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 ...
It's a brave banker who dares to urge buying a stock on earnings eve. Fortunately, for Motorola (NYSE: MOT  ) investors, one did just that this morning. More fortunate still, the name of the banker is MKM Partners.

Yes, Fools, just hours before Motorola releases its Q3 earnings report, out came MKM with a "buy" recommendation this morning. While the details are still sketchy, one number in the report should grab your attention: Motorola, selling for under $8 a share before the upgrade, is expected to reach $10 a share -- a clean 25% profit, and maybe more.

There are few situations more frustrating to the individual investor than knowing your stock has been upgraded, but not knowing why -- or whether there's any basis for the upgrade at all. Sadly, the mainstream media outlets are keeping mum on the details of MKM's upgrade (or perhaps the analyst was just too shy to share them.) But while we cannot tell you precisely what the analyst is thinking about Motorola, here at CAPS we can at least give you some insight into how well it does its thinking.

Let's go to the tape
And here's the really good news: When it comes to picking communications equipment stocks like Motorola, there are few analysts on the planet who can touch MKM's record of 75% accuracy in the industry. Over the two years we've been tracking this analyst's performance, MKM has only missed the boat twice on comms stocks -- while walloping Wall Street with its wins:

Companies

MKM Said

CAPS Rating 
(out of 5)

MKM's Picks Beating 
S&P by

Nokia (NYSE: NOK  ) Underperform *** 30 points
Riverbed Tech (Nasdaq: RVBD  ) Outperform *** 104 points
F5 Networks (Nasdaq: FFIV  ) Outperform *** 139 points
Blue Coat Systems (Nasdaq: BCSI  ) Outperform **** 148 points

MKM was also right, incidentally, the last time it told investors to buy Motorola, in August of last year. That pick beat the market by a modest 8 percentage points -- and call me crazy, call me a Fool, but I think MKM is setting itself up for a repeat of that win. Here's why:

Motorola motors, while Jobs just jabs
With a P/E ratio of 48, and a projected long-term growth rate of less than 8%, Motorola isn't the most obvious candidate for market outperformance, I'll admit. But dig a little deeper, and you'll see that regardless of the "GAAP" earnings numbers say it's "earning" less than $400 million a year, the actual fact is that Motorola generated in excess of $1.9 billion in free cash flow last year.

So forget about the 48 P/E-stock-story. What we're really looking at here is a company that trades for less than 10 times annual free cash flow, and that boasts nearly $5 billion in net cash in its bank account (brining its enterprise value-to-free cash flow ratio now to an even cheaper 7.2.)

It's also a company, lest we forget, that's standing on the cusp of a historic spinoff of its cell-phone-making arm. As "Motorola" evolves into the twin companies Motorola Solutions (radio sets, handheld scanners, and telecom equipment) and Motorola Mobility (cell phones and cable set-top boxes), management aims to unleash shareholder value. And it's doing so at the very time when its long-beleaguered cell phone division is experiencing a renaissance of revival with help from the now ubiquitous Android operating system.

For all Steve Jobs' jabbering about how his Apple (Nasdaq: AAPL  ) iPhone is conquering the world, outselling Research In Motion (Nasdaq: RIMM  ) and out-apping Google, the fact remains that Android is very, very popular with consumers these days. We've seen the evidence in Motorola's improving financial performance already. I wouldn't be a bit surprised if we see even more evidence of it when Motorola reports tomorrow.

Rich Smith owns shares of Google. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 578 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Google and Nokia are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Apple and Google.


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Comments from our Foolish Readers

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 27, 2010, at 2:47 PM, barilro wrote:

    The truth about the spin off of the cel phone asset is that Mot thinks they are too dependent on Android...something they do not control at all. Let me give you an example...cel phones are too small to run virus programs...if..no no...when a Russian hacker makes a virus for Android and it effects a bunch of android phone, Android will drop faster then it went up....when that happens, Motorola mobility is worth zippo....might as well sell it now while its worth something.

  • Report this Comment On October 28, 2010, at 4:45 PM, kuzumel wrote:

    Mobile phones have evolving computing power. These days, it's not about running on the handset as much as some apps talk to central servers. This means the app on your handset just needs SOME smarts, and your data (address book, e-mail setting, IM/twitter/facebook IDs). What does this have to do with iPhones or Androids? History said "there can be only One" but that's not true when it comes to your mobile device. If the apps are relatively simple and we only have the two or three versions (Apple OS, Android, Windows), it won't take that much more effort than a single version.

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