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 ...
You knew it would come to this. After Boeing (NYSE: BA) revealed Tuesday that one of its 787 "Dreamliners" had caught fire, melting (melting!) a power control panel and forcing an emergency landing in Texas, it was practically certain that downgrades would ensue. Surprisingly, so far we've only seen one: the downgrade to neutral that Bernstein announced Friday. (Yes, I know Goldman Sachs removed the stock from its "conviction" buy list as well -- but whether Boeing is innocent or convicted, Goldman's still maintaining a "buy" rating on the stock.)

Not that I blame Bernstein or Goldman. When you take the "headline risk" attendant on Boeing's (literal) 787 downfall, and add to it the truly nightmarish history of the Dreamliner's development, I can well imagine the fear this engenders in analysts. I just don't happen to share it. The worse the news gets, the more bullish I am on Boeing.

Let's go to the tape
Before I tell you why, I feel it's only fair to give Bernstein its due credit. Ranking in the 94th percentile of analysts we track on CAPS, and with a sterling record of 67% accuracy in aerospace, there are few analysts out there I'd listen to before Bernstein. (Click here to see the exception to that rule.) Here's how the analyst's recommendations have played out to date:

Four of these six Bernstein recommendations (everybody but Northrop and Boeing itself) are suppliers to Boeing's 787 program. So I'll go ahead and state the obvious: If Bernstein's been right about most of these companies before, the odds favor it being right about Boeing today. 

Chances are that Boeing will indeed, as Bernstein warns, suffer "delivery delays and exacerbate issues with suppliers and customers." Boeing could well be forced to abandon its promised February 2011 delivery date on the first 787, missing "by two or three months." And between the added cost of getting its supply chain in order, and the expense of paying penalties as customers like United Continental (NYSE: UAL) and others are forced to wait for their planes, Boeing's profit margins could well face "pressure," as Bernstein so delicately puts it. Worst of all, "the problem here is that it is virtually impossible for anyone on the outside to predict a charge on this program given the information available and high level of uncertainty on future costs."

Now, we all know how Wall Street abhors uncertainty. Until Boeing makes a full damage report public, this stock will likely languish, or even slide further. But in my humble, Foolish opinion, that's actually a good thing for new investors in the stock.

Uncertain costs, definite value
While Wall Street is running away from Boeing, small investors like you and I have the chance to sneak in and buy the stock on the cheap. And from one perspective, at least, Boeing really is cheap.

Over the past 12 months, Boeing generated $4.1 billion in free cash flow -- a number 20% higher than the company's GAAP "net earnings" would suggest. With the stock down more than 10% from recent highs, this means Boeing currently sells for just a little more than 11 times free cash flow -- not bad for a projected near-10% grower that pays a 2.7% annual dividend.

It's also worth pointing out that Boeing could grow faster than Wall Street expects. That free cash flow number, remember, is what Boeing's making without the benefit of bringing in any cash from 787 deliveries. It's what Boeing gets before it reaps the bounty of the multiple 737 deals it's inked in recent months. (While many investors continue to focus on the 787 as the be-all and end-all of Boeing's growth prospects, the lowly 737 is quietly stealing the show.)

Foolish takeaway
In short, there's every reason to believe that Bernstein is correct: Boeing's stock will show weakness in the near term, as 787 concerns continue to control its trajectory. But in the longer term, the future for this airplane oligopolist still looks bright -- and the stock's price is starting to look right.