This Just In: 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, analysts are talking up refiners Phillips 66 (NYSE: PSX  ) and Valero (NYSE: VLO  ) . They're taking a more nuanced view of the tech sector, where Apple's (Nasdaq: AAPL  ) looking shinier, but Advanced Micro Devices (NYSE: AMD  ) and Intel (Nasdaq: INTC  ) a bit dull. Let's look at both stories now.

Phillips and Valero
As hurricane season works up on the Gulf Coast, threatening oil and gas supply lines, analysts at Simmons are placing bets on another bullish year for oil refiners. This morning, the analyst upgraded both Phillips 66 and Valero to "overweight." At first glance, this looks like quite the smart call.

After all, at 10.3 times earnings, Valero shares hardly look expensive. Phillips, at a bit over 5 times, appears downright cheap. Then again, whatever happens this hurricane season in particular, few analysts believe that either Phillips or Valero can grow its profits at much more than 5% or 6% a year going forward. When you consider further that neither company currently generates free cash flow at anywhere near the rate at which it reports net income, the "bargain" status of each comes even further into question.

The big news in tech
By now you've heard all about Apple's $1 billion patent court victory over Samsung. I won't belabor the details. You can learn everything you need to know about what this means for Apple -- and for Samsung -- in Anders Bylund's colmn right here. (Then, for the big-picture buy thesis for Apple, read our new premium report on the company right here.)

For now, suffice it to say that Apple has won a big victory over a major player in the Android tablet and smartphone market, and its lead over "everyone else" has increased dramatically. Analysts at Oppenheimer responded to the news by lifting their price target on Apple to $800 this morning. With the stock still selling for a cheap 16 times earnings, they're right to do so.

But did you know that Apple isn't the only tech stock in the world? It's true. Keep reading…

Chips dip
As Wall Street was singing Apple's praises this morning, it appeared to have second thoughts about the people who make computer chips for Apple's -- and everybody else's -- products. Investment banker Sterne Agee started off the week by cutting a dollar apiece off its target prices for both AMD (now targeted for $6 within a year) and Intel ($24). Investors, on cue, began selling both stocks. But is this the right call?

In a word, yes. Sterne says that recent weak results out of Dell and HP foreshadow poor performance for the chip makers in both Q3 and Q4 of this year "based upon weak consumer demand, cautious PC OEM October quarter commentary with lowering PC channel inventory." (Sterne isn't the only one worried. Citigroup announced this morning that it believes there's a "high" chance Intel will issue an earnings warning in the near future.)

Result: Intel may look cheap at 10.5 times earnings and near-12% projected growth. But investors need to question whether that growth will in fact materialize. They should also give Intel's cash flow statement a second look, and wonder why the company's generating only $9.5 billion in free cash flow, even as it claims to be "earning" $12.4 billion. Seems to me, that works out to a 24%-wide hole in Intel's valuation, and it's not nearly as cheap as it seems.

As for AMD, the company's not GAAP profitable, like Intel is, but at least it's generating some cash. I'm not quite as bullish as Sterne on AMD's future. (Projecting 50% profits from the stock seems a bit of a stretch.) Still, with $340 million in trailing free cash flow, and a resulting price-to-free cash flow ratio of 8.1, there may actually be a bigger margin of safety in AMD than you'll find at Intel.

Need more market intelligence on Intel? Get our premium research report on the company right here.

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. 267 out of more than 180,000 members. The Fool has a disclosure policy

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and Intel. Motley Fool newsletter services have recommended 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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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 August 27, 2012, at 4:21 PM, sandysanmina wrote:

    AMD provides the chips for Lenovo who is about to overtake HP as the #1 PC seller worldwide. Granted things look soft here and in Europe but in China and India those basic PC units are moving briskly. AMD is going to surprise a lot of folks.

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