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.

Before the soap opera
"At the least, P&G needs to post fiscal first-quarter earnings per share for the period ended in September within the 91-to-97-cent range provided by the company."

So ordained The Wall Street Journal, ahead of Procter & Gamble's (NYS: PG) fiscal Q1 earnings report last week. It was a low bar the Journal set, though -- earning less than the $1.03 P&G earned a year ago, and far less than the $1.10 the company was promising as recently as April.

P&G compliantly cleared the bar, reporting $0.96 per share, and on Friday, it got its reward. Stock shop CLSA liked this number so much that they flipped their opinion of the stock 180 degrees, upgrading all the way from "underperform" to "outperform," and setting a $78 price target.

Not everyone was impressed, though. Downgrading from "neutral" to "sell," analysts at Oracle Investment Research blasted P&G devoid of signs of "progress" and added, "In fact, we see the opposite." While profit margins floated higher, Oracle criticized the company for spending $2.5 billion on share buybacks. Yet instead of lowering its share count, and boosting profits as a result, "the share count is up1.7 million shares from last quarter." So it seems P&G's buyback only really succeeded in:

(a.) Wasting money on shares that underperformed the S&P 500 by more than four percentage points over the past year.

(b.) Growing its debt load $2.5 billion. (The company is now $26.5 billion in hock, net of cash.)

Adding insinuation to injury, Oracle notes that while P&G was trying to keep its stock price afloat with buybacks (and failing), it sold its own employees down the river. The gaping hole in the company's pension program yawned $1.3 billion wider in Q1, and the pension fund is now $5.5 billion underfunded.

Conclusion: Oracle calls Procter & Gamble "a slow train wreck."

The price of failure
I know, I know. The betrayal of its employees notwithstanding, a lot of P&G investors still love the company. With its 3.2% dividend, and stable of well-known, popular consumer goods, P&G is seen as a safe haven in a weak economy -- a stock that simply can't be sunk, because people have to buy its brands. But do they? Is P&G really as great as everyone thinks?

I mean, if Procter & Gamble was selling stuff that people just have to buy, in any economy, then it stands to reason the company could charge premium prices for these goods, and grow sales and profits in any environment, with no regard for the competition. Instead, what do we see? The company's 12.7% profit margin isn't that much stronger than Church & Dwight's (NYS: CHD) 11.3% net margin. P&G actually lags Colgate-Palmolive (NYS: CL) in the margins race.

And speaking of brands like "Colgate" and "Palmolive," is it really true that consumers have no alternative but to buy Tide and Pampers, at all times and in all economies? If you keep a close eye on discount shopping websites, as I do, this doesn't seem to be the case. For example, consumers on continue to rave about the quality and value of a detergent called "Ultra Plus," which is manufactured by Church & Dwight, and distributed in bulk by Sears Holdings (NAS: SHLD) . Any time the stuff goes on sale, it sells out online in a matter of hours.

Kimberly-Clark (NYS: KMB) , which competes with P&G in any number of paper-goods markets -- often at lower prices -- experienced less than half the loss of sales that Procter did in the most recent quarter (sales down 2.5% versus down 5.4%). Colgate's sales dropped a mere 1.2%, while Church & Dwight's sales were actually up last quarter, and projected to rise again when it reports next week.

Foolish takeaway
Given these trends among the competition, I'm not at all sure Procter & Gamble deserves the "safe haven" halo than investors appear willing to give it. To the contrary, the company's massive debt load -- once again, that $26.5 billion-with-a-Capital-B net debt -- combined with its steep 19-times-earnings valuation and its anemic, single-digit growth rate, all suggest to me that the stock is overvalued today.

Sure, if investors keep faith in the company, and cling to its shares in hopes they'll weather a stormy economy better than a less-premium brand name, P&G could hold onto its current high P/E ratio. (Never underestimate the power of inertia). But with little growth ahead of it, and the competition outperforming on every front, I don't see much hope that P&G will hit CLSA's $78 target price anytime soon.

And I certainly don't see a reason to follow the analyst's advice and buy this overpriced stock.

Populated by overpaid bankers whose nannies, maids, and cab drivers are often their only connections to the "real world," Wall Street often overestimates certain companies' consumer appeal and misses the boat entirely on others. Are you part of the 99%? Our new free report highlights three less-than-luxurious stocks the 1% may be overlooking. Just click here to read it now.

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Fool contributor Rich Smith neither owns nor shorts shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 296 out of more than 180,000 members.The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Kimberly-Clark and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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