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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So 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.

Today, it's "HEK-and-tech" day on Wall Street, as one analyst initiates a "buy" rating on Heckmann (NYS: HEK) , while two others cut their price targets on tech stocks Nuance Communications (NAS: NUAN) and Hewlett-Packard (NYS: HPQ) . Let's dive right in.

Is it safe to come out now?
This month has not been kind to oilfield-services provider Heckman. First, Ladenburg Thalmann hit the stock with a "sell" rating in late April. Then, a few days later, we found out why, as Heckmann confirmed it completely missed Wall Street's earnings target for Q1 and instead lost $0.03 per share.

Combined, these two news items helped drive Heckmann shares down as low as 14% below where they were before the news started breaking. But luckily, says Credit Suisse, that's now all in the past. Priced at less than $4 today, Heckmann's destined to hit $5 a share within a year -- and the time to buy back in is now. If only they were right.

The truth, though, is that the hard times aren't yet over for Heckmann's shareholders. With the company's most recent results in hand, we can see that rather than turning around, earnings continue to deteriorate. Heckmann's now well on its way to reporting a fifth straight year of GAAP losses on its income statement and cash burn on its cash-flow statement. Worse, with $16 million net debt on its balance sheet, the company's ill-prepared to book another year of around $160 million negative free cash flow.

Long story short, Credit Suisse may be sweet on this stock -- but it's more likely a "sell."

Nuance: naughty or nice?
Not so with Nuance. This one I'll come right out and declare a sell -- and I'll back it up with a red thumb on CAPS, to boot. Yesterday, Nuance beat earnings by $0.02 when it reported revenues ahead of consensus and earnings of $0.43 per share for its fiscal second quarter. Yet even so, analysts at Mizuho Securities cut 12% off their price target and now say Nuance will fetch just $28 a share a year from now.

Why? Probably for the same reason I'm downgrading Nuance, myself: The earnings just aren't all they're cracked up to be. According to GAAP accounting, you see, Nuance earned $47 million over the past 12 months. On one hand, that's only enough profit to drop the stock's price to 152 times earnings. But things are actually worse than they look.

You see, Nuance is what we call a serial acquirer. Every year, it generates a lot of cash flow, spends a little money on capex ... and then spends a whole lot of money acquiring other companies, using their revenue streams to drive its own. In 2010, such acquisitions amounted to more than $200 million in cash spent. Last year, that number doubled to more than $400 million. Over the past 12 months, it's amounted to more than $500 million. In many years, acquisitions consume most of the cash that would otherwise have poured into Nuance's free cash flow. Lately, they've been consuming all that cash, and more -- leaving the company with an actual cash-flow deficit and a rising debt load.

So far, the company's managed to keep pace with market averages and even outperform a bit, despite the limits of this strategy. Eventually, though, I expect it to hit a wall. It's for this reason that I intend to rate Nuance an underperform on CAPS.

Where to now, Hewlett?
A similar situation can be seen at Hewlett-Packard, recipient of a second Mizuho price target cut -- this time, by 17%. At first glance, H-P doesn't resemble Nuance much. Unlike Nuance, H-P is a company with strong GAAP earnings and a low P/E ratio (8.2). H-P does resemble Nuance, however, in that it's spent a lot of money on acquisitions over the years -- $8 billion in 2010, $10 billion in 2011, $10.6 billion over the past 12 months.

That's enough that, if you consider acquisition costs a drain on cash flow like I do, you'd ordinarily want to consider H-P a de facto FCF-negative stock as well. That said, H-P is a bit different from Nuance in a couple of respects. First, it's under new management today, and as a result, we can't assume that Meg Whitman will continue making acquisitions at the rate Mark Hurd used to. And second, there have been plenty of years in which H-P made few or only minimal acquisitions yet proved itself quite capable of generating strong free cash flow without them.

My hunch is that if Whitman shows more spending restraint than her predecessors did, we could see H-P begin living up to its free cash flow potential soon -- in which case, free cash flow on the order of $6 billion to $8 billion annually is not out of the question. At a market cap just 6 to 8 times that sum, I'm willing to give H-P the benefit of the doubt for now. It may not be quite as good as The Motley Fool's Top Stock for 2012, but I'm not convinced H-P is a stock that needs to be sold. It might even be a stock worth buying.

Whose advice should you take -- Rich's, or that of "professional" analysts like Credit Suisse, Ladenburg Thalmann, and Mizuho?Check out Rich's track record on Motley Fool CAPS, andcompare it with theirs. Decide for yourself whom to believe.

At the time this article was published Fool contributorRich Smithowns no shares of, nor is he short, any companies named above. He does, however, have public recommendations available on more than 60 other companies. Check them out on Motley Fool CAPS, where he goes by the handleTMFDitty-- and is currently ranked No. 330 out of more than 180,000 CAPS members. The Motley Fool has adisclosure policy. The Motley Fool owns shares of Heckmann.Motley Fool newsletter serviceshave recommended buying shares of Nuance Communications. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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