This Just In: Upgrades and Downgrades
Jan 12th 2012 10:36AM
Updated Jan 12th 2012 4:32PM
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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, 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.
Deutsche to the rescue
Alcatel-Lucent (NYS: ALU) had a pretty rough time of things in 2011, and so far, 2012 isn't working out much better. But have a little faith, investor, because according to the smart stock folks at Deutsche Bank, things are about to turn around.
Dismissing the risk of a "financial distress scenario" -- in 2012 and 2013, at least -- as "limited," Deutsche upgraded Alcatel shares to "buy" yesterday. As the analyst pointed out, Alcatel is selling for 72% less than its shares fetched at their peak of last year. What's more, Deutsche says that even if worst comes to worst and Alcatel is forced to restructure, breaking up the company should yield asset values of roughly 2 euros per share -- around $2.54 at current exchange rates.
But is Deutsche right about that? Is Alcatel really worth 45% more than its shares cost today?
Let's go to the tape
I suppose it's possible. But if Deutsche does ultimately turn out to be right about Alcatel, it would almost be a first for this banker. Much as I'm sure Alcatel fans would like to believe the analyst's analysis here, the sad truth is that Deutsche Bank is a simply miserable picker of telecom equipment stocks.
Over the five years we've been tracking its performance, Deutsche has managed to pick winners in the tel-equip industry only about 29% of the time. It's been wrong about Corning. Wrong about Cisco. Wrong about Motorola, Ciena, and Riverbed, too.
You may be right, I may be crazy
But is it right about Alcatel? Key to Deutsche's buy thesis is the argument that revenue visibility is set to improve, with U.S. and China capital spending growing, and Europe likely bottoming in the first half of 2012. That's a pretty picture Deutsche paints. Problem is, it seems to contradict the facts on the ground.
Just yesterday, The Wall Street Journal cited a slowdown in capital spending by telecom giants AT&T (NYS: T) and Verizon (NYS: VZ) as torpedoing the sales prospects at Juniper Networks (NAS: JNPR) and Acme Packet (NAS: APKT) . As the Journal noted, AT&T and Verizon account for a good $35 billion worth of annual spending on telecommunications equipment. It seems unlikely that cutbacks at the telcos could cripple business at Juniper and Acme... yet leave Alcatel unscathed.
Foolish final thought
Now, I don't mean to come off sounding too harsh about Alcatel. While I admit that the multiple mentions of the "b" word echoing around analyst-land are starting to unnerve me, I for one do not see a risk of Alcatel going bankrupt anytime soon. Yes, Alcatel carries a heavy debt burden. No, it's not generating free cash flow. But with $4.8 billion of cash in the bank, I believe Alcatel has the money it needs to continue stumbling forward, and burning cash for quite some time to come.
But as far as Deutsche's argument goes, that a bankruptcy at Alcatel -- an event I see zero chance of transpiring in the immediate future -- is probably not going to happen? And that Deutsche's dispelling of a spurious argument justifies an 8% jump in Alcatel's market cap? That's just silly.
For this reason, I expect the stock's short-term gains to evaporate in short order. And to put my reputation where my mouth is, I'm going to back up this prediction with an "underperform" rating on Alcatel's stock on Motley Fool CAPS.
(Think I'm wrong? Follow along, and feel free to jeer if I'm mistaken. While you're at it, take a look at the nearly six-dozen other public recommendations I've made on CAPS -- and feel free to make a few picks of your own.)
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At the time this article was published Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 338 out of more than 180,000 members. The Motley Fool has a disclosure policy.The Motley Fool owns shares of Cisco Systems and Corning. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Riverbed Technology, Acme Packet, Corning, and Cisco Systems, as well as writing covered calls on Riverbed Technology.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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