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 our Motley Fool Stock Advisor-endorsed Seadrill (NYSE: SDRL  ) , balanced out by new upgrades for Pandora (NYSE: P  ) and Alaska Communications (Nasdaq: ALSK  ) . Let's dive right in.

Bank of America pulls out of Seadrill
Bad news first: No sooner had our analysts at Stock Advisor added Seadrill as a new recommendation than the company reported disappointing quarterly results. Revenues for last quarter were better than expected, but earnings came in at a loss, dragged down by an anchor-weight of one-time charges.

The bad news isn't scaring our SA team, which still sees good "long-term prospects" for this deep-sea driller. But this morning, the folks at Bank of America pulled their buy rating on the stock and downgraded to neutral.

Who's right? It probably depends on what numbers you focus on. Even after last quarter's loss, the bull case here is plain to see. Seadrill sells for just 13.2 times earnings -- a tempting price given the stock's 6% dividend yield and long-term earnings growth estimates of 28%. Personally, however, I'd be leery of running with the bulls on this one. Free cash flow at Seadrill is nonexistent. (The company's actually only generated positive FCF once in the last five years, and that was for less than $100 million.) Personally, I'm no great fan of cash-burning businesses -- and I'm no fan of Seadrill, either.

Stifel opens Pandora's box
Speaking of businesses that burn rather than earn, Stifel Nicolaus upgraded Pandora Media to "buy" this morning, calling the Internet radio provider "a must-have tablet and connected device application." Although Stifel groans over the "vexing" nature of valuing the company, the analyst boasts that Pandora (whose IPO it helped to run) has an "audience larger than any terrestrial radio broadcaster." Last clocked at 125 million registered users, Pandora's customer base is several times the 20 million-odd subscribers claimed by Sirius XM (Nasdaq: SIRI  ) .

Of course, that's part and parcel of the "vexing." Sirius actually makes its subscribers pay for the service, and as a result, the company's not just profitable, but rolling in free cash flow. Most Pandora patrons, in contrast, get their service for free.

Stifel thinks Pandora's ad-driven business model is worth "$4 billion or more." But that's twice what Pandora shares fetch today, and honestly, when I see Stifel projected $0.02 per share in profits this year, or even $0.11 in profits next year -- either way, I just can't see myself paying a triple-digit P/E for a share of Pandora. And the quadruple digits Stifel says it's worth?

Dream on.

RBC puts Alaska Communications on hold
Last but not least, we come to the curious case of Alaska Communications (Nasdaq: ALSK  ) . When shareholders were greeted this morning by news that RBC was rating the stock only "sector perform" (that's a hold in analyst speak), it probably sounded like bad news. It wasn't. In fact, sector perform was a step up from the sell-equivalent rating RBC had on ACS just last week.

What changed? Well, earnings, for one thing. Last week, ACS announced that it had closed out fiscal 2011 with a small profit -- quite an accomplishment for a firm that lost $30.7 million in 2010. But here's the bad news: In the "bad" year of 2010, ACS nonetheless managed to generate $48 million in free cash flow from its business. The "good" year 2011, in contrast, saw FCF shrink by nearly half to just $27 million. The shrinkage is all the more striking, given how often ACS CEO Anand Vadapalli mentioned his plans to drive free cash flow in last week's earnings release.

I don't think he was intending to promise to drive free cash flow over a cliff -- but that does seem to be where things are heading. Long story short, at an enterprise value of roughly 26 times FCF today, Alaska Communications doesn't really ring any bells for me.

I wouldn't necessarily sell the stock, mind you -- because 6% dividends like these don't exactly grow on trees. But if it's stable, rich free cash flows you're looking for in a telecom stock, I would urge you to take a close look at AT&T (NYSE: T  ) as a potential alternative. Ma Bell-lite has generated free cash on the order of $14 billion for two years running. It's almost always profitable, and its dividend yield of 5.7% is within spitting distance of Alaska Comm's.

Sometimes, the obvious choice is the right one.

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Motley Fool newsletter services have recommended buying shares of Seadrill, but 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 five dozen separate companies. Check them out on Motley Fool CAPS, where he goes by the handle "TMFDitty" -- and is currently ranked No. 371 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.

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Comments from our Foolish Readers

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  • Report this Comment On March 07, 2012, at 10:50 AM, farfetched1 wrote:

    The edge comes in when you throw in some recent analyst downgrades from Goldman Sachs influence to help market makers curve the odds, and you have the perfect storm to drive down the stock price to make the bet a winner for CEO Fredriksen and those in the know.

    The event announced Feb. 28th of the CEO of SeaDrill LTD reducing his ownership from 28% to 23% per cent in, is not seen as bearish. In-fact, we see the overall move as a net positive for the corporation and investors. This pull back opens the door for strategic purchases to expose your portfolio to a higher yield with good future growth.

    Bank of America (BAC) downgraded the issue, but raised their targets near term $44 dollars, as did HSBC, and Bernstein target was initiated at $33 with underperform given.

    We still have our price models giving targets of mid to low $50s forward looking 6-12 month period, with continued healthy dividend projected increases, and with possible share buyback history, bring focus on the coming June or September quarters in 2012 making a keeper for 2012 - 2013.

    The world's stage brings tensions with hyperinflation leading to the dangerous signs of deflation or double-dip recession. However, the hot spot of issues, is dealing with economic welfare in developed nation's getting a handle on their oil consumption. Oil consumption that is reaching critical mass, and SeaDrill is one of only a few companies that can retrieve it from beneath the ocean floor. Iran threats keep continued world pressure, with the US and other nations trying to avert any further conflicts interrupting oil supplies.

    For many reasons, this becomes part of the equation for US and world politics. Securing another 4 year term for the incumbent or opens the door for the republican challenger in the US Presidential election. It further seems, this may not be in the cards under the current administration, and causes possibly, President Barack Obama to fail in his re-election hopes due to $5 - $6 dollar gas prices to be paid at the pump. Bring in the Health care Reform, Austerity Economics, and you have opened up Pandora's Box for both parties through 2012 leading in to 2013.

    The time is ripe, when trying to handicap Republicans and Democratic candidates needing to pull out all the stops; even after this presidential election is over. SeaDrill LTD plays an important roll to the United States moving forward during the near term.

    Some of the biggest answers to the immediate energy problem come through the Oil Drillers. Until either party can secure energy concerns moving forward, with cost at the pump back to pre-president Bush $2.95 a gallon, all bets are off. Oil Drillers seem to be a better hedge than Gold (GLD) at this point of the 2012 - 2013 game.

    Opportunity comes at any time of the trading day, even in the pre and post after-market news wire events. Could we be thinking this may be a VERY FOOLISH IDEA; the answer is NO. When you have what everyone in the world needs, and you raise the yield to hover 6.00% - 7.28% per cent. You have created a desirable stock issue that needs to be bought by many money managers.

    In the last earnings just recently filed, increased their dividend .76 to we believe; .80 cents each quarter from most recent announcement. This presents a buying signal, as Jim Cramer of Mad Money of CNBC, instructs, back up the truck and load up on the potential profit by both double bagging the dividend with stock appreciation for serious income bound money managers actively working their client's portfolio.

    I would venture to say; David Gardner of Motley Fool and a few other prominent analysts can keep their theme intact on this issue for the next couple of years. I still see targets well into the mid-50s near term 6-12 months out as gleaned by subscription reports subscribed to in trying to maintain an edge in the markets.

    Keep the Creator within the "Money Math" equation of economic theory's and the rest will all turn out fine.

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