This Just In: More 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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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 Howard Stern, all the time
By now I suspect you've heard the news: Howard Stern says Sirius XM (Nasdaq: SIRI  ) cheated him out of some stock grants. He's mad as hell, and he's not going to take it anymore. After putting in five long, arduous years of talking for a living, the humble shock jock is left with total compensation of a measly $500 million. So he's suing.

In response, Wunderlich Securities is downgrading the stock. Recapping Stern's argument that he was "largely responsible for the survival of Sirius, attracting millions of subscribers," Wunderlich worries the stock will not escape this latest controversy unscathed. Precisely how "scathed" it gets is not clear, but Wunderlich suggests that rather than wait to find out, investors should take their money and run. With Sirius shares fetching about $1.70 apiece, the analyst downgraded the stock to "hold," and predicts the shares will actually lose value over the next 12 months. But is the situation really as bad as all that?

Let's go to the tape
Wunderlich thinks so, and considering the analyst's record, perhaps you are worrying, too? If so, you've got grounds. There are few analysts out there in the markets today showing anywhere near Wunderlich's skill in picking media stocks. Fully 80% of its active recommendations in the industry are beating the S&P 500, including both flavors of Sirius-backer Liberty Media (Nasdaq: LCAPA  ) (Nasdaq: LINTA  ) . Overall, this analyst manages to consistently outperform more than 95% of the investors we track on CAPS.

As such, Wunderlich's worries should not be taken lightly, and yet -- perhaps perversely -- that's precisely what I'm about to do.

Fear "fear itself" -- but don't fear controversy
I get that people are nervous about this latest Sirius imbroglio. You might even go so far as to term some of the reactions "shocked." But at the risk of stating the obvious -- that's exactly what Stern is about. Stirring up controversy. Getting people talking about, and tuned into, him. Shocking them.

So while Wunderlich muses that even if Stern's lawsuit ultimately turns out to be "meritless ... SIRI's current stock market valuation likely cannot accommodate the uncertainty engendered by the suit," I tend to take such assertions with a few grains of salt:

Grain No. 1
Sirius doubters may ask: "What happens if Sirius and its star cannot come to an understanding, and Stern stalks off in a huff?" To which I reply: "Not gonna happen." Remember: Stern's allegations relate to stock awards that he claims he was entitled to, but that Sirius stopped delivering to him three years ago. This is not a new dispute. Only a few months ago, Stern re-upped on a contract that many pundits agree nets him perhaps $400 million over the next five years. Stern himself last year described the contract thusly: "My contract is very fair, I'm very pleased."

I ask you: Does this sound like a man so upset he's going to walk out the door?

Grain No. 2
Over the past few weeks, Stern has been stumping around the country, singing Sirius' praises. He's urging listeners to sign up to receive Sirius content streamed through mobile devices manufactured by Apple, Research In Motion, and makers of Google Android-based smartphones such as Motorola Mobility -- aiming not to boost smartphone sales, mind you, but to help further build Sirius' fan-base.

Grain No. 3
I've saved the best for last. Wunderlich worries that Sirius' "stock market valuation" is too high to endure another controversy. I don't. To the contrary, when I look at Sirius today, I don't see the "167 P/E stock" that seems to frighten Wunderlich so. Instead, I see a company that's promising to generate $300 million in free cash flow in 2011. Assuming Sirius delivers on its promise, this will value the company at 22 times FCF, on a stock expected to post 30% annual profit growth over the next five years.

Foolish takeaway
Call me crazy, but that valuation really just plain doesn't scare me. Nor, I might add, does Stern's latest tirade. Call me a Fool, but I'm looking at yesterday's mini-selloff as a buying opportunity.

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. 516 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Google is a Motley Fool Inside Value pick and a Motley Fool Rule Breakers selection. Apple is a Motley Fool Stock Advisor recommendation. The Fool has written puts on Apple. Motley Fool Options has recommended a bull call spread position on Apple. The Fool owns shares of both Apple and Google.

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


Read/Post Comments (14) | Recommend This Article (15)

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 March 24, 2011, at 8:00 PM, siriuslyrick wrote:

    I have to wonder if this is an "any publicity is good publicity" ploy.

    Sirius doesn't need Stern, and personally I would happy to see his no-class, no-talent act exit from the lineup. As I said elsewhere, I've never listened to the creep, and never will.

  • Report this Comment On March 24, 2011, at 8:05 PM, southernbeachguy wrote:

    Wunderlich is a second rate Company anyway, no one listens to them. If anyone thinks that Howard Stern could make a difference in anything that a company does, they aren't worth listening too.

    Howard is a nasy mouth publicity seaker.

  • Report this Comment On March 24, 2011, at 8:32 PM, mlrinc10 wrote:

    Spokesmen for Sirius have stated all obligations have been met. I'm sure there is a very detailed contract concerning all this and if this hadn't been resolved then Stern would not have re-upped. BTW.....Stern has TONS of SiriusXM stock anyway. He doesn't want to start losing value at this point. REALLY dumb idea Howie.

