Wednesday's Top Upgrades (and Downgrades)

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature diverging views on networking equipment, as MKM Partners upgrades Juniper Networks (NYSE: JNPR  ) , but downgrades Cisco Systems (NASDAQ: CSCO  ) . Later, we'll take a look at an interesting new view of Tesla Motors (NASDAQ: TSLA  ) . Let's dive right in.

Everything's coming up roses for Juniper
Starting the day on a bright note, we'll begin with MKM Partners' decision to upgrade Juniper Networks. As reported on StreetInsider.com this morning, MKM has upped its price target on the networking equipment company to $26, and upped its rating to "buy."

MKM explains the move with a prediction that Juniper's Service Provider business is "poised to meaningfully accelerate" revenue in the market for hybrid router/switches, helped by "newer products like T4000 and PTX." MKM expects Juniper to soundly thump its own guidance for the third quarter of 2013, with earnings of $0.34 per share, on $1.2 billion in revenue. The analyst further projects full-year profits of $1.25 per share, rising 18% in 2014, to $1.48 per share.

Given that MKM only sees the broader router/switch market growing sales in the high single digits -- at best -- this suggests the likelihood of significant market share capture by Juniper.

"Capture" from whom?
Excellent question. And the answer would appear to be -- from Cisco Systems. Because at the same time as MKM was upgrading Cisco's rival, it was cutting its expectations for the Internet equipment giant.

Warning of "soft macro conditions in several Emerging Markets," compounded by the fact that "the U.S. Federal shutdown has slowed U.S. Enterprise spending," MKM says it sees little chance of product orders "accelerating" at Cisco into fiscal 2014. MKM's baking this new, muted outlook into its earnings expectations, saying Cisco could now earn as little as $0.50 per share in the current first fiscal quarter of 2014, maybe $2.11 for the full year (so basically, flat earnings from quarter to quarter, all year long), and essentially no growth next year either -- just $2.14 per share.

MKM's new views are having exactly the kind of effects you'd expect to see in the two stocks' relative prices. So far today, Cisco shares are down 0.5%; Juniper is up more than 4%. But is that the right call?

After all, with a price-to-earnings ratio of 36, Juniper shares arguably cost nearly three times more than Cisco, priced at just 12.4 times earnings. The disparity in valuation is even more glaring when you notice that Cisco pays its shareholders a generous 2.9% dividend yield, while Juniper pays... nothing.

True, many analysts agree with MKM that Juniper is a faster grower than Cisco, with expectations centering on 14% earnings growth at the smaller company over the next five years. But 14% is hardly hypergrowth -- and is, in fact, only about five percentage points higher than the 9% growth that Cisco is expected to turn in.

A final factor in Cisco's favor is the quality of the earnings that the two companies earn. According to their cash flow statements, Juniper has generated only $282 million in positive free cash flow over the past year -- 6% below the level of its reported net income. Cisco, in contrast, generated $11.7 billion in cash profit during the same period -- 17.5% more cash than it reported as accounting profit under GAAP.

Long story short, I'm still more likely to go long Cisco.

Tesla: Running on fumes?
And now for the rating you've all been waiting for: Tesla Motors. Known far and wide in the equities world for the quality of its research, S&P Capital IQ usually restricts itself to providing raw financial data for analysts to use in their research on companies. But today, Capital IQ actually issued a rating of its own: It told investors to sell Tesla.

Initiating coverage of the upstart electric car company, Capital IQ announced today that, while it believes Tesla deserves "a premium to peer valuation ... given its unique business model and technological leadership," the analyst, nonetheless, thinks the valuation of Tesla shares has gotten out of hand, warning that the stock looks overpriced relative to even optimistic expectations for its future earnings power.

Diverging from its own reporting of analyst estimates for Tesla's earnings this year, where the consensus is that the company will continue losing money (but turn profitable in 2014), Capital IQ said today that it actually expects Tesla to turn a profit this very year. Tesla could earn $0.40 a share, to be precise, followed by $1.53 per share in 2014, and then continue to grow at an astoundingly fast clip of 70% per year over the next five years. Yet, even so, with the stock selling for more than 460 times what Capital IQ says it could earn this year, that growth pace looks insufficient to justify the valuation.

In sum, this is a good news/bad news kind of a rating for Tesla investors. On the one hand, Capital IQ thinks Tesla could surprise a lot of skeptics and report its first full-year profit just a few months from now. On the other hand... no matter what Tesla reports, it's not going to be enough money to justify how much the stock costs.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Tesla Motors. The Motley Fool owns shares of Tesla Motors. 

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