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.

Is AMD an A-plus?
For the second day in a row, networking equipment stocks are taking it on the chin. This morning, FBN Securities initiated coverage of Juniper Networks (NAS: JNPR) with a "neutral" rating. That doesn't sound so bad. But according to FBN, near-term prospects for this tech heavyweight look bleak, as service providers like Verizon (NYS: VZ) and AT&T (NYS: T) are "slowing" their tech spending, even as Juniper rival Cisco (NAS: CSCO) is "becoming more aggressive" on pricing, threatening to retake Juniper's market share gains.

Speaking of Juniper's rivals, though, Riverbed Technology (NAS: RVBD) is doing even worse. If FBN takes a dim view of Juniper's prospects, then the report Jefferies & Co. put out on Riverbed yesterday was positively bleak. Initiating coverage on three net-equip stocks -- Riverbed, F5 Networks (NAS: FFIV) , and Aruba Networks (NAS: ARUN) -- Jefferies saw reasons to "hold" the latter two, but could only fish up a "sell" argument for Riverbed. Seemingly turning logic on its head, Jefferies argued that Riverbed's 50% share of the "WAN optimization" market was actually a bad thing for the company. Warned the analyst: This market "only grows as IP traffic growth continues and latency-sensitive application deployment spreads and consolidation of data centers happens."

Translated into English, what Jefferies is telling us is that when Web traffic is growing, Riverbed benefits disproportionately as companies buy its products to maximize their available bandwidth. If traffic stagnates, though, Riverbed may not see any growth at all. And "no-growth" isn't exactly the kind of prospect you want to see for a stock that costs 38 times next year's projected earnings ...

But is Jefferies right? On this score, I come bearing good news for Riverbed bulls: Jefferies is almost certainly wrong about Riverbed.

Let's go to the tape
Beginning with its stockpicking history, I have to say that Jefferies doesn't really impress me. Over the five years we've been tracking this analyst, Jefferies has racked up a miserable 26% record for the accuracy of its picks in the communications equipment industry. Across the three-dozen odd picks it's made so far, Jefferies has underperformed the market by a combined 504 percentage points.

That's an astoundingly bad track record, Fools, and I suspect this week's Riverbed write-up will only make it worse.

Why? Consider first that Jefferies' numbers don't seem to compute. According to the analyst, Riverbed is only likely to earn about $0.51 per share in 2012. But according to most analysts, the correct number here is more likely $1.13 per share -- giving the stock a 19 forward P/E, rather than the 38 times ratio that Jefferies suggests. This alone seems to call Jefferies' "sell" rating into question.

Granted, all these numbers focus on near-term earnings projections, which are notoriously difficult to nail exactly, but also consider the longer-term picture at Riverbed: We already know that this company generated $118 million in free cash flow over the past year (twice reported earnings.)That's a cold, hard fact -- cold, hard cash that we know Riverbed can generate because it's already made it, and deposited it in the bank. And if you back out the company's net cash reserves, it gives Riverbed a much more reliable enterprise value/free cash flow ratio of 24.0. Not quite as cheap as Wall Street's "consensus" forward P/E, but not nearly as bad as the bleak picture Jefferies paints.

Foolish takeaway
Compared to long-term growth rates that Wall Street estimates at somewhere north of 30%, Riverbed's EV/FCF ratio looks pretty cheap to me. Whatever happens in the near term, if Riverbed can live up to Wall Street's opinion of its long-term potential, I'd say this stock is anything but a "sell."

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. 298 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Riverbed Technology, AT&T, and Cisco Systems.Motley Fool newsletter serviceshave recommended writing puts in Riverbed Technology.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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