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 this, 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.
Calling all telecoms
Last week was a big week for investors in the telecom equipment industry, and it ended with a bang. On the one hand, ace investment banker Bernstein announced an end to the carnage at Alcatel-Lucent (NYS: ALU) . Arguing that the company is "structurally loss making in Wireless ... [and] exposed to fundamentally unattractive Wireline and Enterprise segments" (together, that's already more than half its business), Bernstein says a review of Alcatel's balance sheet shows "no immediate bankruptcy risk." So apparently, now's the time to buy.
To which I can only reply: Wow. Talk about damning with faint praise! Heck, I've been down on Alcatel myself, and for quite some time now. I've criticized the company's cash flows, and called its earnings low-quality ... but even I haven't used the "B" word. If the best Bernstein can say about the company, though, is that they don't think it's going bankrupt ... then maybe things are even worse over there than I thought.
Moving on from Bernstein's "endorsement" of Alcatel, tel-equip investors were also treated to multiple critiques of Alcatel peer Ciena (NAS: CIEN) . In a series of revisions, first Jefferies lowered its price target on Ciena to $10. Then Morgan Stanley reduced its earnings estimate for the stock. Then in a shout from across the pond, Deutsche Bank joined the chorus of criticism by cutting its own price target for the stock 20% (to $16).
What's with all the negativity, you ask? Well, on Thursday, Ciena reported earnings that fell short of analyst expectations, but were in at least a couple of respects good news. For one thing, the company appears to be stealing market share from rivals like JDS Uniphase (NAS: JDSU) , Cisco (NAS: CSCO) , and -- you guessed it -- Alcatel-Lucent. For another, the company reported positive cash from operations for the quarter. Not enough to pull the company up into positive free cash flow territory for the trailing-12-month period, granted. But enough to at least slow the rate of cash burn at Ciena.
The good news lent itself to an initial 10% pop in the stock Thursday. But that gain was quickly eroded down to 1% as the trading day wore on, and judging from today's performance, looks ready to evaporate entirely. So who was right? The folks who bought Ciena in a wave of relief that the news wasn't worse Friday or the folks who woke up on the wrong side of the bed Monday, and proceeded to sell off the shares?
I'll tell you right off, I'm inclined to side with the sellers myself. On Motley Fool CAPS, I've had a long-standing "underperform" rating on Ciena stock, you see. (And yes, I'm beating the market by 45 points. Thanks for asking.) My main reason for pessimism, however, has been the frenetic rate at which Ciena has been burning cash. If the company's working to fix that problem, then perhaps it's time to call a halt to my negativism.
Perhaps. But I'm not yet ready to turn into a Ciena bull, and I'll tell you why: Ciena's unexpected free cash flow pop last quarter owed a lot to the fact that the company notched faster-than-expected sales. Problem is, that happy coincidence may not repeat in coming quarters.
Already, the company has warned us to expect weaker gross margins and sales in fiscal Q1 than Wall Street had been predicting. Revenue streams aren't growing anywhere near as quickly as you'd like to see at key customersAT&T (NYS: T) or Verizon (NYS: VZ) . As a result, on the low end, the company says its own sales could potentially fall nearly $20 million short of the $454 million that Wall Street was expecting. Adjusted gross margins "in the low 40s range" could meet the consensus expectation of a 43% gross ... or not. By management's own admission, however, they're unlikely to exceed that expectation.
Make no mistake: I'm pleased to see that Ciena managed to turn cash-flow positive for the fourth quarter. But before buying the stock, I'll need to see proof that this is not just a one-time deal, but rather the beginning of a trend.
My advice: Don't rush out and buy Ciena just now. If the company shows further improvement in fiscal Q1, we'll still have plenty of time to buy the stock on the basis of the emerging trend of better performance. We'll also have more evidence that the trend's for real.
But until I see that evidence, my "underperform" rating on Ciena stands. Keep track of it here.
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At the time this article was published Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 327 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Cisco Systems.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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