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." 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.

And speaking of the best ...
One month ago -- nearly to the day -- I told you that investors were probably right to be buying Harley-Davidson (NYS: HOG) in reaction to its "hog-wild" Q2 earnings report. While the stock didn't look as cheap to me as either General Motors (NYS: GM) or Ford (NYS: F) , at 45 bucks and change, it was starting to look attractive. This morning, one of the best investors in the business agreed with me.

Taking a hard look at Harley this morning was the ace stock-picking team at KeyBanc Capital Markets -- literally one of the best bankers on Wall Street. Over the five years we've been tracking its performance, KeyBanc has racked up a record better than 95% of the analysts we track on CAPS. In short, if you're going to take any analyst's advice on how to pick stocks, KeyBanc is a good place to start.

So ... what is it exactly about Harley that attracts the analyst? I'm certain the stock's 19% decline from its post-earnings rally had something to do with it. A 20%-off sale is bound to catch any value investor's eye -- but it's not the only thing KeyBanc likes about Harley: "Near term, we expect Harley-Davidson to build on the recent positive inflection point in domestic retail sales trends." What's more, writes the analyst: "our channel checks have indicated that most dealers have not seen a material deceleration in traffic or shift in purchasing patterns over the past month. ... Over the long term, we believe the iconic Harley-Davidson brand, high quality products, and loyal customer base should drive growth through new demographic target markets and support international expansion."

In short, KeyBanc sees a strong long-term growth story at Harley. And it's not the only one. In fact, the consensus on Wall Street these days is that recession or no recession, Harley is poised to grow earnings at 18% annually over the next half-decade. Which leads us to our next question:

Is that fast enough?
After all, Harley is currently priced at a 23 P/E, a number higher than you'll find at pretty much any other motorcycle maker you can name. Honda (NYS: HMC) , for example, costs 15 times earnings. Snowmobile and ATV builder Arctic Cat (NAS: ACAT) sells for 16 times earnings, and Polaris (NAS: PII) sports a 17 multiple. PEG ratio investors will also doubtless note that 23 times earnings is also considerably ahead of the 18% growth rate at Harley.

To understand why this stock is a bargain, though, you have to look deeper than just the P/E. You need to examine the company's cash flow statement, where we find Harley generating free cash flow -- cash profits -- at nearly twice the rate that GAAP accounting standards allow the company to report net earnings.

Steal this bike
Over the past 12 months, Harley-Davidson's free cash flow comes to an impressive $667 million. On a company currently valued at $8.1 billion, this works out to a price-to-free cash flow ratio of just 12.1. Coupled with Harley's impressive growth projections, this makes for a very attractive valuation. Toss in Harley's cool 1.5% dividend yield to sweeten the deal, and I think the stock's a steal.

At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 428 out of more than 180,000 members.The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of General Motors and Ford. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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Originally published