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." 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.
Oppenheimer less Opp-timistic
Today, we're taking a look at more muted expectations for the tech sector -- and specifically in smartphones -- as analysts at Oppenheimer peer into the future for Apple's (NAS: AAPL) iFranchise, and all the companies that benefit from it ... and cut price targets across the board.
Apple itself, according to Oppenheimer, will fetch not the $700 originally projected for its shares, but "only" $680 by year-end. (Still that's a 22% gain from today's prices, so nothing to cry about.) Meanwhile, Oppy sees communications chipmaker Skyworks (NAS: SWKS) at $30 in year-end value, for about a 17% gain and believes Qualcomm (NAS: QCOM) will do even better, rising 23% to hit $70 (but down from the previous $75 target price). Best of all, Oppy pegs Brightpoint (NAS: CELL) at $9 instead of $11 -- but that still works out to a gain of 80% over today's $5 share price!
Apple pie in the sky
Are these targets realistic? In one case, almost certainly so. At less than 14 times trailing earnings, Apple shares are almost certainly undervalued if the company manages to hit consensus targets for 20% long-term earnings growth.
On the other hand, though, Qualcomm already looks close to fully valued at 17 times earnings, and a 15.5% long-term growth rate. If the stock's to reach Oppenheimer's targeted 23% return, Qualcomm's really going to have to wow Wall Street over the next few quarters. The single-digit-percentage earnings beats it's been turning in over the past few quarters just won't cut it.
Similarly with Skyworks. Its even pricier 23.5 P/E ratio means that the 15% growth rate the Street is expecting probably won't be enough to drive the stock higher. And given that Skyworks has been beating estimates by even smaller margins than Qualcomm has lately, the company certainly has its work cut out for it.
How "bright" is this stock's future?
As for Brightpoint, the fact that this stock is cheapest, and expected to produce the least growth of any of these four companies, may actually work in Brightpoint's favor. Priced at only 8 times earnings, but expected to grow earnings at a 12% clip over the next half-decade, Brightpoint is arguably the closest thing to a value stock on Oppenheimer's recommendation list. That said, the stock does have a few "issues" to address if it's to be worth the $9 Oppenheimer says people will soon be anteing up for it.
For one thing, out of all the smartphone plays discussed so far, Brightpoint is currently the only one carrying debt on its balance sheet -- and not just a little debt, either, but well over $270 million, or nearly as much as the stock's own $345 million market cap. Meanwhile, the company's recent struggles with negative free cash flow ($72 million burned over the past 12 months) will make working down that debt load difficult.
Its recent weakness notwithstanding, Apple's share price has run up pretty fast over the past few years. So it's only natural that investors, and analysts like Oppenheimer, should want to look for "cheaper" ways to play the smartphone revolution. (Indeed, we've been doing a bit of research into this ourselves.)
Sometimes, though, the best answer is the most obvious one: Apple is cheap. All the others are ... not.
Whose advice should you take -- Rich's, or that of "professional" analysts like Oppenheimer?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 company mentioned above. He does, however, have public recommendations available on more than 60 separate companies. Check them out on Motley Fool CAPS, where he goes by the handleTMFDitty-- and is currently ranked No. 307 out of more than 180,000 CAPS members. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.