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 worst ...
When you think of megabanks, fewer names come to mind faster than that of Citigroup. Along with Bank of America
Or at least ... about one of 'em. Yesterday, Citi took advantage of recent turmoil in the defense sector to upgrade one of the biggest names in Big Defense -- Lockheed Martin
But I believe that Citi went a step too far when, in addition to upgrading Lockheed, it decided to pull its buy rating on Raytheon
True, like Lockheed, Raytheon has suffered at the hands of the Obama administration. Under Secretary of Defense Gates' stewardship, the Pentagon has taken a meat cleaver to programs at both companies -- Lockheed's F-22 Raptor program for example, and Raytheon's role in national missile defense.
Facts are stupid things
And yes, I know I should take Citi's word on this one. After all, the analyst has developed a sterling record in the defense sector, making such prescient calls as:
|
Stock |
Citi Says |
CAPS Says |
Citi's Picks Beating S&P By |
|---|---|---|---|
|
Spirit AeroSystems |
Underperform |
***** |
13 points |
|
Boeing |
Underperform |
*** |
13 points |
|
Goodrich |
Outperform |
**** |
19 points |
True, too, Citi has called Raytheon right in the past. Its February 2007 recommendation thumped the market with 22 percentage points worth of outperformance through yesterday's downgrade.
The thing
But here's the thing: Even Citi admits that Raytheon is worth about 13% more than its shares are fetching today. (Investors who sold off the stock by 1.3% yesterday may have overlooked that part of the "downgrade.")
So why downgrade a stock with 13% upside in this frothy market? With so many bad stocks having been bid up to unsustainable heights since the March rally began, I'll take a high-quality defense stock that's still 13% undervalued any day of the week.
And in fact, I believe Raytheon is actually cheaper than that. Why? Several reasons:
- First, the company sells for a price-to-sales ratio of less than 0.8, which, to me, seems too cheap for a marquee defense contractor. Especially one which has been outperforming its peers recently.
- Second, its P/E of 10.6, and 11% projected long-term earnings growth, works out to a moderately attractive 1.0 PEG ratio.
- Third, did I mention just how much cash Raytheon churns out? I mean, its $1.8 billion in trailing earnings are impressive enough. But in fact Raytheon generated slightly more free cash flow than that -- a feat it duplicated in five out of the past six years.
With solid cash profits, strong growth prospects, and minimal net debt on its balance sheet, Raytheon remains a buy in my book.
Foolish takeaway
Now, none of the above should detract from my endorsement of Citi's Lockheed upgrade, mind you. To the contrary, I believe that Lockheed Martin stock presents a better bargain than Raytheon when viewed from any angle -- price-to-sales, P/E, or price-to-free cash flow.
But just because Citi woke up yesterday morning, slapped its collective analytical forehead and exclaimed: "I realize it now! Lockheed's a buy!" doesn't mean that Raytheon is not. In my view, both of these stocks are poised to conquer.
