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.

Today, we're going to take a look at three high-profile ratings moves on Wall Street: a downgrade for JDS Uniphase (Nasdaq: JDSU  ) balanced out by two buy ratings for fellow tech stars Broadcom (Nasdaq: BRCM  ) and Marvell Technology (Nasdaq: MRVL  ) . Let's dive right in.

JDS Who?
Bad news first: It's not often you see a company's "earnings beat" followed immediately by an analyst downgrade, but that's exactly what happened to JDS shareholders this morning. On Wednesday, the telecom equipment manufacturer announced that it had earned $0.15 per share (before items), or 50% better than the $0.10 pro forma profit Wall Street had been expecting.

However, that didn't change the fact that on a GAAP basis, JDS actually lost $0.04 per share in its fiscal second quarter. Nor did it prevent Swiss banker UBS from downgrading the shares to neutral on worries that revenues actually declined in the past quarter, and look set to stagnate, or at best grow slowly, in the current fiscal third quarter, while pricing weakness seems likely to depress the current quarter's profits.

Considering that JDS shares sell for something on the order of 44 times earnings, that the company is expected to grow earnings at only 10% per year over the next half-decade, and that near-term growth could be even weaker than that, I can't say UBS is wrong to be cautious.

Broadly optimistic
Communications chip maker Broadcom carries a P/E ratio just half as big as JDS' (22), and a faster growth rate to boot. It's also generating gobs of cash, nearly $1.7 billion over the past 12 months, giving the stock a price-to-free cash flow ratio of less than 12.

That's why I like Broadcom, at least. But the analysts at top-10%-rated stock shop Canaccord Genuity see even more reasons to be optimistic about it. According to Canaccord, Broadcom customers such as Apple (Nasdaq: AAPL  ) and Samsung have been gaining market share. This implies stronger sales for Broadcom chips, as the cell-phone makers make more cellphones. Assuming, of course, that Apple decides to stick with Broadcom and not go with some rival chip maker for future releases of its iPhone.

The analyst also sees improvement in Broadcom's infrastructure and networking businesses "following inventory digestion and spending delays." For dividend investors, Canaccord points out that Broadcom's strong record on the cash production front should permit the company to increase its dividend, which currently yields only a modest 1%.

Canaccord thinks Broadcom's a "buy" at 12 times current-year earnings estimates and should be worth closer to 15 times (or $45 a share). I look at the current P/FCF ratio on the stock, compare it to long-term growth estimates, and agree. There's a good midteens percentage upside in this stock.

Buy Marvell? What a marv... er, what a great idea
In honor of the Super Bowl, Canaccord's second tech-rec of the day is also a chip stock. (Think about it.) Last month, I praised Marvell for being one of just a handful of companies spending their shareholders' money wisely, and buying back their shares at a discount. Today, Canaccord seconded the emotion.

This analyst sees $16-per-share Marvell as a buy anywhere up to the $20 it thinks the stock is worth. Moreover, Canaccord points out that Marvell's "buyback, if used, could make valuation even more attractive," driving "incremental EPS growth of 9%."

That's on top of the 11.5% long-term earnings growth analysts are already expecting. And where is this growth coming from? Canaccord explains: "We expect revenue and earnings growth to outstrip the broader semiconductor market in 2012, based on a recovery for the company's core HDD business, rising demand for TD-SCDMA smartphones, and a shift to merchant SSD controllers that should favor Marvell's technology leadership." In the cell-phone sphere in particular, Canaccord points to Google's (Nasdaq: GOOG  ) "non-TD-SCDMA Android smartphone growth in emerging markets" as a key growth driver. Given how important Android is for Google, tying into that strength is a good strategy for Marvell to follow.

Foolish takeaway
Canaccord's optimism notwithstanding, consensus growth estimates at Marvell have come down a bit since I recommended it last month. Marry these weaker expectations with the gains the stock has made since my rec, and I think Marvell's still a bargain, but less of a bargain than Broadcom. If you're considering investing in one of today's Street tech picks, I'd say Broadcom is now your best bet.

Whose advice should you take -- mine, or that of "professional" analysts like UBS and Canaccord? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.

And if you're looking for even more profitable investing ideas in the world of tech, read the Fool's new -- and free -- report on the industry: The Next Trillion Dollar Revolution.

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 56 separate companies. Check them out on Motley Fool CAPS page, where he goes by the handle "TMFDitty" and is currently ranked No. 366 out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Marvell Technology Group, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Apple and Google, as well as creating a bull call spread position in Apple.

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


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