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This Just In: Upgrades and Downgrades

Rich Smith
November 29, 2012

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.

And speaking of best and worst...
Over in analyst-land, Credit Agricole brokerage CLSA has just issued a series of reports on the big players in data storage. Specifically, the analyst is telling its clients to buy up shares of EMC(NYSE: EMC) and VMware(NYSE: VMW), but to sell NetApp(NASDAQ: NTAP). Why?

Valuation is probably part of it. Focusing first on NetApp, we note that Forbes just published a report worrying about the stock's P/E ratio, which the magazine describes as "much higher than its peers." On the one hand, NetApp may deserve the higher valuation, given that it just reported an "earnings beat" a couple weeks ago. Forbes sees this as evidence of the company's ability to "fend off competition from the likes of EMC, IBM(NYSE: IBM), and Dell(NASDAQ: DELL)."

On the other hand, investors can still lose money by buying a winning stock, if they overpay for it. So does NetApp's share price today make sense?

How pricey is it?
Well, let's consider: At 25 times earnings, NetApp shares costs about 25% more than a share of EMC will set you back. That right there seems to explain why CLSA is rating EMC an "outperform" while it rates NetApp an "underperform" -- the one's clearly less expensive than the other. What's more, with a projected five-year profits growth rate of less than 11%, NetApp isn't even outgrowing EMC so as to justify its higher P/E ratio. To the contrary, EMC's 14.4% long-term growth projections leave NetApp in the dust.

On the other hand, there's still VMware to consider. The EMC subsidiary, after all, carries a P/E ratio more than twice that of NetApp, which hardly jibes with Forbes' assertion that NetApp carries a higher P/E ratio than its peers. Even if EMC proper is a better bargain than NetApp, does VMware, too, deserve Wall Street's endorsement?<