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 ...
What do you do when one of the best bankers in the business upgrades one of the hottest stocks in international business? Me, I listen up. And from what I hear: "Blue Horseshoe loves Anacot Steel."

Er, sorry. Got my upgrades confused. What I actually heard as trading wound down for the week on Friday, was that KeyBanc Capital Markets loves Accenture (NYSE:ACN). Calling the company: "one of the two dominant vendors in the global IT outsourcing market along with IBM (NYSE:IBM)," and predicting that Accenture will "gain more business over the next several years," KeyBanc upgraded the shares to "buy" on Friday.

Predicting that the recession will not kill the global trend toward clients seeking advice from bigger, better, sole-source providers, KeyBanc called Accenture just such a "preferred" vendor, and suggested that "longer-term investors who are looking for a large-cap, high-quality industry leader trading at a discount" should buy the stock.

Do tell
As a Fool, KeyBanc's conclusions raise a couple of issues for me. First and foremost: "longer-term investors ... looking for a ... high-quality industry leader trading at a discount?" Seriously, who wouldn't answer that personal ad? KeyBanc couldn't have ginned up more enthusiasm with its recommendation if it had offered to pay for the shares itself!

And second -- so IBM's the other dominant IT contractor in the world, huh? I wonder what Hewlett-Packard (NYSE:HPQ) thinks of that?

These quibbles aside, though, it's hard to argue with success. And successful is just what KeyBanc has been with its previous picks. Despite the odd loser here or there (one area is steel) ...

... KeyBanc's put together an admirable record of outperforming the market, beating the S&P 500 by nearly 5 percentage points per pick, getting 54% of its recommendations right, and topping more than 90% of the investors we track on CAPS. Helping it achieve these successes have been high-profile winners such as:

I'd also point out that the last time KeyBanc gave Accenture the thumbs-up, in January 2008, it outperformed the market by 10 points on the pick in just three months. Suffice it to say I believe KeyBanc is keying up for a repeat of that performance today.

When you're right, you're right
Explaining its recommendation, KeyBanc laments that "investor and analyst sentiment on [Accenture] turned sharply more negative following [Accenture's] 2Q09 results, which included a reduction of the Company's FY09 constant currency revenue growth guidance from 6-10% to 0-4%."

But whatever the short-term view, after reviewing Accenture's numbers it's hard for me to come to any conclusion other than that KeyBanc is right today.

I'm not just talking about the price-to-earnings ratio (P/E), either. Although at 10.5, and with analyst consensus at better than 13% long-term growth, that alone tells you the stock's probably cheap. No, what really gets me excited about Accenture today is the company's prodigious cash-generating prowess. Over the past 12 months, Accenture generated over $2.9 billion in free cash flow.

Foolish takeaway
Thus, the stock's selling for not even 7 times trailing free cash flow. At this price, I don't even have to explore how the firm's balance sheet -- bursting at the seams with nearly $3 billion in cash and equivalents with essentially no debt -- makes it cheaper than it seems. Any way you look at it, Accenture's dirt cheap.

And KeyBanc is dead right when it tells you to buy it.