This Just In: Upgrades and Downgrades

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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.

And speaking of the best ...
If shares of Sprint Nextel (NYS: S) are holding up surprisingly well on this miserable day for the market, you can probably thank RBC Capital Markets. Yesterday, RBC boldly told investors to buy Sprint ahead of tomorrow's Q2 earnings report.

RBC notes that Sprint added more wireless subscribers last quarter than it had in any quarter in the past five years. The telecom's still losing "contract" customers (known in the industry as "post-paid"), but its business is going great guns in the prepaid cell market.

RBC thinks Sprint may have added as many as a half-million prepaid subscribers in Q2, losing only 85,000 post-payers in the bargain. This despite the fact that the Verizon (NYS: VZ) / Vodafone (NYS: VOD) wireless joint venture has now joined AT&T (NYS: T) in offering the iPhone -- and Sprint has not.

That, however, is actually part of RBC's buy thesis for Sprint. Because Sprint doesn't yet have the iPhone, you see, it could see an increase in business once it does get it -- an event RBC thinks could happen as early as September. In further counterintuitive thinking, RBC argues that even AT&T's intended purchase of T-Mobile USA, if it goes through, might not be such bad news for Sprint.

Historically, T-Mobile has competed with Sprint on price, leaving the upper end of the market to Verizon and AT&T. AT&T is buying T-Mobile in part to remove such low-price competition. But in the process, it may just sharpen the distinction between Sprint's low-priced calling plans and AT&T and Verizon Wireless's pricier offerings.

Is RBC crazy -- or crazy like a fox?

Let's go to the tape
I think the latter's the case. Few analysts can boast a track record as successful as RBC's in the telecom sphere. Over the years, this analyst has correctly called the trend on a diverse field of telecom picks, including:

Company

RBC Rating

CAPS Rating
(out of 5)

RBC's Picks Beating S&P by

Cellcom IsraelOutperform*****17 points
WindstreamOutperform***40 points
American TowerOutperform****51 points (right three times!)

In five years, RBC has racked up a record of 62% accuracy on telecom services stocks generally -- and an astounding 79% success rate in wireless telecom in particular. Could it be right again about Sprint?

Sprint: Buy the numbers
Sprint isn't currently profitable, and the average analyst on Wall Street doesn't expect it to earn a profit this year or next. But Sprint did generate more than $2.5 billion in free cash flow over the last 12 months -- and nearly $15 billion over the past five years.

That gives a $15.5 billion dollar stock like Sprint a 6.2 price-to-free cash flow ratio. If Wall Street's more pessimistic analysts are right, and the company can only expect to grow profits at about 4.5% annually at best, that's still not a very high price to pay. If RBC's right, and everyone else is underestimating Sprint, then 6.2 times FCF looks awfully tempting.

Foolish final thought
Mind you, I'm not interested in buying Sprint myself. I'm a pretty cautious investor myself, and Sprint's $14.5 billion net debt load frankly frightens me. But if you're a braver Fool than I, looking to take a flyer on an underappreciated and downright disdained telecom stock, Sprint may be the stock for you. RBC thinks it's a good bet -- and I wouldn't bet against this particular analyst.

At the time this article 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. 571 out of more than 170,000 members.Motley Fool newsletter serviceshave recommended buying shares of American Tower, Vodafone Group, AT&T, and Cellcom Israel. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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

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