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This Just In: More Upgrades and Downgrades

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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 debt-laden Frontier Communications (NYSE: FTR  ) , balanced by a hike in price target for (NYSE: CRM  ) , and an honest-to-goodness upgrade for Mosaic (NYSE: MOS  ) . Let's dive right in.

Frontier gets smaller
Dividend dynamo Frontier Communications stumped the skeptics last week, reporting earnings that, although down YOY, at least exceeded expectations. Sadly, this did not save the stock from an analyst downgrade, as Hudson Square Research stripped Frontier of its "buy" rating and dropped the stock to "hold."

You can't say you weren't warned. For several weeks running now, I've been pointing to Frontier's mammoth debt load as a worry for the stock. When S&P downgraded the company's already-junk-rated bonds in January, that set the stage for a dividend cut ... and that's just what Frontier gave us last week. Any goodwill Frontier earned when "beating" earnings, it lost when it cut its dividend nearly in half.

Salesforce on sale?
In happier news, ace analyst Needham chose today to buy a ticket on the Salesforce train. Salesforce doesn't report earnings until tomorrow evening, but rather than await good news as an excuse for optimism, Needham jumped the gun this morning. Already bullish on the stock, the analyst upped its price target for Salesforce by 11%, to $139.

Let's hope Salesforce can justify Needham's optimism tomorrow -- because the company is really going to have to wow us if it wants to justify its high-flying stock price. Selling for 8,538 times earnings (yes, you read that right), Salesforce is one of the most richly valued tech stocks out there today. By way of comparison, fellow database specialist SAP (NYSE: SAP  ) costs a mere 17 times earnings (less than 0.2% Saleforce's multiple). Oracle (Nasdaq: ORCL  ) , meanwhile, costs only 16 times earnings -- yet, when analyst Longbow initiated coverage of Oracle today, the most it was able to say was that it was "neutral" on the stock.

Sure, Salesforce is projected to grow more than twice as fast as its closest rival. But does even this kind of growth justify a quadruple-digit P/E ratio? I have my doubts.

Mosaic on the mend
And finally, a bit of good news for Mosaic shareholders who've stuck with the stock through its 30%, 52-week-long slide. Yesterday, Mosaic settled a long-running lawsuit with environmental groups such as the Sierra Club, which had been aiming to block its plans to mine phosphate in Florida. In exchange for a commitment to ensure its operations don't ruin the local watershed, Mosaic won the right to spend the next 10 years harvesting "fertilizer gold" in the mines of central Florida.

The news prompted an immediate upgrade to "buy" from Canaccord Genuity and a near-18% hike in target price to $73. While Mosaic shares look pricey today at 11 times earnings (and a growth rate of only 8%), if Canaccord is right, it means there's still a further 24% worth of profits left in this stock. But is Canaccord right?

I wish I could give you an unqualified "yes," but the truth is I have my doubts. Already, Mosaic is a company where reported net income vastly exceeds actual cash profits. Despite claiming to have earned well over $2.3 billion over the past year, free cash flow at the company is actually less than $1 billion. Add increased capital spending on the firm's new mines, and we could see this number dip even further.

Long story short, at a market cap that's already 25 times annual free cash flow, I just don't think 8% annual growth is going to cut it. Canaccord may think this stock's a buy now. I disagree.

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

If you're going to dig around in the dirt for something, why search for fertilizer when there's gold in them thar hills? Rather than invest in Mosaic, maybe you'd be better off investing in a little gold mining concern we've recently uncovered. Read "The Tiny Gold Stock Digging Up Massive Profits," and we'll tell you all about it -- for free.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 400 out of more than 180,000 members. The Motley Fool has a disclosure policy.

Motley Fool newsletter services have recommended buying shares of Motley Fool newsletter services have recommended shorting 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 (3) | Recommend This Article (3)

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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 February 23, 2012, at 1:28 AM, prginww wrote:

    even though FTR cut it's divi. doesn't it seem like a decent deal at $4.60 with a .10 per??? I mean you really don't have to hold this forever. If you factor the divi into pps you have a little wiggle room if the stock does take a dip. IMO we stay range bound until March, a run up until the 9th and sell off by the end of March.

  • Report this Comment On February 23, 2012, at 11:33 AM, prginww wrote:

    How long does it maintain the dividend at even this lower rate, though? Even after the cut, FTR's dividend obligation is way, way more than it reports as net profit.

    Can't pay what you ain't got ... at least, not for long.


  • Report this Comment On February 23, 2012, at 12:02 PM, prginww wrote:

    While it's true that you can't pay what you don't have, earnings is not a reliable indicator of what you actually take in. Anyone who invests in telecoms will tell you that things like depreciation and goodwill distort the earnings numbers to the point that they're practically useless, at least as far as payout ratios are concerned (especially so in Frontier's case, due to their humongous acquisition of infrastructure from Verizon). You need to look at the free cash flow numbers instead. FCF is much less susceptible to accounting tricks and paints a much clearer picture of dividend sustainability. And considering their FCF payout ratio was around 80% before they cut the payout in half, consider how much healthier it is now.

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