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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So 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 moves on Wall Street: an upgrade for Halcon Resources (NYSE: HK  ) , new and improved price targets for Cirrus Logic (Nasdaq: CRUS  ) , but a downgrade for TriQuint Semiconductor (Nasdaq: TQNT  ) . Let's dive right in.

Drilling for bargains
Today's first upgrade comes courtesy of the oil analysts at Global Hunter Securities, who this morning upped their rating for Halcon Resources in response to the firm's blockbuster billion-buck bid to acquire GeoResources (Nasdaq: GEOI  ) . That sounds like a lot of cash, but in fact, as fellow Fool Travis Hoium pointed out yesterday, it's really only about a 7% premium to where GeoResources had been trading pre-buyout.

Plus, as Global Hunter argues this morning, buying GeoRe gets Halcon a bigger piece of the action in the coveted Bakken Shale formation. Quoting from StreetInsider.com's write-up: "HK can add 55,000 net acres in the Bakken to the already impressive list of unconventional or emerging liquids plays it is targeting with its aggressive growth plans." Best of all, Halcon is accelerating its growth here at a bargain price. Valued at just under 10 times annual sales itself, Halcon's purchase price nets it Geo's resources at the bargain price of just 7 times sales and change. And with GeoResources already profitable (Halcon is not), the company just might earn itself a positive P/E ratio in the process.

Raise the target? Is that really Logical?
Shifting gears quickly now from natural resources to the world of tech, shares of Cirrus Logic are flying this morning in the wake of a fiscal Q4 earnings report that shocked and amazed the Street. Mind you, it wasn't Cirrus' numbers that impressed. (To the contrary, revenues and earnings were both right in line with estimates.) As fellow Fool Evan Niu explains, what's really getting investors excited is Cirrus' promise to begin reporting "sharply higher level[s] of revenue beginning in the September quarter" -- an indication that Cirrus expects to play a big part of Apple's (Nasdaq: AAPL  ) next iPhone iteration.

Also contributing to the enthusiasm are a pair of price target increases emanating from Wall Street. After crunching the numbers from Q1's report, both Needham & Co. and Stifel Nicolaus upped their price targets on Cirrus by more than 20%, to about $35 a share. And you might think that's only logical. After all, all it takes is a glance at Yahoo! Finance to see that Cirrus sells for a lowly 11 times earnings today. If the company's growing at 20%, as Wall Street seems to expect, that sounds cheap.

It may not be. Once you incorporate Cirrus' latest profit report (which Yahoo! apparently hasn't done yet), it turns out that Cirrus is actually selling for closer to 19 times earnings already. The reasoning is simple -- an income-tax benefit Cirrus logic received in last year's first quarter is no longer in its trailing 12 months. That income-tax benefit had made the company look cheaper than it was in reality.

On 20% growth, this suggests the stock may already be fairly valued, with limited upside. Moreover, Cirrus has been reporting weak free cash flow in recent quarters. While the company hasn't yet provided updated cash-flow information, a look at its past four quarterly reports suggests free cash flow could be as little as half ($45 million) of what Cirrus claims as GAAP earnings.

My advice: Don't pay more money for Cirrus just on Wall Street's say-so. Insist on seeing the most recent cash-flow information available before deciding whether to buy. Wait for the 10-K.

Tri-al and failure
Speaking of companies that live and die by their success in getting into the iPhone: TriQuint Semiconductor. Yesterday, TriQuint reported declines in both revenue and earnings and warned that it expects to actually lose money in Q2 -- as much as $0.15 per share.

Investors were not amused. Indeed, there was so little mirth at Northland Securities that the analyst actually decided to downgrade the stock to "market perform," assigning a $4 share price. In fact, even that number looks generous.

Consider: At $37.6 million in trailing profit, TriQuint shares now carry a P/E ratio of 22. That's a bit much for a company that most analysts expect will only grow earnings at a single-digit pace over the next five years. True, TriQuint's free cash number may (or may not) turn out to be better than reported earnings suggest (in fact, in the fourth quarter TriQuint generated several times more free cash than it reported "earning"). Unfortunately, like Cirrus, TriQuint didn't bother to provide its shareholders with a cash-flow statement in yesterday's earnings release.

Foolish takeaway
When you consider that the rest of TriQuint's news centered on an earnings miss and a promise of more losses to come ... you might think that if TriQuint had other, better news to report, it would have mentioned it in the press release. In that context, TriQuint's silence about free cash flow (or its lack) seems rather ominous.

Long story short, I'd rather be short this stock than long.

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Whose advice should you take -- Rich's, or that of "professional" analysts like Global Hunter, Needham, and Northland? Check out Rich's track record on Motley Fool CAPS, and compare it with theirs. Decide for yourself whom to believe.

Fool contributor Rich Smith owns no shares of, nor is he short, any company mentioned above. He does, however, have public recommendations available on more than 50 separate companies. Check them out on Motley Fool CAPS, where he goes by the handle TMFDitty -- and is currently ranked No. 349 out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Cirrus Logic and TriQuint Semiconductor. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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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 April 30, 2012, at 5:35 PM, tmerrif wrote:

    Maybe you are using a different type of math?

    GEOI was ~$30 pre-announce, ~$38 post-announce and now with HK over $10 its closer to $40 for GEOI.

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