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." 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.

Sun rises in the West
On Monday, an arbitration tribunal in Minnesota told Western Digital (NYSE: WDC  ) to pay $525 million to archrival Seagate Technology (Nasdaq: STX  ) -- compensation for allegedly having poached a former Seagate employee and "misappropriated" confidential information and trade secrets known by this employee. Seems a strange time to decide to recommend buying Western-D ... but that's just what Barclays Capital decided to do.

In quick succession, Western-D has suffered a sales slump from consumers gravitating to flash memory-equipped smartphones, tablets, and ultrabooks, gotten hit by flooding of its factories in Thailand, handed over a huge chunk of market share to Seagate (which wasn't as badly hurt by the flooding) -- and now lost the arbitration award. As Barclays points out, pretty much everything bad that could have happened to Western Digital has happened already. Enough is enough, and if there's any fairness in the Universe at all, the next news out of Western Digital should be good news.

An-ti-ci-pation ...
How long must we wait for this long-delayed good news to arrive? Sadly, Barclays makes no promises of immediate gratification. To the contrary, the analyst says you need to "look past" at least a couple of quarters to find any light at all at the end of this tunnel.

But once you do, what you'll see is that "WD will be able to begin improving production by the June quarter and could systematically begin regaining share" in the second half of 2012. Moreover, Barclays predicts that Western Digital's "pending acquisition of Hitachi GST will be very accretive to earnings -- on the order of $5.00 in earnings power by 2H CY12." So basically, if an investor can hold his or her breath for the next six to nine months, the reward could ultimately be a 50% increase in annual profits.

Is that good enough?
If Barclays is right about this, then Western Digital's current difficulties are giving us a chance to own this stock at the low, low price of about 5 times "normal" earnings. That's not a bad price for a company that most folks on Wall Street expect to grow at 8% per year over the next five years. It's downright cheap when you consider that Western-D generates free cash flow at a rate 18% above what it reports as GAAP "net income."

Flash-memory specialists like STEC (Nasdaq: STEC  ) and SanDisk (Nasdaq: SNDK  ) can't say the same. OCZ (Nasdaq: OCZ  ) and Micron (Nasdaq: MU  ) are actually burning cash. And speaking of cash, did I mention that more than half of Western Digital's market cap is backed up by cold, hard cash in the bank?

Foolish takeaway
Listen, Fools -- I know it's hard to be a Western Digital shareholder these days. The stock's underperformed the Dow Jones Industrial Average (INDEX: ^DJI  ) by 26 percentage points over the past year, and that hurts. To be honest, I don't even know for certain when this trend will turn around. Barclays could be right that the turnaround is coming in six to nine months ... or it could be wrong. It could take longer.

What I do know is that when I run the numbers on Western Digital today, I see a stock whose enterprise value is only 3 times the amount of free cash flow it generated over the past year -- a stock that even pessimistic analysts agree will probably keep on growing at 8% or so annually over the next five years. That sounds cheap to me.

Does it sound cheap to you? Tell us on Motley Fool CAPS.

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