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.
Laugh at the pain
On Wall Street today, there were more tears than laughter among shareholders in airport bomb detector-manufacturer American Science & Engineering (NAS: ASEI) . Shares are plunged almost 24% in the wake of an earnings miss of truly epic proportions -- $0.15 per share earned, versus an estimated $0.83 for Q4.
But if you're looking for a bit of comic relief from the misery, you need look no farther than The Benchmark Company -- which recommended holding onto the shares through earnings and is now ruing its mistake -- and cutting its price target.
While not particularly optimistic about the quarter, Benchmark was at least confident enough in the stock that it told investors to hold on and to expect a share price not lower than $66. Now, with AS&E shares dropping like a landslide, the analyst is cutting its target back to $58 -- as the shares fall below $52.
There are any number of ways to view this news. If you're a shareholder of General Electric (NYS: GE) , for example, you're probably thinking management was pretty darn smart to exit the bomb-detecting biz back in 2009, when it sold out to SAFRAN.
If you're among the minority of investors who see a future in this business, and perhaps with a little money tucked away in OSI Systems (NAS: OSIS) or L-3 Communications (NYS: LLL) , you're probably feeling just a wee bit nervous over AS&E's results. Shares of both companies actually held up pretty well today, but as soon as people start making the connection between AS&E's warning about "tightening of the U.S. defense and homeland security budgets" and the fact that L-3 and OSI get their revenues from the very same budgets that feed AS&E, that could change in a hurry.
As for investors in AS&E in particular, however, there's really only one way to view today's news and Benchmark's after-the-fact decision to turn more cautious on AS&E: This is a buy signal bright enough that anyone can read it.
Consider: Wall Street may be freaking out over AS&E's reported "earnings", but according to CEO Anthony Fabiano, things aren't nearly as bad as the GAAP numbers suggest: "We are heading into fiscal year 2013 with a lot of positives on our side -- a solid backlog, a robust pipeline, high-growth potential product developments, a very healthy balance sheet, and an extraordinary team of employees that are committed to top-notch performance."
So said the CEO, and while puffing can be expected from any corporate exec forced to spin news such as that which AS&E announced, in this case the numbers back him up. GAAP notwithstanding, last year, AS&E generated $45.8 million in free cash flow -- a 64% increase over 2010's take, and the biggest cash haul AS&E has collected in at least the last five years. Its bank account is flush with nearly $207 million worth of cash, equivalents, restricted cash, and "short-term investments," which long-term liabilities amount to less than $8 million.
At today's post-selloff market cap, American Science & Engineering's business now bears an enterprise value of just $265 million, which gives the stock an enterprise value-to-free cash flow ratio of less than 6. This, on a stock that despite all the pessimism, analysts still expect to see grow at a 15% clip annually over the next five years.
Cheap doesn't begin to describe it. AS&E is a steal -- and that's why today, right now, I'm heading over to Motley Fool CAPS to publicly rate it an "outperform." Other Fools may believe that they've found the best stock of 2012 among the recommendations of the Fool's flagship Stock Advisor newsletter service. But personally, I think I've found it right here.
Am I right or wrong? Find out. Follow along.
At the time thisarticle was published Fool contributorRich Smithowns shares in any company listed above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 328 out of more than 180,000 members. The Motley Fool owns shares of L-3 Communications Holdings.Motley Fool newsletter serviceshave recommended buying shares of American Science & Engineering and L-3 Communications Holdings. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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