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.

Goldman on the cutting edge
And speaking of "the best," few analysts out there have been more right about telecom equipment maker Infinera (NASDAQ: INFN  ) than Goldman Sachs. Although a perpetual favorite on CAPS, scoring a full five-star rating from our members, Infinera has never been particularly profitable at Goldman. This investment banker has pegged Infinera to underperform the market since way back in 2010 -- and it's been right.

Very right. 73 percentage points worth of market-underperformance right. Fact is, the same stock that Goldman said was a sell two years ago, at $11.86, is worth only $7.30 today -- in a market that's up 35%. That's why it's so significant to note that on Tuesday, Goldman removed its "sell" rating from Infinera, and began making cautiously optimistic noises about the stock instead.

According to StreetInsider.com, Goldman now believes that Infinera has reached a "bottom" in its gross margins (which averaged about 36% last year). From here on out, the company will be making mainly "higher-margin blade shipments following the initial install of lower-margin chassis," says the analyst. And this has Goldman upping its expectations for earnings per share, and pulling forward its prediction for the date Infinera turns profitable by a full year. Goldman now sees pro forma profits arriving in 2014. A year later -- Goldman sees Infinera turning GAAP profitable as well.

Cautious optimism
For the record, even this bold claim (Infinera hasn't booked a real profit since 2008 ) may be conservative. Most analysts  agree 2014 is the year Infinera turns the corner, with estimates averaging $0.16 per share pro forma for that year. Goldman, in contrast, is calling for only $0.06 pro forma.

Goldman's right to be cautious, too. Across the networking equipment industry, things are still in a funk. Ciena Corporation (NYSE: CIEN  ) has seen its gross margins plunge more than 10 percentage points -- a fifth of its gross profits -- over the past five years. Alcatel-Lucent (NYSE: ALU  ) experienced a near-5-percentage point drop last year alone. Both these rivals are currently burning cash, and Infinera is, too, with negative free cash flow approaching $75 million in 2012 .

This being the case, Goldman's making a pretty bold call in trying to time the bottom on an industry that's been looking pretty bottomless so far. Indeed, I'd go so far as to see I think the analyst may be both early, and wrong, in placing a bet on Infinera. Of the three turnaround plays named so far, Infinera is arguably the most expensive at a price-to-sales ratio of 1.8. Ciena costs only half as much -- 0.9 times sales. And if you really want to roll the dice, Alcatel at a mere 0.2 times sales has the most potential upside ... assuming it doesn't go totally bankrupt before it turns around.

Foolish takeaway
If you ask me, rather than betting on a turnaround among telecom equipment sellers, investors may be better off investing in telecom equipment buyers instead. Industry giants AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) are both solidly profitable, and generating strong free cash flows from their businesses. Last year, AT&T churned out a record $19.5 billion in positive free cash flow. Verizon did nearly as well, producing $15.3 billion in cash profits.

In addition to these companies being on more solid footing, business-wise, remember too that in order for things to turn around for the equipment sellers, the equipment buyers have to be doing well as well. In other words, if sales begin to pick up for Infinera and its peers, this almost of necessity implies that business must be booming for the companies they're selling to -- Verizon and AT&T.

Given my druthers, I'd rather invest in the companies that could do well tomorrow ... and are already doing pretty well today. AT&T and Verizon fit the bill on both counts.

Making the right financial decisions today makes a world of difference in your golden years, but with most people chronically under-saving for retirement, it's clear not enough is being done. Don't make the same mistakes as the masses. Learn about The Shocking Can't-Miss Truth about Your Retirement. It won't cost you a thing, but don't wait, because your free report won't be available forever.


Read/Post Comments (3) | Recommend This Article (6)

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 March 20, 2013, at 9:47 PM, rainmon wrote:

    after losing 10% of my net worth in Apple last year, I have not bought any stock since then, now I am considering T as my first stock to buy because they pay a good dividend and have a low beta with solid long term performance. No more fast money crowd stocks for me, although I am tempted to buy a few shares of yahoo at 21 (naked cash reserve put sale).

  • Report this Comment On March 27, 2013, at 11:55 AM, bunngolf wrote:

    T and VZ are fine stocks, and at a reasonable cost basis should be part of ones portfolio. Just DRIP those dividends, and be a happy camper years out. INFN, however, has been a wonderful trading sock the last several years. I have always owned a position in this stock, at a low cost basis. Backed up the truck when it was trading in the $4 - $5 range, and trimmed some recently in the mid $7 range, further lowering cost basis.

    Yes, Goldman has been spot on about INFN. And, yes, it is good to see them recognize their technology is catching on. I believe MKM Partners summed it up well for both CIEN and INFN while attending the Optical Fiber Communication Conference and Exposition/ National Fiber Optic Engineers Conference recently.

    http://online.barrons.com/article/SB500014240527487045386045...

  • Report this Comment On April 01, 2013, at 5:25 PM, SnapCrack100 wrote:

    How do you square this analysis with the analysis of Fool David Meier?

    On March 8th in a video interview he called INFN an "incredible disruptive" opportunity, one of his largest holdings, and one of the "next great companies on the market."

    This is really getting confusing.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2322922, ~/Articles/ArticleHandler.aspx, 11/28/2014 8:19:50 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement