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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
For some months now, I've been feeling mighty lonely sitting out on my perch and arguing that salesforce.com (NYSE: CRM  ) is cheaper than it looks, with its triple-digit price-to-earnings ratio and all. This morning, though, I gained a little company, and it came in the form of a "buy" rating from one of Wall Street's better stock-picking groups: Kaufman Bros.

Although Kaufman doesn't boast a particularly admirable record for accuracy (just a hair above 50%), it nonetheless ranks in the top 15% of members tracked by CAPS on the strength of how well it does when it guesses right:

Company

Kaufman Said:

CAPS Says (5 Max):

Kaufman's Pick Beating S&P by:

LSI (NYSE: LSI  )

Outperform

***

28 points

Dolby (NYSE: DLB  )

Outperform

*****

33 points

Axsys Technologies

Outperform

****

287 points


Of course, that 50% accuracy rating tells us that Kaufman also guesses wrong from time to time:
 

Company

Kaufman Said:

CAPS Says (5 Max):

Kaufman's Pick Lagging S&P by:

Circuit City (NYSE: CC  )

Outperform

*

85 points

Motorola (NYSE: MOT  )

Outperform

**

35 points

Google (Nasdaq: GOOG  )

Outperform

***

6 points


As for whether its guess on salesforce.com will land in the first table above, or the second ... well, we don't have a lot to go on. It has a 50/50 accuracy overall. Its highest-profile software pick (Google) is so far a loser. And of course, we do not know precisely why Kaufman chose to endorse salesforce.com just a few hours before earnings.

But we can guess
What we do know is this: Yesterday evening, salesforce.com announced its purchase of privately held product-support software maker Instranet. And we know that Kaufman peer JMP Securities thinks this is bad news for salesforce rival Rightnow Technologies. We also know that while JMP has an abysmal record of picking winners generally, it's beating the market soundly on its picks of salesforce peers Oracle (Nasdaq: ORCL  ) , Rightnow, and Google.

Foolish takeaway
Put that mishmash together, blend well, and I suspect that Kaufman is telling us salesforce.com's prospects just improved markedly, and that's why Kaufman initiated coverage at "buy."

Toss in the fact that salesforce.com is already selling for an attractive valuation of 40 times trailing free cash flow, versus 43% projected long-term growth, and I'm inclined to agree.

Google is a Motley Fool Rule Breakers pick. Dolby Laboratories and Axsys Technologies are Motley Fool Stock Advisor recommendations.

Fool contributor Rich Smith owns no shares of any company named above. You can find him on CAPS, pontificating under the handle TMFDitty, where he's ranked No. 651 out of more than 115,000 players. The Fool has a disclosure policy


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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 August 25, 2008, at 7:57 AM, WebDesignMiami wrote:

    Is Salesforce.com the new ADP ... or the next Datapoint?

    What will happen if blue sky clears the cloud?

    ***

    This headline recently appeared in several places across the Web:

    "Salesforce.com Passes $1 Billion Annual Revenue Mark"

    THIS IS NOT TRUE. I don't know whether this material misstatement arose from media manipulation or an honest mistake, but it's genesis is most likely this 20 August 2008 press release...

    "Salesforce.com Announces Record Fiscal Second Quarter Results"

    http://tinyurl.com/5m5mea

    ...the subheading of which claims:

    "First Ever Software as a Service Company to Exceed $1 Billion Annual Revenue Run Rate"

    THIS IS NOT TRUE, EITHER. "Software as a Service" is marketing technospin for "service bureau". And payroll processing giant ADP--another service bureau--exceeded not only a "run rate" but actual annual revenues of $1 billion in 1985:

    "The original outsourcer, Automatic Data Processing..."

    http://tinyurl.com/56y5tx

    Yes, SalesForce.com did report revenues of $263 million for their most recent quarter. And yes, they have raised "FY09 Revenue Guidance to $1.070 - $1.075 Billion". But NO, Salesforce.com has NOT passed the "$1 Billion Annual Revenue Mark". And despite Cheerleader/CEO Marc Benioff's effusive exuberance, some like Tiernan Ray do not share his enthusiasm:

    "Salesforce's Deferred Revenue Debacle"

    http://tinyurl.com/6oagtp

    Perhaps in an effort to meet ever-inflating investor expectations--a fire they themselves have fueled--Mr. Ray notes that Wedbush Morgan analyst Michael Nemeroff "...thinks Salesforce may be pushing customers to sign more multi-year subscription contracts by lower prices, which could be hitting deferred revenue." And reading that, for me, brought on a disturbing case of Datapoint deja vu:

    http://tinyurl.com/gk77r

    "By the early 1980s, Datapoint was a Fortune 500 company. Under immense pressure to increase sales figures, its sales representatives encouraged customers to place large orders at the end of the fiscal year, permitting the company to count the orders as revenue even though the money had not been received and, in some instances, the sold equipment had not yet even been produced.... When some of the customers went broke before paying their bills, Datapoint had to reverse sales or record substantial bad debts, which caused the company to lose $800 million of its market capitalization in a matter of a few months in early 1982. The U.S. Securities and Exchange Commission (SEC) ordered Datapoint to stop this practice."

    Is Salesforce.com the new ADP ... or the next Datapoint? Some say their business model is to take your watch and then bill you for the time. If so, what will happen to all those watches if blue sky clears the cloud?

    Bruce Arnold, Web Design Miami Florida

    http://www.PervasivePersuasion.com

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