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.
Suisse give some Credit to Sprint (and AT&T and SBA, too)
If you were an investor in telecoms, then yesterday probably felt like Christmas came early, with Credit Suisse playing the part of Santa Claus. (They even have the same initials -- just reversed.) In an early holiday delivery, the Swiss megabanker sleighed onto Wall Street and gave investors a passel of five new stock recommendations covering much of the telecom sector.
Credit Suisse begins its analysis with three companies whose cell phone towers underlie the infrastructure of the whole telecommunications industry: SBA Communications (NAS: SBAC) , Crown Castle International, and American Tower (NYS: AMT) .
Of the three, SBA boasts a middle-of-the-road growth rate of 17%, versus 16% for Crown Castle, and 18% for American Tower. SBA's not currently profitable, of course. But honestly, with American Tower shares costing 64 times earnings, and Crown Castle 74 times, this may be a distinction without a difference. None of these stocks are earning anywhere near the kinds of profits they need to be to justify buy ratings.
CS thinks SBA is the only one you should spend any time on, rating the other two cell tower stocks just neutral. Personally, though, I wouldn't waste time on any of the three. Profitless companies just don't interest me, and with only one of them -- American Tower -- paying a dividend, and just 1.2% at that, I really don't see the attraction here. For any of 'em.
Turning now to traditional telecommunications providers, CS had two suggestions to make: Sprint Nextel (NYS: S) and AT&T (NYS: T) . And wouldn't you know it? They like 'em both. CS gives Sprint an outperform rating and a $8 price target, suggesting 40% upside from today's prices. AT&T meanwhile, gets an outperform and a $36.50 target -- which curiously works out to just a 4% potential profit, or one-tenth the upside of Sprint.
Are AT&T shares really worth buying for such a meager potential profit? I don't think so, and I'll tell you why. Costing 47 times earnings, or even 13 times its more robust annual free cash flow, AT&T is priced for modest double-digit growth in future years. Problem is, few analysts don't think the company will manage any more than about 7% annualized profits growth over the next half decade. Even AT&T's beefy 5% dividend isn't quite enough to make this stock look cheap. Just "fairly priced" is more like it.
Meanwhile, Sprint offers an even worse value proposition. Here we have a company growing little faster than AT&T, at just 6.2%. But Sprint pays no dividend, and earns no profits. Meanwhile, at just $414 million in annual free cash flow, Sprint costs a whopping 41 times annual FCF -- more than 50% more expensive than its profitable, dividend-paying peer.
Foolish final thought
Long story short, neither stock is the value that Credit Suisse makes them out to be. If you're looking for a bargain stock in telecom, you should instead be putting Verizon (NYS: VZ) on your speed dial.
At less than 41 times earnings, Verizon's offers a cheaper P/E than does AT&T (and Sprint, too). With more free cash flow, and a smaller market cap, it's also a much better bargain than AT&T on a P/FCF basis (and Sprint, three). Toss a 4.6% dividend yield into the mix, and Verizon's the clear winner. The stock's performed quite nicely since I put it in my CAPS portfolio, both for myself and for anyone who followed my advice to buy it last summer.
In short, if it's the best bargain in telecom you're after, Verizon's it. AT&T and Sprint, not so much.
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The article This Just In: Upgrades and Downgrades originally appeared on Fool.com.Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 296 out of more than 180,000 members. (By way of comparison, Credit Suisse ranks 4,385).The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Tower and AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.