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.

Imperial who?
Today's featured rating comes courtesy of a virtual unknown in investor circles. Neither best nor worst, Los Angeles-based Imperial Capital has no rating whatsoever on CAPS -- a result of the investment banker's failure to report its ratings to for public review. It's perhaps because of this shortcoming that when investors heard Imperial had begun covering cancer researcher Dendreon (NAS: DNDN) with an "underperform" rating yesterday, they responded by bidding the shares up 12%.

But was that the right call? Should investors have given short shrift to Imperial's concerns? I'm not so sure. As I mentioned last month, Imperial is far from the first analyst to express concerns about Dendreon's business. Ace analyst William Blair, for one, recently argued that the company's prospects dimmed in comparison to those of firms further along in the blockbuster-drug business, such as Sanofi (NYS: SNY) and Johnson & Johnson (NYS: JNJ) . Indeed, surveying the field, Blair saw better chances for investors to make a profit on even lower-profile stocks, like Medivation (NAS: MDVN) and OncoGenex, than on Dendreon.

Why? Well, let's take a look.

Dendreon: By the numbers
Dendreon management says it needs to make about $500 million in annual Provenge sales in order to break even. The problem is, the company's not even halfway there yet. It's currently on track to do only $215 million in business this year, and its current estimated run rate of $240 million will fall far short of the $800 million run rate it had previously set as a target by the end of 2011.

True, the consensus of analysts who follow the stock is that Dendreon will ramp to $384 million or so in sales next year, and top the $560 million mark in 2013. But if sales fall shy of the $384 million mark next year, it would likely postpone the date when Dendreon hits cash flow breakeven beyond 2013 -- disappointing investors who've been relying on Wall Street's promises yet again, and probably doing little good for the stock price.

Valuation matters
Speaking of price, it's hard to value a stock on P/E in the absence of profits. However, based on its revenues, Dendreon is selling for roughly 11 times trailing annual sales today. That's about 50% higher than the average valuation on stocks in the biotech sector. It's also about three times the valuation of biotechs like Gilead Sciences (NAS: GILD) and Amgen (NAS: AMGN) -- both of which are already earning profits.

While I certainly hope Dendreon is able to overcome its difficulties, the reality is this: Investors have a whole host of profitable alternatives to choose from in the biotech industry. Given Dendreon's tenuous present condition, and the unreliability of analyst estimates of how much it will earn (or even sell) in the future, there doesn't seem much reason for an investor to prefer Dendreon over the alternatives.

Disagree? Think Dendreon will regain its former glory?Add it to your Fool Watchlist, and read along as it tries.

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. 267 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Johnson & Johnson and Dendreon.Motley Fool newsletter serviceshave recommended buying shares of Johnson & Johnson and Gilead Sciences, as well as creating a diagonal call position in Johnson & Johnson.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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