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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Who's hot, who's not -- in transportation stocks The Dow Jones Industrial Average, at 13,850, is pushing once again toward its all-time high today, but can it keep the momentum up? According to stock market lore, key to future strength in the stock market at large, is the performance of some of its strongest constituents -- the transports. So how are those guys doing?
As luck would have it, three separate analysts chimed in with three separate ratings changes on three of the biggest names in transport this week. Here's what they said:
United Parcel Service, Inc. (NYSE:UPS) -- still going up Shares of UPS hit a new 52-week high yesterday -- and earnings aren't even out yet. (In fact, they're due out Thursday). But one analyst, at least, has decided to beat the rush, and beat feet to get into UPS stock early. Yesterday, Bank of America announced it was upgrading UPS ahead of earnings. Problem is... B of A may be coming late to this party.
UPS shares, you see, have rallied strongly off their November lows near $70 -- up 17.5% in a matter of just a couple months. As a result, the stock now costs a heady 24.4 times earnings, which seems quite a lot considering that most analysts believe UPS will have difficulty growing earnings in the future at much more than a 10% annual rate.
In UPS's defense, the shares aren't quite as overvalued as they look. UPS boasts strong free cash flow of $4.8 billion annually, or roughly 45% more than the $3.3 billion in net earnings it reports for the past year. Even so, at a price-to-free cash flow ratio of 16, the stock looks fully valued to me -- and maybe even too fully valued to justify B of A's buy rating.
FedEx Corporation (NYSE:FDX) -- flying into turbulence? Another transport stock setting new records this week was none other than UPS archrival FedEx. What's curious here, though, is that while UPS probably got a little help with hitting its high from the B of A upgrade, FedEx was actually bucking the headwinds of a negative ratings move from Standpoint Research, which downgraded the stock to hold Wednesday.
The stock's up again today, so investors appear to be ignoring the analyst's warning. But even so, I have to say that Standpoint has the better of this argument, long term.
Oh, I know -- at first glance, FedEx shares look like a much better value than do UPS's. The stock sells for only a 16.4 P/E ratio, after all, fully a third less than the ratio UPS sports. But here's the thing: Where UPS's GAAP earnings understate the company's real cash profitability, FedEx's earnings actually overstate the case. Fact is, over the past 12 months, FedEx has only generated about $707 million in free cash flow from its business -- that's about $0.36 for every $1 it claimed to be "earning."
Thus, if you value the company on its cash profits, rather than its accounting profits, FedEx actually sells for a price-to-free cash flow ratio nearly three times as large as the one UPS sports. It costs 45.3 times the amount of cash it generates in a year. And speaking of cash, FedEx's dividend yield is positively miserly -- a mere 0.6%, versus the generous 2.8% that UPS shares yield.