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.

All's well for Alcatel (or is it?)
Monday was a big day for Alcatel-Lucent , which started off the week with a pair of buy ratings. First, analysts at Natixis upgraded Alcatel shares from neutral to buy on Monday. Then, adding to the holiday cheer, Evercore Partners decided to initiate coverage of the stock at an overweight rating (essentially, another buy).

What explains this sudden burst of enthusiasm for the Franco-American telecom equipment maker, which only a few weeks ago, many pundits were saying might go bankrupt?

It's hard to say, since none of the major news outlets that covered the new ratings gave any details on what, precisely, the analysts find so attractive about Alcatel. After all, rival Ciena reported some pretty dismal earnings news last week, making Nokia's recent sales success look more the exception than the rule. This tends to throw cold water on hopes of an industrywide rebound getting under way among telco suppliers in general (or Alcatel-Lucent in particular).

Hope springs eternal, but...
There is, of course, AT&T's promise of a years-long, billions-of-dollars strong spending spree to look forward to. Last week, Alcatel secured a $2.1 billion loan from Goldman Sachs and Credit Suisse , which may be enough to keep the company in business long enough that it can feed at the AT&T trough.

Or it may not.

Remember, Alcatel-Lucent burned through $386.5 million in Q3. It's sent nearly $509 million up in smoke over the past 12 months. This is hardly the picture of a company in good health. Nevertheless, my fellow Fool Anders Bylund made the argument last week that Goldman and Credit Suisse didn't likely lend money to Alcatel in hopes of losing it all. They must, reasoned Anders, have had good reason to believe that "Alcatel would be able to pay these loans back."

...cynicism rears its ugly head
Or did they? In agreeing to give Alcatel the money it needed, Goldman and CS required the company to pledge its portfolio of 27,900 valuable tech patents, plus other assets, as security. Now here's the thing: These patents alone (let alone the "other assets"), are reported to be worth some $6.5 billion at fair market value.

Alcatel itself is only worth half that ($3 billion). Its loan, if repaid in full, is worth less than a third the value of the pledged patents. In other words, and viewing the situation from a purely mercenary perspective, the bankers may actually be better off it Alcatel defaults on its loan, than if the company succeeds in "paying these loans back." Default, you see, would leave its creditors, the bankers, in possession of the pledged patents.

Foolish takeaway
Maybe I'm just being cynical here, but seeing as we are talking about Goldman Sachs, I wouldn't put it past the investment banker to have given Alcatel just enough rope to hang itself with.

Sure, on the one hand, Alcatel-Lucent may pull a rabbit out of a hat, use the loans to survive, and then to thrive -- repaying Goldman its loans with interest. On the other hand, though, if Alcatel fails and has to hand over its patent portfolio to Goldman Sachs, that hardly looks like a bad outcome for the banker.

Whatever winds up happening with Alcatel, this looks like a case of heads, Goldman wins; tails, Goldman doesn't lose.

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Fool contributor Rich Smith owns shares of Nokia. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 306 out of more than 180,000 members. (For the record, Goldman's CAPS rank is No. 14,791).The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Goldman Sachs. 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.

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Originally published