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.

All it's cracked up to be?
What do you do when one of the smartest minds of Wall Street makes what appears to be, by all indications, a completely bone-headed call? When it tells you to buy a stock you've examined, and re-examined, and re-re-examined -- and always thought a dog of an investment?

Personally, I take the analyst's record as a clue, and head back to re-re-re-examine the reason I disliked the stock in the first place to see if I somehow got it totally wrong. And this, Fools, is why today I'm going to be taking yet another look at the prospects for that darling of the Telecom Boom Era, and that standard-bearer of the flat-panel TV industry of today: Corning (NYSE: GLW  ) . Because, against all odds, Standpoint Research up and recommended the darn thing Friday.

Let's go to the tape
Why am I willing to give Standpoint -- and Corning -- the benefit of the doubt, after so many years of finding the stock wanting? Mainly because of the analyst's record. Over the years, I've learned to trust Standpoint's hunches (mainly because they align with my own quest for deep value). According to CAPS, 63% of the time Standpoint says a stock will beat the market, it goes on to do just that; a record so good, it's lifted Standpoint into the elite ranks of Wall Street's Best analysts, outperforming more than 96% of investors on the market.

Indeed, there are very few areas of the market where Standpoint underperforms. Unfortunately for Corning investors, one of those just happens to be the one in which Corning resides: communications equipment:

Company

 

Standpoint Said

CAPS Rating
(out of 5)

Standpoint's Picks Beating (Lagging) S&P by

Qualcomm (Nasdaq: QCOM  ) Outperform **** 5 points
Cisco (Nasdaq: CSCO  ) Outperform **** (4 points)
Motorola (Nasdaq: MOT  ) Outperform ** (15 points)

Research In Motion

(Nasdaq: RIMM  )

Outperform ** (14 points)

Of the five picks Standpoint has made in this sector over the past two years, four are underperforming the market. So it's all well and good when Standpoint tells us that the reason you should buy Corning is that it's "under-performed the S&P-500 by 1000 bps since August 4 ... underperformed the Nasdaq by 1500 bps [and] .... is undervalued by more than 20%." But the "20%" that concerns me is Standpoint's record for "20% accuracy" in the communications equipment space.

According to the analyst, Corning is on track to earn between $2.00 and $2.20 in 2012, and should be worth "11x-12X" that number. Even better, "if GLW goes back in favor, we could take out the three-year high of $27 from 2008 and the five-year high of $29 from 2006. If we were going to set a 2012-2013 price target (as opposed to 2011-2012 …), it would be $27-$29."

Shedding some like on Corning
That sure makes Corning sound attractive. But here's the thing, Fools: This glassmaker's earnings still aren't all they're cracked up to be. True, Corning has made progress since I panned it for generating "negative free cash flow" a few years back. Operating cash flow is on the upswing, while capital expenditures have trended down for two years straight. That's commendable, and gives reason for optimism.

Still, at just under $2 billion annually, Corning's free cash flow remains only a shadow of its ballyhooed (and I'd argue, inflated) $3.2 billion in GAAP earnings. If Corning looks cheap at 9.1 times earnings and 11% annual growth, it looks a whole lot more expensive at 15 times free cash flow.

Foolish final thought
Recent weeks have seen a series of concerns raised about Corning's business. Last quarter's earnings report showed that LCD glass prices are now falling faster than volumes can rise, taking a toll on Corning's revenue. Oppenheimer recently warned that volumes are also at risk, as the Netflix-ization of television-viewing habits draws consumers away from large-screen flat-panel TVs, and focuses their eyeballs instead on smaller, less-glass-intensive mobile viewing devices such as Apple's iPad and the slew of "me-too" devices issuing from Samsung, Research In Motion, and the like.

Sure, Standpoint would probably argue these risks are now "baked into" Corning's stock price. But me, I look at the continuing failure of free cash flow to support GAAP earnings at the company and reply: "No. These earnings are still undercooked."

My advice: Put your Corning-ware back in the oven. And don't take it out until the free cash flow has finished rising.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he was recently ranked No. 639 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Apple and Netflix are Motley Fool Stock Advisor recommendations. The Fool has written calls (bull call spread) on Cisco Systems. The Fool owns shares of Apple and Qualcomm.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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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 December 07, 2010, at 11:02 PM, jonashad wrote:

    If the Fool is so bloody smart, why hasn't it yet absorbed the fact that Corningware is not made by Corning, but is licensed to a consumer goods company? Or that the glass used in almost every one of those smart-pads/phones/tablets is high-margin Corning Gorilla Glass? That glass prices for flat-panels are not falling in Q3 or Q4 as fast as in the first half - and that Corning's market share is rising, thus offsetting price declines? That the folk in Corning are adding high-margin medical supply businesses to the core businesses of panel glass and fibre optics? That the last business is on the upswing as non-USA markets rush to meet wireless broadband demand? Oh well - by ignoring the Fool, I've doubled my money twice on Glassworks, whilst he's been re-re-re-re-re-navel-checking.

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