This Just In: More 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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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.

The best, the worst, and everyone in between
Yesterday, Wall Street's best and worst were on brilliant display as the "quiet period" following Dunkin'Brands' (NAS: DNKN) IPO expired, and the folks who brought the company public were free to tell us what they think of the company. You'll doubtless be surprised to learn that they like it.

Or rather ... most of them do.

Time to buy the doughnuts?
According to its IPO prospectus, no fewer than 14 investment bankers took part in Dunkin's IPO, underwriting a staggering 22.25 million shares of stock (and perhaps as many as 25.6 million shares if all overallotment options were exercised). Most, if not all, of these bankers came out with new ratings on the company yesterday.

Among the ones we know about: Four bankers say you should buy the stock -- William Blair, Stifel Nicolaus, JPMorgan, and Williams Capital. Five more say you should hold it if you own it -- ,,, Raymond James, and. Only one brave (or is it cynical?) soul argues that the stock it told you to buy just one month ago, is now a sell:

How much for a box of Munchkins?
Dunkin's more optimistic backers posit price targets of anywhere from $30 to $34.50 on the stock that's currently $27 per share, suggesting the upside here is actually pretty limited. Analysts rating the stock a hold are even more cautious, arguing the stock is fairly valued at anywhere from $27 to $29 per share. But even here, their reasoning raises some concerns.

But to be perfectly honest (or am I cynical?), it's the lone sell rating we see this week that really gets my attention. Consider: Wells Fargo praises Dunkin's "growth potential" and "impressive brand strength." Yet the analyst undermines its own argument when it suggests the most Dunkin' could possibly earn next year is $1.05 per share -- implying a forward earnings multiple of 26 on the stock. Goldman looks at this number and warns it looks excessive; that even with solid growth trends and "best-in-class margins" to support it, the most Dunkin' can probably manage is midteens growth over the long term. As a result, paying 26 times earnings for a perhaps 15% grower is "ahead of fair value."

Listen to the doughnut-man
I agree. I mean, consider a few comparisons here. According to Morningstar, 26 times forward earnings is more than twice the average stock valuation on the Dow Jones Industrial Average (Index: ^DJI). According to Wall Street analysts, Starbucks (NAS: SBUX) is supposed to grow faster than Dunkin' at 17% over the next five years -- but its forward P/E is only 21 -- fully 20% cheaper than Dunkin's. McDonald's (NYS: MCD) is growing slower, but at only 18 times earnings, and with a 2.7% dividend to perk up an investor's profits, it's clearly cheaper than Dunkin' as well. Meanwhile, if "America runs on Dunkin'," then Canadians get better miles per gallon at doughnut purveyor Tim Hortons (NYS: THI) -- 13% long-term growth, costing just 12 times earnings. (And yes, Tim Hortons pays its shareholders a dividend, too.)

To be frank, if you want to find a Dunkin' "peer" with anything approaching Dunkin's overvaluation, you probably have little choice but to compare it to Green Mountain Coffee Roasters (NAS: GMCR) . Needless to say, I don't think we want to go there.

Foolish takeaway
Analysts on Wall Street like their money even more than folks down here on Main Street like our coffee. They don't issue "sell" ratings lightly -- and especially not on stocks that they themselves had a part in bringing public. In short, if Goldman felt compelled to slap a sell rating on Dunkin', you can be darn sure it had a good reason for it.

That reason: Dunkin' costs too much. Goldman said it, and now so have I.

At the time thisarticle was published Fool contributorRich Smithdoes not own shares of any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 426 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Starbucks.Motley Fool newsletter serviceshave recommended buying shares of Starbucks, McDonald's, Tim Hortons, and Green Mountain Coffee Roasters.Motley Fool newsletter serviceshave recommended creating a lurking gator position in Green Mountain Coffee Roasters.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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Originally published