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…
Citigroup initiated coverage of Oracle (Nasdaq: ORCL) with a "buy" rating yesterday -- ordinarily a bullish sign, yet the stock tumbled right along with the rest of the market. Why?

After all, Citi didn't go out of its way to say anything particularly stupid. To the contrary, it tracked the logical lines laid down by fellow bankers Janney Capital and Soleil Securities earlier this month. Like its peers Citi sees both "growth and margin expansion" in Oracle's future, and calls the stock's valuation "unassuming." In other words, while Oracle appears only fairly valued based on what it's done so far, the stock's price today underestimates just how great Oracle is about to become.

I'll bite. How great is it?
According to Citi, Oracle's already worth $19 a share based on its immense stream of maintenance revenue alone. Tack on non-recurring revenues, and consensus expectations for the now-acquired Sun, and the shares become fairly priced. But if you then proceed one step further, and consider the unanticipated upside from buying Sun, then Oracle shares become downright cheap. Says Citi, Sun will add $1.7 billion to Oracle's operating income in fiscal 2011, and $2.6 billion in 2012 -- even more than Oracle is projecting.

Let's go to the tape
And I'll admit, there's good reason to hope Citi is right about this one. The number of analysts crowding about the Oracle train is growing greater by the day, and among them, Citi shines out as a real star. This megabanker ranks in the top 15% of investors we track on CAPS and boasts a host of successful tech picks, including several active multibaggers in the form of:

Plus, the last time Citi picked Oracle to outperform, way back in September 2006, the advice worked out pretty well -- the stock is up nearly 48 percentage points since then.

And yet … something about Citi's recommendation doesn't smell quite right to me. Let's take another look at the banker's projections and see if we can hunt down this malodorous scent.

Buy the numbers
Considering that Oracle is expected to book about $12.8 billion in EBITDA this current fiscal year (which wraps up next month), Citi's projections of $1.7 billion in extra operating income from Sun next fiscal year, and $2.6 billion the year after, suggests the Sun acquisition alone will add 13% to Oracle's profits-growth rate next year, then another 7% in fiscal 2012 -- putting a big chunk of Wall Street's anticipated 14% long-term growth "in the bag" so to speak, even if Oracle achieved no organic growth whatsoever.

But is that likely? I mean, sure, Oracle's a great company, and a superb acquisition integrator. Last month, in a column entitled Keep Your "Synergies." Show Us Results, we compared Oracle's performance to those of fellow serial acquirers SAP (NYSE: SAP), AMD, and Hewlett-Packard (NYSE: HPQ). What we found was that companies buying up other companies and promising to produce profit-plumping "synergies" vary widely in the results they produce. Some, like SAP and AMD, fall flat on their faces, ending in "disaster on all fronts." In contrast, Oracle, like H-P, is one of the good 'uns, rolling up mediocre businesses and improving their performances.

But is even Oracle good enough to save Sun?
But here's the problem: Improving Sun may be a tougher task than Citi anticipates. You see, Sun (now known as "Oracle America") actually lost money in the year prior to its acquisition. Indeed, it's been losing money most of this millennium. The last time Sun generated operating profits anywhere near what Citi is promising us, was 2001.

While I've little doubt that, given enough time, Oracle can improve Sun markedly, the numbers Citi is bandying about seem wildly optimistic. Transforming Sun's $378 million-per-year money-losing business into a $1.7 billion operating profit producer in just two years' time may be a task beyond even Oracle's ken.

Sidenote
And for the cynical among us, there's evidence that Oracle's CEO may doubt Citi's bullish prognosis himself. Late Monday, Larry Ellison announced that he plans to sell as many as 50 million shares of his Oracle shares over the next 10 months. This Rule 10b5-1 plan permits Ellison to trade at regular intervals without worrying about any material adverse information he might possess. Granted, even selling 50 million shares will still leave Ellison with a 1.1 billion-share stake in Oracle -- but if you were looking for a reason to doubt Citi's "buy" rating on the stock … well, Ellison just handed it to you on a silver platter.