This Just In: 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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Morgan Stanley goes all in on Alcatel
With all the grace of a Bolshoi ballerina, investment banker Morgan Stanley spun on a dime Friday, deftly ditching its earlier conviction that Alcatel-Lucent (UNKNOWN: ALU.DL  ) is a disaster of a stock and upgrading the shares from underperform to outperform.

According to Morgan, Alcatel may have lost a CEO last week, but it's got several things going in its favor:

  • A debt refinancing that gives it a "substantial cushion" of $8.4 billion "gross cash"
  • The potential to raise even more cash through asset sales
  • An "ambitious" plan to cut $1.7 billion in annual operating costs
  • A revival in wireless infrastructure spending by major U.S. telecoms such as AT&T, which last year announced plans to spend $22 billion annually on capital investment.

In Morgan's opinion, this all makes Alcatel "attractive" again. Predicting the company is back on a path to generating "sustainable cash flow," Morgan says the shares will hit $2.67 within a year. But is the analyst right about that?

Facts are stubborn things
Investors weren't particularly impressed by Alcatel's earnings report last week, after all. Despite a late rally on Morgan Stanley's bullish report, the shares still ended down nearly 5% for the week -- and for good reason. Q4 earnings featured a 1.3% decline in sales and an $0.80 per-share loss. Free cash flow ($474 million) turned positive for the quarter, but was still decidedly negative ($907 million) for the year.

This latter fact calls into question Morgan's optimism about the company's ability to produce mere "cash flow," as opposed to true free cash flow (which is cash from operations, minus capital expenditures). Remember -- last year's Q4 showed positive cash from operations at Alcatel as well, but the company still ended up in the red for full-year 2012.

What's more, last year's Q4 saw Alcatel actually generating better cash from operations ($668 million) than it reported this year ($541 million). Far from showing a trend toward improvement, as Morgan seems to suggest, what we're really seeing at Alcatel is less cash from operations, more need to spend on capital investment... and greater cash-burn, as the "free" cash flow number just gets more and more negative.

Foolish takeaway
Much as I'd love to say that Morgan Stanley is right, and all's well with Alcatel at long last, the truth is that Alcatel's problems remain -- and it's going to take more than a single quarter's positive cash earnings to fix them. Or more succinctly: "One quarter does not a trend make."

 And one more thing...
This last point is not directly related to Friday's Alcatel upgrade, but still bears mentioning: Rumors are apparently flying about a possible breakup of the telecom equipment manufacturing joint venture -- and Alcatel archrival -- between Nokia (NYSE: NOK  ) and Siemens (NASDAQOTH: SIEGY  ) .

As Bloomberg points out, the revival in telecom infrastructure spending here in the U.S. has yet to make its way across the pond. And apparently, Siemens isn't interested in waiting around to see when it will make a comeback. Citing sources with knowledge of the negotiations, Bloomberg says that Siemens wants to cash out its 50% interest in Nokia Siemens, and is floating the idea that Nokia and Alcatel could make a joint offer for the stake.

The obvious objection to this idea is that neither Nokia nor Alcatel is exactly flush with cash right now. Nokia recently suspended its dividend to conserve cash. Alcatel -- as noted above -- is busy burning what little cash it has left. How Siemens thinks either of these companies would come up with the money needed to take its JV stake off its hands is a mystery... but if the rumors do turn out to be correct, that's an additional area of concern that Alcatel shareholders should watch out for.

Long-term, grabbing a piece of the once-again profitable Nokia Siemens might be a good business move for the long-term. In the short-term, however, it would only weaken Alcatel's balance sheet further.

Nokia's been struggling in a world of Apple and Android smartphone dominance. However, the company has banked its future on its next-gen Windows smartphones. Motley Fool analyst Charly Travers has created a new premium report that digs into both the opportunities and risks facing Nokia to help investors decide if the company is a buy or sell. To get started, simply click here now.

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Comments from our Foolish Readers

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 12, 2013, at 6:04 PM, Robertlhayes wrote:

    Rick like Andrew and Brian did not get up to listen to the alu call on feb 7.There were thing said at the call that did not show up on the transcript;all true I just read the transcript and I got up early and made the call. Morgan Stanley has it right,you have it wrong.Morgan Stanley overweighted alu because alu has almost turned the company around.When Ben said alu had achieved 260 million in saving they said they would back in 2012 I heard the morgan stanley analyst say; that says it all you have almost turned the company around and ben said well yes we have a little more to do in sga but we are almost there.This conversation never showed up on the transcriptSetting aside the imparement charge alu would have made a profit.A billion and multi billion dollar contracts start the first quarter off with a pick up in nearly all sales.Last chance to get alu stock with a discount to book is what you should be saying.Rick did you hear what saved Australia largest sports event from a video overload?How about network radio light or am I like you and got something backwards here?

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