, for example, sells for only a 8.2 P/E despite consensus estimates that it will grow that "E" at 11.9% per year over the next half-decade.
- Spirit AeroSystems and Triumph are valued similarly, with 7.8 and 6.8 P/Es respectively, versus growth predictions of 11.7% and 10.3%.
- But the best deal of all appears to be TransDigm. Priced at a mere 12.6 times earnings, the company is expected to grow those earnings at a 20% clip over the next five years. At first glance, this stock looks positively priced to fly.
Foolish takeaway
Now mind you, Macquarie is endorsing most of these stocks, but I personally am not. The valuations do look attractive on a few of 'em, especially from a very high-level P/E-versus-growth perspective. That said, before buying any of these stocks, you'll want to consider additional factors such as book value, debt, cash flow, and dividends.
All Macquarie has given us, really, is a nudge in the ribs to begin looking. As investors, we thank 'em for the idea, but the real work is still up to us.
