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 this, 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.

And speaking of the best...
MKM Partners just may be the best analyst you never heard of. According to our CAPS records, where we've been tracking this analyst's performance for more than three years now, MKM is quite literally one of the best analysts on Wall Street -- ranking in the top 5% of investors we track. But even if you've never heard of MKM, I'll bet you've heard of the stock they recommended buying yesterday: Cisco Systems (Nasdaq: CSCO  ) .

Sure, Cisco's been cutting guidance and laying off workers. But in initiating coverage of the Internet backbone-builder yesterday, MKM argued that the fact Cisco's been talking down its prospects is actually a good thing. It means Cisco "is leading the [networking equipment] group in resetting realistic annual revenues and margins guidance for the macro environment." Today, with Cisco promising only sub-market sales growth levels of 5% to 7%, the bar has been lowered -- making it easier for the company to surprise investors to the upside.

Indeed, upside surprises seem to be the order of the day in this industry, with Riverbed (Nasdaq: RVBD  ) , F5 Networks (Nasdaq: FFIV  ) , and Juniper (NYSE: JNPR  ) producing numbers that ranged from modestly pleasing to downright good news in recent weeks. And with Cisco "on plan" to at least hit its targets, on course for a "multi-quarter sustained improvement in [its] order rate," and in position to collect "revenue upside in FY12," the stock's forward P/E ratio of 9.5 looks well nigh on ridiculous.

I agree.

Cisco: Buy the numbers
Consider: 9.5 times conservative forward earnings estimates isn't just cheaper than the average valuation on the Dow Jones Industrial Average (INDEX: ^DJI). It's cheaper than you'll find at almost any company operating in Cisco's industry today. The three rivals named above range in valuation anywhere from 16 to 24 times forward P/E. Ciena (Nasdaq: CIEN  ) is right there in the middle, too, at 18. (Yes, I know Alcatel-Lucent (NYSE: ALU  ) is quite a bit cheaper, but you know what I think about the quality of earnings at that company.)

MKM also points out that 9.5 times earnings is far cheaper than Cisco shares have fetched in years past. Indeed, over the past half-dozen years, Cisco has more usually been priced at 15 times forward earnings. This suggests that today's price is a bargain. And it may be even cheaper than it looks.

Cash (flow) is king
Why is that? For one thing, it's because earnings multiples generally don't take into account a company's balance sheet -- and Cisco has a big one. At last report, the Internet king had something on the order of $28 billion in net cash on its balance sheet. Subtract this treasure chest from its market cap, and Cisco's actual business (its "enterprise value") costs only $66.6 billion. That's 10.3 times trailing earnings, let alone what earnings growth Cisco will achieve next year. It's only 7.5 times the amount of actual free cash flow the company raked in over the past 12 months.

If Cisco comes anywhere close to achieving the 9.2% annual growth rate it's projected to maintain over the next five years, the stock's a pretty compelling bargain today. That's the upshot of MKM's recommendation -- and if you ask me, they're right on the money with this one.

Learn more about the latest tech trend benefitting Cisco's business in the Fool's new -- and free! -- report: "The Two Words Bill Gates Doesn't Want You to Hear..."