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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Texas Instruments (NYSE:TXN) shareholders have seen their stock trounce the S&P's gains over the past year.To hear FBR Capital tell it, the good news isn't over yet. While other investors may shudder at TI's seemingly high 33 P/E, this analyst looks at this stock and spies a screaming bargain.

What is it, exactly, that FBR sees that others do not?

• "Meaningful" gains in analog market share, with fourth-quarter analog revenues likely to fall "only a few points below peak quarterly shipments."
• Gross margins that could hit 55% "over time."
• A "defensive ... large-cap" with a "large net cash position, and dividend paying status."
• And last but not least, a 12 P/E stock selling for 6.8 times EBITDA (once you net out TI's cash) -- valuations that are "near the lower end of its historical trading ranges."

All of which has FBR thinking TI is "extremely inexpensive" today -- enough so that it's likely to keep on "outperforming" the market just as it's done all year long. But is the logic A-OK at FBR?

Let's go to the tape
At first glance, you might not think so. Fact is, while FBR enjoys a strong reputation on the Street, its numbers don't always back that up. Over the past three years that we've tracked this analyst, only about 47% of FBR's stock picks have managed to beat the market. In the semiconductor sector in particular, FBR's batting only about .400 (great stats in baseball; not so hot in stock picking), hurt by recommendations such as:

On the other hand, FBR has picked some outstanding winners as well:

Will TI turn out to be just the latest feather in FBR's cap? The answer really depends on where you think we are in the semiconductor cycle.

Valuation
Let's begin with the basics: First and foremost, FBR is 100% right about the valuation on this one. TI is not nearly so expensive as its P/E makes it look. Its $922 million in trailing earnings are eclipsed by the non-GAAP, but in my view more important, $2.4 billion in free cash flow that TI has generated over the past year.

If you net out from its market cap the $2.8 billion in cash TI already possesses, what you're looking at here is a stock valued at 11.2 times trailing free cash flow, expected by most of Wall Street's inquiring minds to grow north of 12% per year over the next half-decade. That price looks more than fair to me -- but it could be cheaper still.

Settle down, bears
You see, FBR thinks the bears are underestimating TI's ability to grow, based on a belief that "the 'semiconductory cycle' is rolling over, potential first-quarter order cancellations are coming, near-term momentum metrics are peaking, and inventories are building." Yet FBR sees no signs of such inventory build, and consequently believes TI's growth story will continue.

As for me ... well, I am just a humble Fool. I lack the resources of a major investment bank, capable of running "channel checks" and confirming inventory numbers up and down the supply chain. But what I can see, based on publicly available information, suggests to me that FBR's calling this one right.

Windows 7 just rolled out. Android is on the move. Corning (NYSE:GLW) just told us that high-def television demand remains strong. So in general, it doesn't look to me like demand for semiconductor chips has peaked -- to the contrary, demand looks to be revving up after a long recession. And that's good news for TI.

Foolish takeaway
Combine this with a market valuation on Texas Instruments that looks at worst quite fair, and at best pretty darn cheap and, well ... are we looking at a double here? Maybe not. But I do see a whole lot more upside than downside risk in TI shares today.

Give 'em a look -- I think you'll like what you see.