  • Report this Comment On March 24, 2011, at 8:46 PM, letitbegood wrote:

    Before this happened Wunderlich had a $2 target on SIRI based on fundamentals. And now they decide to reduce that target by a whopping 35 cents on a suit that has NOTHING to do with fundamentals, and is relatively insignificant in the big scheme of things!!?

    If this is the case then there $2 target was bs to begin with. Because there is no way to justify this new downgrade based on this event. Really pathetic on their part. But being the same company that downgraded SIRI last year the day before auto earnings (only for SIRI to go up shortly after), I guess this does not surprise me.

    SIRI has been proving analysts wrong over the last couple years time and time again, and should continue to do so for some time to come.

    The best is yet to come!

  • Report this Comment On March 24, 2011, at 9:26 PM, wrigmar wrote:

    Finally, someone with a brain points out the obvious. This lawsuit is nothing but BS and should not effect the valuation of the company. I am going to go out on a limb and say it will actually help the company, as it has generated lots of headlines = more exposure. The recent pullback will be in the rear view mirror in a few weeks, as we start climbing up to the conference call.

  • Report this Comment On March 25, 2011, at 1:09 AM, darkhorse99 wrote:

    I agree with Rich Smith.

    No disrespect to Wunderlich Securities, but I don't let any do my thinking for me, no matter what their record is...even it is a damn good record. I can't help thinking that from a risk point of view, no one will blame Wunderlich for being wrong with being cautious, but they will be blasted and blamed if they don't warn you and things go wrong. Given the news that has come out...and they way people blame or credit analyst, they had to lower their price to $1.65.

    My humble thought is that the market considered the news, mulled through it, and now is beginning to say, the heck with it...maybe I don't agree with Wunderlich.

    If I get creamed for my thinking...so be it.

  • Report this Comment On March 25, 2011, at 4:16 AM, rouben45 wrote:

    Howard Stern and Ghaddafi must go.

  • Report this Comment On March 25, 2011, at 6:02 AM, doubting wrote:

    Wow, Rich, I cannot believe it is you. To be honest, never expected sound of reason from you. I would say you presented a very sober assessment. This HS hiccup presents a unique buying oportunity. As to the quarrel, there is no doubt they will work it out to mutual satisfaction.

    Incidentally, bashers have not started singing "the auto parts lack impacting auto production doomsday" song. Let us await it any hour. Or what about "oil decimating auto industry" craze. What is wrong with these guys? How come they are on the fence? In the meantime, March appears at about 1.25M auto sold. The numbers certainly meet siri conservative 2011 estimate. Siri may score big sub numbers.

    I completely agree with you that the company has a perfect momentum and even earthquakes and rebellions elsewhere cannot stop it anymore. They will deliver and make good on expectations of its shareholders. Let us wait another six weeks or so for the first Q results. I just wonder what will take to gag these doomsday augurs.

  • Report this Comment On March 25, 2011, at 9:04 AM, David369 wrote:

    Rich obviously failed to get an adequate dose of brainwashing and he will be sent back to the brainwashing chamber for reprograming. Either that or he was intimidated by the lynch mobs standing outside waiting for anyone that wrote even a slightly negative comment about SIRI.

  • Report this Comment On March 25, 2011, at 10:35 AM, dan9812 wrote:

    Like most are saying this lawsuit is bs, but i used this opportunity to buy a few thousand shares on the dip this caused

  • Report this Comment On March 25, 2011, at 11:32 AM, catmandu88 wrote:

    Stern is an idiot. Stern cut his big hook nose off to spite his ugly face. SIRI should counter sueing for lost shareholder stock value and deduct it from this greedy axxhole's new contract. I would think that being paid $900,000,000 over 10 years for a 6 -10 Mon.-Thurs. "job" is renumeration enough for 12,328,877 Egyptians.

  • Report this Comment On March 25, 2011, at 12:12 PM, multi007 wrote:

    Anti-Stern comments aside, the company's valuation did not change because a lawsuit was filed. The question is, if SIRI settles, how much will it cost?

    Like @dan9812 - i bought more on the dip. Im long SIRI until the fundamentals change or until the car manufacturers drop in sales.

  • Report this Comment On March 25, 2011, at 3:25 PM, foolonthehill48 wrote:

    Bought on the dip. Already up and earnings coming....

    Thank You Howard!

  • Report this Comment On March 29, 2011, at 9:05 PM, motleymarty wrote:

    I enjoy reading these comments. Howard Hears A Who. Whomever thinks the success of SIRI depends on one personality: he/she is not a subscriber. But they've listened to SIRI at various public places - shopping malls, restaurants -- and they just don't know it. Let's keep it to ourselves, guys: satellite radio is The Future, and the future is now.

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