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.

And speaking of the best ...
Shares of wireless chipmaker TriQuint Semiconductor (NAS: TQNT) tumbled for their third day running. Why? Well, the initial cause was certainly Wednesday's disheartening earnings release. After the close of trading, TriQuint confirmed that it made Wall Street's expected $0.17 per share in Q2.

Now the bad news: Investors won't be so lucky in Q3. The company's having to reposition itself to serve the 3G and 4G networks at AT&T (NYS: T) and Verizon (NYS: VZ) , and this "transition" is "muting" growth in revenues for GSM in the short term. Result: Q3 revenues will fall short of expectations, and if TriQuint succeeds in reporting another 17-cent quarter, that will fall about 32% short of expectations.

This soft guidance stands in marked contrast to the growth predictions at Skyworks (NAS: SWKS) and RF Micro Devices (NAS: RFMD) , two key rivals for business from key customerApple (NAS: AAPL) . Hearing the news, Charter Equity downgraded TriQuint to "market perform." Other stock shops held steady with their ratings but cut their earnings estimates. UBS, for example, now forecasts just $0.15 worth of profit in Q3 -- down a third from previous expectations, and $0.02 lower than TriQuint is promising.

Let's go to the tape
So a downgrade and a profits prediction walk-back -- these would be disturbing developments in any case; they're even worse coming from Charter and UBS, which are two of the more respected analysts on CAPS. UBS, for example, ranks in the top 10% of analysts we track on CAPS. Charter, while ranked lower, has a more consistent win rate on its picks, accurately calling the trajectory of its recommendations nearly 55% of the time.

Charter's also laser-focused on the telecom-semiconductor segment, and it's highly successful there, with two of its recommendations outperforming the market for every one that lags. Charter correctly called the downfall of Research In Motion (NAS: RIMM) , for example, and pulled a near two-bagger out of the sack with Altera. It's been right about both these stocks -- and I'll just bet you it's right about TriQuint as well.

TriQuint Semiconductor: Buy these numbers?
A few months ago, if you recall, I criticized the anemic free cash flow record of TriQuint on these pages, earning a quick (but polite) objection from the company for calling it a "dud" of an investment. At the time, TriQuint was reporting barely $25 million in annual FCF, a number far inferior to reported GAAP "profits." TriQuint assured me, however, that this was all part of the plan. The company was racing ahead, grabbing market share and building scale, and would produce beaucoup free cash flow ... eventually.

This "transition" to new carrier tech, however, has me wondering whether TriQuint was perhaps racing in the wrong direction. Rather than rising, a quarter after I critiqued the company's numbers, free cash flow dropped to $19 million for full-year 2010. Last quarter, it turned negative by more than $20 million on an annualized basis. As for this quarter, TriQuint isn't even telling us what its free cash flow was. The earnings release contained no cash flow statement -- not even a reference to free cash flow. Seems TriQuint won't tell us how bad things got until it's required to file its 10-Q statement with the SEC. (Add the company to your Fool Watchlist, and we'll tell you how it did just as soon as we know.)

Foolish takeaway
What we do know is this: Three months ago, TriQuint was burning through $20 million worth of cash on $190 million in annual income. Today, that income number is dropping. It's down just $6 million over the past 12 months, but still ... how much do you want to bet that resulted in better free cash flow?

Bulls may still argue that TriQuint is cheap at 6.5 times reported earnings. Management may assure us that the free cash flow check is "in the mail." As for me, though, until I see actual, concrete, cash profits to back up the accounting profits, I won't be investing in TriQuint.

At the time this article was published Fool contributorRich Smithowns no shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 563 out of more than 170,000 members.The Motley Fool owns shares of Apple, TriQuint Semiconductor, and Research In Motion.Motley Fool newsletter serviceshave recommended buying shares of AT&T and Apple and creating a bull call spread position in Apple.We Fools don't 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.

Read Full Story

Can't get enough business news?

Sign up for Finance Report by AOL and get everything from retailer news to the latest IPOs delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.