This Just In: 2 Upgrades and a Downgrade

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.

Today, we're going to take a look at three high-profile ratings moves on Wall Street: upgrades for Frontline (NYSE: FRO  ) and iRobot (Nasdaq: IRBT  ) , and a downgrade for Clearwire (Nasdaq: CLWR  ) .

Frontline's new rating: hold
Shares of Frontline got torpedoed late last year when, in a last-ditch effort to avoid bankruptcy, the company announced it was splitting itself into two companies -- "Frontline" and "Frontline 2012" (now a Frontline subsidiary).

Dahlman Rose announced yesterday that "after the successful completion of its restructuring," the firm was now willing to remove its sell rating on Frontline stock and upgrade the shares to hold. Dahlman warns, however, that the tanker market is likely to be "weak for at least the next 12 months," and is not yet ready to buy the stock.

I agree. While Frontline's reshuffling of assets appears to have relieved the company of a substantial portion of its debt, the company remains unprofitable and free-cash-flow negative at last report. Before buying into a promised turnaround, I'd at least like to see a full quarterly statement of operations from the "new" company, to get a better picture of what we're working with. Examining the company post-restructuring, Fool alumnus Stephen Simpson recently opined that what remains of Frontline is a "gutted" company earning "substantially lower charter rates" on its vessels. Even if the tanker market does rebound after a year or so, there's no guarantee Frontline will benefit.

iRobot's new rating: buy
A more optimistic upgrade goes to iRobot this week, as broker Brigantine upgrades this stock to buy. Details on this upgrade are scarce so far, but here's what we do know: iRobot has beaten investor expectations time and again these past couple years. Still, the prospects for future outperformance look slim.

Overseas, military operations have concluded in Iraq, and U.S. troops are scheduled for a pullout from Afghanistan in two years. Both of these developments threaten iRobot's warbots franchise. Meanwhile, here at home, the Great Recession -- technically dead and buried in June of 2009 -- continues to shamble about the countryside with zombielike, undead persistence.

Brigantine may see this situation as favorable to iRobot. But with the stock trading for about 22 times earnings, and pegged for 22.5% long-term growth, the best I can say about iRobot is that it might be fairly priced today. What's more, I can't shake the feeling that iRobot's free cash flow, which currently backs up only half the company's reported net income, isn't as robust as it needs to be to justify the stock price. Honestly, the best rating I could give iRobot in this situation is a hold, and I'd be much more inclined to sell the stock.

Clearwire's new rating: hold
And speaking of the walking dead, we come now to the day's featured downgrade: Clearwire. StreetInsider.com reports that Kaufman Bros. is downgrading Clearwire to hold (and chopping 60% off its target price!). The reason: "Total revenue outlook for 2012" is dropping from $1.7 billion to $1.3 billion, and the earnings picture is even worse. Kaufman sees Clearwire losing $334 million in "adjusted EBITDA" this year, an 11-fold increase from previous expectations.

Now, the analyst does believe that a new agreement with Sprint (NYSE: S  ) will help Clearwire turn EBITDA-positive in 2014, which I guess is why Kaufman isn't counseling an outright sale of the stock. Still, if memory serves, EBITDA refers to earnings before interest, taxes, depreciation, and amortization charges are taken out. Such charges amounted to more than $1.3 billion at Clearwire over the past 12 months, which suggests that even an EBITDA-profitable Clearwire may not earn any net profit... even by 2014.

Unprofitable, burning cash, and laden with $3.3 billion in net debt, Clearwire should be downgraded. My only quibble: I wouldn't stop at hold. I'd ratchet this rating all the way down to sell.

Motley Fool newsletter services have recommended buying shares of iRobot. Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. He does, however, have public recommendations available on 57 other companies. Check them out on Motley Fool CAPS page, where he goes by the handle "TMFDitty" -- and is currently ranked No. 356 out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy.

We 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 (2) | Recommend This Article (6)

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 January 05, 2012, at 8:40 PM, fireinyoureyes wrote:

    The reason Clearwire is not a sell is because it's a real estate play. They are sitting on the most spectrum. With the AT&T/T-Mobile merger gone, there will be even greater interest for someone to buy spectrum or sign on to a LTE deal with Clearwire in 2012, which would be a strong catalyst to the stock price. Also, the deal with Sprint will give Clearwire 2/3 of $926mm in 2012, and 1/3 in 2013.

    This will help free cash flow, although under GAAP it will be reflected as 1/2 in 2012 and the other half in 2013. To fully evaluate Clearwire, one must take into account the spectrum value. That is why there are also several buy recommendations.

  • Report this Comment On January 05, 2012, at 11:58 PM, TMFDitty wrote:

    You may very well be right. However, if I had a nickel for every time I've seen an unprofitable company rated a "buy" because of the value of its patents, real estate, or other assets ... I could buy several shares of Kodak.

    TMFDitty

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