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 have a couple of picks in the oil sector to consider, as SeaDrill (Nasdaq: SDRL  ) spears an upgrade, while National Oilwell Varco (NYSE: NOV  ) digs up a new buy rating. Meanwhile, tech is starting to look overpriced, with new price targets on Micron (NYSE: MU  ) , Marvell (Nasdaq: MRVL  ) , and Juniper (Nasdaq: JNPR  ) all down significantly. What's going on here? Let's find out.

Drilling for cash, and coming up dry
SeaDrill starts us off, boasting of an upgrade from Britain's HSBC to overweight -- and it's not hard to "sea" why. At just 17 times trailing earnings, and expected to grow these earnings at an (improbably) fast 55% annual clip (according to Yahoo! Finance), the stock looks anything but expensive. Throw in a superbly generous 7.2% dividend payout, and what could possibly go wrong?

Um ... everything? Listen, Fools, SeaDrill is certainly in a good business, providing offshore drilling services to a world thirsty for more oil and natural gas. But this company's anything but the cash cow it seems to be. "GAAP" profits notwithstanding, the company's only managed to produce actual free cash flow once in the past five years -- and that year, 2009, the company produced only $83 million worth of free cash. Every other year, the company burned cash, including the last one -- over the past 12 months, "free" cash ran negative to the tune of $138 million. Which is a real pity. Maybe, if SeaDrill could figure out how to make a real profit drilling for oil, the company wouldn't be lugging around more than $10 billion in net debt.

A better option
Investors may have better luck with HSBC's other idea, however. At the same time it was upgrading SeaDrill, HSBC initiated a new "overweight" position in National Oilwell Varco. This stock, which the banker believes will hit $97 within a year, is everything SeaDrill is not.

It's not growing as fast, for one thing (analysts posit a 14.5% long-term growth rate). Nor is it as generous a dividend payer. (Indeed, it pays hardly anything at all -- a measly 0.7%). But on the plus side, National Oilwell is cheaper than SeaDrill (12 times earnings) and generates positive free cash flow (about $1.6 billion), and as a result, it has built up a fortress of a balance sheet, with $2.9 billion more cash than debt.

At an enterprise value-to-free cash flow ratio of 16, National Oilwell looks like a much safer place to drill for value than is SeaDrill. (And if it's oil stocks you're looking for, here are three more that we like quite a lot).

Tumbling techs
One of the great things about buying National Oilwell, of course, is that the stock is about 7% cheaper than it was a year ago. Falling stock prices are a great place to look for bargains, and so perhaps we should send Wall Street a note of thanks for helping to hurt the share prices at three tech standouts -- Micron, Marvell, and Juniper -- with new-and-reduced target prices.

This week, Stifel Nicolaus shaved 10% off its target price for Micron (now set at $9.50), Mizuho gave Marvell a 20% haircut (targeting $16), and FBR simply scalped Juniper, lopping 42% off a target price now set at $14.

As a result, investors were presented with the opportunity to buy these stocks for anywhere from 4% to 6% less than they'd have had to pay previously. But should we take Wall Street up on its offer(s)?

Well, let's see here. In my humble opinion, Micron shares SeaDrill's problem, in that it's currently generating no positive free cash flow. The company's a strong player in the DRAM market and probably bears watching for when semiconductor demand improves. But for now, it doesn't really look like the best place to put your money. Juniper and Marvell, in contrast, do appear to offer some value.

With $555 million in positive FCF, Juniper looks modestly underpriced at an enterprise value-to-free cash flow ratio of less than 12, but 14%-plus growth projections. Marvell looks even better. Annual free cash flow production of $702 million is simply Marvell-ous. Plus, once you net out the company's bank account, the EV/FCF ratio on this one is an ultra-cheap 6.5.

Foolish takeaway
Marvell may not be quite as attractive as the stock we recently pinpointed as the prime beneficiary of The Next Trillion Dollar Revolution (find out who that is when you read our free report.) But at 6.5 times free cash, Marvell shouldn't have to grow anywhere near as fast as the 14% annual growth that it's expected to produce to justify the stock price. Add in a tidy 2% dividend payout, and I think Marvell just might be the best bargain of the bunch.

Whose advice should you take -- Rich's, or that of "professional" analysts like Stifel Nicolaus, Mizuho, and FBR? 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 does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 330 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of National Oilwell Varco and Seadrill Limited. Motley Fool newsletter services have recommended buying shares of National Oilwell Varco and Seadrill Limited. 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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