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 best ...
As the trading week wound down on Friday, the good folks at FBR Capital found time to slip out one last batch of ratings for us. This analyst, better known for its REIT and banking picks, took a stab at picking winners and losers in the telecom equipment industry.
Surveying the field, FBR announced it was initiating coverage of Juniper Networks (NAS: JNPR) and Ciena (NAS: CIEN) at outperform, sidelining Cisco (NAS: CSCO) , Research In Motion, and Nokia (NYS: NOK) with market perform ratings, and starting Motorola Solutions (NYS: MSI) at underperform. (FBR also included Apple among its recommendations. But really, who doesn't love Apple? No real news there.)
Now what do these picks have in common? They're all key players in the telecommunications equipment industry -- Juniper, Ciena, and Cisco most obviously. Nokia, while best known for its handsets, also pulls down roughly $17 billion annually from its networks joint venture with Siemens. And Motorola Solutions, which sold its own wireless network business to Nokia Siemens last year, still does significant business in government communications, for example. What investors should pay more attention to, perhaps, is how these companies differ:
Free Cash Flow as a % of Net Income
Sources: Yahoo! Finance, S&P Capital IQ. NM = not meaningful due to negative earnings and free cash flow.
A quick scan of the chart reveals little pattern to FBR's choice of tel-equip picks. Juniper and Ciena, at P/E ratios of 24.2 and the unfortunate "NM," respectively (Ciena has no profits), nonetheless receive the highest marks from FBR. RIM, selling for an enticing 3.8 times trailing earnings, gets only a shrug. Likewise with Nokia, despite the fact that the Finnish wireless giant boasts the best free cash-to-earnings ratio of the bunch.
Speaking of free cash flow, Motorola's no slouch in that department. In fact, it's generating free cash where Ciena isn't, and generating more than enough to back up its reported income, a claim that RIM cannot make. Yet Motorola gets the only sell rating in the industry, while Ciena and RIM don't?
Method in madness
Strange, but not without a certain logic. Fact is, I actually agree with FBR's top pick(s) today. While Juniper Network is apparently overpriced from a P/E perspective, its strong cash generation means that this company is actually selling for a more modest 11.1 times free cash flow. If you combine this valuation with Juniper's projected 14% growth rate, I think you can make a good case for buying Juniper.
And Ciena... While I'm not yet convinced the stock is a buy, Ciena did turn free-cash-flow positive in its most recent quarter. As I mentioned in December, one quarter does not a trend make. But the stock bears watching. Back-to-back FCF-positive quarters could give us evidence that Ciena is serious about getting its business back on track.
Foolish final thoughts
That said, I'm not sure speculating about a turnaround at Ciena is the most profitable use of an investor's time today. Rather than guess about what Ciena might do, why not invest instead in a business that's going great guns already?
RIM, where earnings are projected to decline over the next five years, may not fit that bill. But Cisco, for example, costs only about 8.3 times free cash flow, once you back out its sizable cache of net cash. Nokia looks even more attractive at an enterprise value-to-free cash flow ratio of less than seven -- and Nokia pays an astounding 8.6% dividend yield to boot.
FBR may think these stocks are only worth holding. Me, I think they're worth a closer look.
In fact, I think Nokia looks so good that I'm going to add it to my CAPS portfolio right now (it's already in my real-life portfolio), and publicly rate the stock an "outperform." Between the 8% dividend and the strong free cash flows that promise to fund it, I believe Nokia's got a much better chance of beating the market than FBR gives it credit for. Think I'm wrong? Follow along.
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At the time this article was published Fool contributorRich Smithowns shares of Nokia.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 349 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Apple and Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Apple and Cisco Systems, as well as creating a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
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