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 that, 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.

And speaking of the best...
Shares spiked after the first quarter, then fell steadily for the past month, and now shares of flying-robot-maker AeroVironment (NAS: AVAV) got a new lease on life Tuesday when FBR Capital upgraded the stock to buy.

Now you probably know FBR as one of the "gang of six" Wall Street bankers that helped to bring AV public four years ago. As such, the analyst has a special insight into the company and its operations. (And four years removed from the IPO, it's also probably less biased in the company's favor than it was in the months immediately following AV's going public.) What you may not know is that FBR is also one of the more active investment bankers in defense stocks generally.

Over the five years we've been tracking its performance, FBR has racked up a mixed record of success in the aerospace and defense industry. On the one hand, it's made more mistakes than we'd like; only about 43% of its recommendations actually do "beat the market" as predicted. On the other hand, FBR does a good job of risk management, keeping its losses small and picking an inordinate number of big winners including:

Company

FBR Rating

CAPS Rating
(out of 5)

FBR's Picks Beating S&P by

Goodrich Outperform **** 54 points
BE Aerospace Outperform **** 102 points
Ladish Outperform **** 295 points (!)

FBR has also, not coincidentally, earned its clients beaucoup profit on AeroVironment. After recommending the stock after its March 2007 IPO, FBR rode AV to a 32-percentage-point gain. And call me an optimist, call me a Fool -- but I think FBR just might bag another winner with this week's AV pick. The price is right, and there's every reason to suspect the stock is poised for another big run.

AeroVironment: Buy the numbers?
Why do I say that? Well remember, as recently as last month I told you I was starting to get tempted by AeroVironment. My only concern was that the stock price didn't offer a very large margin of safety -- and I was just waiting "to grab it at a bargain price."

Since I wrote those words, AV has steadily slipped toward just such a bargain price. Before FBR spotted it, the shares were selling for about 24 times earnings. That might not sound like an obvious bargain relative to rival UAV enthusiasts like L-3 Communications (NYS: LLL) , Northrop Grumman (NYS: NOC) , or Lockheed Martin (NYS: LMT) -- each of which still sells for a single-digit P/E. On the other hand, these larger defense shops also sport single-digit growth rates, while AV is pegged for growth in the low 20s. As a result, you could argue that AV was getting pretty close to "cheap" at the time FBR upgraded it. It's a little less so post-upgrade, but still attractive.

Consider: At today's price, AV shares cost about 25 times earnings. Back out the firm's $189 million in cash (AV has no debt worth mentioning), and you get an enterprise value to free cash flow ratio that's even lower -- around 20. Not bad for a company where consensus expectations call for 21% annual long-term growth.

Foolish final thought
As for how likely AV is to achieve that growth rate, and where the growth will come from -- take your pick. On the electric-vehicle-charging front, AV is the lead contractor for building charge stations for Nissan's Leaf electric vehicle. It probably lags General Electric (NYS: GE) in the charging market overall, but it's a big field, AV has won multiple contracts to build municipal charging infrastructure, and the industry is only going to grow as Ford (NYS: F) , General Motors (NYS: GM) , and eventually Toyota begin bringing plug-in electric cars to market.

On the unmanned aerial vehicle side of things, AV remains the undisputed king of small UAVs. The Pentagon loves its stuff, while its closest formidable competition in this niche of the UAV market is Honeywell -- whose own T-Hawk has taken flak from the military for "poor reliability." Budget cuts doubtless have investors worried about investing in defense contractors. Still, AV appears to be one of the safer bets in the industry -- and a good bet to help FBR keep outperforming the market.

At the time this article was published Fool contributor Rich Smith does not own shares of, or short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 557 out of more than 180,000 members. The Motley Fool has a disclosure policy.The Motley Fool owns shares of Northrop Grumman, L-3 Communications, Lockheed Martin, and Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford, General Motors, AeroVironment, and L-3 Communications.Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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