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.

The Apple of Wall Street's eye
Is there anyone left who doesn't love Apple (Nasdaq: AAPL  ) ? Lately on Wall Street, it seems it's been more a contest to see who can profess their love the most, and who make the most outrageous price target claims quickest. Yesterday, CAPS-unrated CLSA Asia-Pacific joined rated-analyst Ticonderoga Securities in issuing a pair of buy ratings on the stock, CLSA's a reprise of earlier bullish comments, Ticonderoga's a new initiation of coverage.

Citing a "quickly expanding" supply chain for the Apple iPad, CLSA boosted its sales projections for the new tablet computer -- and with them, its price target on the stock: $365 per share within a year. Not to be outdone at the advent of its buy-rating, Ticonderoga clambered quickly out on a limb and announced to the world that it loves Apple even more -- and believes the stock will hit $430 per share. For the record, that's now the highest price target of anyone following the company.

Why does Ti think Apple's worth more than ExxonMobil (NYSE: XOM  ) (currently leading the globe with a $319 billion valuation, versus the $393 billion Ticonderoga posits for Apple)? In a nutshell, because: "Apple is still in the early stages of capitalizing on the trend toward smart phones and the digital lifestyle, while positioning itself to take advantage of large market opportunities in the enterprise, advertising, cloud computing and social networking." It is poised to attain "market share gains in various product segments," immersed in "a powerful near-term product cycle (e.g., iPhone 4, iPad)," boasts "a cash-rich balance sheet," and possessed of "an inexpensive valuation." All of which adds up, in Ticonderoga's view, to a stock worth more than 20 times 2011 pro forma earnings.

An Apple a day keeps underperformance at bay
Which, when you think about it, isn't even all that shocking a valuation, coming after all the prose-formed praise that Ticonderoga showers upon the company. Right now, Apple sells for barely 21 times trailing earnings. Considering how fast Apple is growing these days -- faster than Google (Nasdaq: GOOG  ) or Research In Motion (Nasdaq: RIMM  ) , and twice as fast as Microsoft (Nasdaq: MSFT  ) -- attaching a 20 times valuation on future earnings when Apple already commands 21 times trailing earnings seems positively restrained.

Nor would Apple even need to outpace consensus results by all that much to make Ticonderoga's wishes come true. Right now, consensus estimates are calling for the iMagnate to earn $17.71 per share in 2011. For a 20 times multiple to reach $430 (minus nearly $50 in cash-per-share), all Apple needs to do next year is earn $19 a share.

Easy-peasy, Apple squeezy
Even the shorts don't seem to think that goals terribly unrealistic. Considering the tiny 1.4% share of the company's float that is currently sold short, it seems few traders are willing to run the risk that a company that's exceeded estimates in each of the past four quarters will do it again in the future.

Which to me, seems prudent. With $14.3 billion in trailing free cash flow, even today Apple's reported GAAP earnings significantly understate the cash profit this titan churns out every year. Apple's trailing price-to-free cash flow ratio sits at less than 18 right now -- appropriate in light of the 20% projected growth rate, and suggestive of even greater earnings growth as the company narrows the gap between reported "earnings," and real free cash flow.

Foolish final thought
Now admittedly, I'd feel a whole lot more comfortable hearing these arguments coming out of someone else's mouth. If you've ever taken a look at Ticonderoga's CAPS page, it's pretty clear that this is not exactly the world's best analyst we're talking about here. Since we began tracking Ti, two months ago, it's only managed to call two stocks right -- Apache Corp (NYSE: APA  ) and Newfield Exploration (NYSE: NFX  ) , both oil & gas plays.

Then again, seeing as how Ticonderoga is arguing Apple will soon be bigger than Exxon, maybe that's a good omen after all.

Fool contributor Rich Smith owns shares of Google. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 608 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Google and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers choice. Apple is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, ExxonMobil, Google, and Microsoft.

The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2010, at 11:09 AM, PeyDaFool wrote:

    MillerFallsMan,

    It's obvious your inherent jealousy of Apple and Steve Jobs are likely due to the fact he looks much more professional and versed in a black turtleneck than you. Don't worry, though, there are still plenty of people who think you look quite dashing in that flannel getup you've owned since 1964 and your rusted old pickup truck from the early 70s.

    Keep trying, my man. One day you'll be able to claim you got in on a ten-bagger and you'll be able to relinquish your title of an old, deeply angry man who is kicking himself for missing out on a great stock-buying opportunity. Until then, I'm riding my Apple shares up until the mid 300s.

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