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 worst...
The fallout -- the good kind -- from AT&T's (NYS: T) blockbuster revelation Wednesday just keeps spreading. As you've probably heard by now, AT&T announced Wednesday that it plans to accelerate spending on building out its wireline and wireless infrastructure. In an effort to bring LTE access to more smartphone users, and U-Verse cable service to everyone else, the AT&T will boost capital spending by approximately 16% from this year's levels, spending $22 billion on capex in each of the next three years.
So far, we've seen spikes in stock prices at first Ciena (NAS: CIEN) on Wednesday, and then at Alcatel-Lucent (NYS: ALU) on Thursday, as investors absorbed the news, and placed bets on telecom equipment manufacturers that they expect to benefit from the additional spending. Yesterday, analysts at Cantor Fitzgerald added one other firm to the list of potential beneficiaries: Juniper Networks (NYS: JNPR) .
Cantor recommended buying the stock ahead of an "inflection point" in tel-equip spending. So far, however, the endorsement has had little effect. Like rival Cisco Systems (NAS: CSCO) , Juniper followed the market down yesterday. But does this just mean investors have more time to get into the stock? To board the train before it leaves the station?
Let's go to the tape
Perhaps. But I wouldn't bet on it. Before you rush right out and buy shares of Juniper on Cantor's say-so, here's what you need to know about the analyst making the call: It's usually wrong about these kinds of stocks. In fact, it's usually wrong about most stocks.
Based on the six years we've been watching Cantor, and measuring its performance, we can tell you that Cantor gets about 43% of its stock recommendations right, and underperforms more than 80% of the investors we track in the process. (Here. See for yourself). That's the good news.
The bad news is that when it comes to the kinds of stocks that investors hope will benefit from AT&T's largesse, Cantor does even worse. Over the past six years, fully 70% of this banker's stock picks have underperformed the market, lagging the S&P 500's returns by a combined 100 percentage points. So historically speaking, chances are very good that Cantor is wrong about this one as well.
What could go wrong?
How might Cantor turn out to be wrong on this particular call, the endorsement of Juniper Networks? There are a couple of ways. First and foremost, valuation.
After all, priced at 49 times trailing earnings, Juniper's not exactly a cheap-looking stock. Free cash flow at the firm is strong, but even so, the company costs 23 times free cash flow, a valuation that seems pretty optimistic already, in light of expectations for only 13.5% long-term growth.
Could Cantor be right about AT&T changing the pace of Juniper's growth rate, though? Sure it could. But before you assume the analyst is right, take a moment to consider: In moving from $19 billion in annual capex to $22 billion, AT&T will be adding, at most, $3 billion to its annual cash outlays. If all that money was going to Juniper, sure, it would move the needle a lot on a company that ordinarily does about $4.4 billion in business a year.
Problem is, most of this money will not be going to Juniper. Most of it is going to get spread around quite a bit. Even Alcatel-Lucent, mighty Alcatel, which sells $18.6 billion worth of telecom equipment a year, only gets about 10% of its business from AT&T. Meanwhile, Ciena owed 15.5% of its business to Ma Bell at last report. Juniper, in contrast, hasn't been able to get 10% of its revenue from Ma Bell since way back in 2009 . In this respect, Juniper is similar to Cisco -- which according to its 10-K filings, is so well diversified in its customer base that AT&T hardly merits a mention. Indeed, according to Cisco, "no single customer" accounts for 10% or more of its business -- a double-edged sword for anyone hoping for a huge AT&T-originated windfall.
Logically, a 16% boost in spending by AT&T, with Juniper capturing less than 10% of the new business, can at best result in a 1.5% or smaller boost in Juniper's overall growth rate. Even assuming none of this additional growth is already factored into analysts' growth estimates, therefore, the best we can conceivably expect AT&T's announcement to translate into is, say, a 15% growth rate for Juniper.
That's too little to justify paying 23 times free cash flow, way too little to justify a 49 P/E ratio, and a poor case for buying Juniper at all.
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The article This Just In: Upgrades and Downgrades originally appeared on Fool.com.Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 287 out of more than 180,000 members. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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.