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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the worst ...
Shareholders of Juniper Networks (NASDAQ:JNPR) got a bit of a shock yesterday when BWS Financial (a.k.a. Mr. Hamed Khorsand) suddenly reversed course on the stock, downgrading it all the way from "buy" to "sell."

Why the abrupt 180? BWS explains:

The decision by AT&T (NYSE:T) to reduce their capital expenditure budget for 2009 from 2008 levels changes the dynamics of the communications equipment industry. ... AT&T is only the first in what could be a series of carriers reducing their capital expenditure budgets for 2009. ... It is becoming clear that 2009 would be a difficult year for communications equipment companies, but with [Juniper] generating more than 70% of their revenues from carriers the risk to earnings intensifies.

Note that in addition to AT&T, Juniper also sells to such major players as Verizon (NYSE:VZ), Comcast (NASDAQ:CMCSA), and Cox. If BWS is right, there are a lot of dominoes lined up that could potentially fall, here.

Let's go to the tape
What are the odds that BWS is right this time? The analyst has a pretty strong record in the world of biotech:

But it has mixed results with its straight tech picks:

Overall, BWS is batting about .430 on its recommendations, getting 57% of its calls wrong, and underperforming the market by about 1.5 percentage points per pick, on average. Hardly a stellar record.

Worse yet, its record on Juniper in particular leaves much to be desired. Since recommending the stock in July, BWS's pick has lagged the market by eight percentage points. And thanks to most of Wall Street ignoring yesterday's downgrade, bidding Juniper shares up instead, BWS is now down about 15 points in total on its two Juniper picks.

Sure, sure. But is BWS right?
About a cutback in capital spending by the big telcos? I'm certain it is. AT&T said as much last week -- but it didn't say how much it would be cutting back. According to management: "Capital plans for 2009 are being finalized now and specific guidance will be provided when the company releases its fourth quarter results in late January."

To my mind, things could go either way here. AT&T's cutbacks in capex could give breathing room for its rivals to make similar cuts -- hurting business at Juniper and its peers. Alternatively, AT&T's rivals could jump at the chance to steal a march on their competitor, and keep upgrading their own networks. In that case, we might see a much less significant downturn for Juniper and its peers. Basically, until January rolls around, we won't know how this will play out.

Still, I do believe Juniper is cheap. As of last night, the stock traded for a 19.2 P/E on 18.7% long-term growth expectations -- the very definition of "fairly priced." But in reality, the situation is even better. Juniper generated nearly $750 million in free cash flow over the past 12 months -- far more than the $500 million that showed up as "net earnings" on the income statement.

Juniper's P/E ratio makes the stock look more expensive than it is. The company currently sells for an enterprise value-to-free cash flow ratio of less than nine. Between this valuation and the analysts' growth projections, I believe the stock is as much as 50% undervalued today.

BWS was right the first time. Juniper was a buy. I think it still is.