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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Meet the Apple of Wall Street's eye
It's official: The iPhone 4S is a hit! Over the weekend, analysts clocked Apple (Nasdaq: AAPL ) selling more than 4 million of the gizmos. And now that the quizzical tech analysts have taken a hammer to the handset, bashing it open and rooting through its innards, we're starting to get an idea of which suppliers are best positioned to profit from the iPhone 4S' success.
These suppliers include ...
- Cirrus Logic (Nasdaq: CRUS ) for the audio chip.
- Sony and perhaps still OmniVision (Nasdaq: OVTI ) for the camera technology.
- Qualcomm (Nasdaq: QCOM ) for the "world mode" baseband chip.
- ARM Holdings (Nasdaq: ARMH ) for the dual-core A5 processor architecture.
- And John Paul Jones on bass guitar.
But only one of Apple's key suppliers got an upgrade yesterday: TriQuint Semiconductor (Nasdaq: TQNT ) , which, along with Skyworks (Nasdaq: SWKS ) and Avago, makes some of the power amplifier modules for Apple.
An upgrade, by any other name, is still pretty sweet
Now admittedly, this wasn't an official upgrade. Sure, based on the iPhone revelation, Kaufman probably would have upgraded TriQuint's stock if it could. Problem was, the analyst had already labeled TriQuint a buy. So instead of upgrading the stock to "seriously, we really mean it this time" or somesuch, Kaufman did the next best thing. It hiked its price target on the stock ... by 23%.
Yes, you read that right. According to Kaufman, TriQuint shares will hit $8 within a year. And why? Because when you take the business TriQuint already gets from "the 3GS continuing to ship plus the initial reads into 4S demand from pre-orders," TriQuint now looks to make out like a bandit. Kaufman sees the new 4S business adding about a penny a share to TriQuint's Q4 profits, then pushing next year's profits up to $0.56 per share (pro forma).
I only wish I could agree.
Let's go to the tape
Mind you, disagreeing with Kaufman on semiconductor stocks is not a step I take lightly. Over the course of the four years we've been tracking this analyst's performance, Kaufman has proven itself a simply stellar picker of semi-stocks -- outperforming the market on nearly 58% of its recommendations (and two out of three of its more recent picks).
Kaufman's also been right about TriQuint itself, booking a small gain over the market's return since recommending the stock back in August. However, not long after that upgrade went "live," I had the opportunity to check in on TriQuint as well. Sadly, I was not pleased with the numbers I found there.
TriQuint: Big profits, but where's the cash?
Indeed, I don't necessarily even disagree with Kaufman's predictions of strong revenues, and stronger GAAP profits, at TriQuint.
The problem, though, is this: For all that TriQuint's reporting beaucoup profits lately, it's proven incapable of fixing the free cash flow drain that I first wrote about last year. Instead, over the past couple of years, cash profits at the firm have fallen, from $36 million in 2009 to $19 million in 2010 -- to negative $55 million in the last 12-month period. Suffice it to say, these are not the kinds of results we want to see in a company that's nearly doubled its annual sales in just four years' time. To the contrary, it almost looks like the more chips TriQuint sells, the more money (or at least cash) it loses!
Now, perhaps in Kaufman's mind this is unimportant. Indeed, when I spoke with TriQuint management about my concerns earlier this year, they assured me that the cash burn was actually an intentional move -- or rather, an unintended consequence of an intentional move to grab market share and raise revenues in a fast-growing market.
Foolish final thought
The way TriQuint seems to look at things, if it can grab market share and grow sales, cash will eventually flow in abundance. Free cash flow will eventually catch up with, then surpass, the reported GAAP earnings that currently have TriQuint trading for an ultra-low 6.6 P/E. And I agree -- that sounds logical. My problem is simply that, so far, I'm not seeing the plan play out in action. Until it does, I can't and won't recommend buying the stock.
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