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 worst ...
At least two of Wall Street's not-ready-for-prime-time players took the opportunity afforded by Texas Instruments' (NYSE:TXN) earnings beat to upgrade the shares yesterday. In so doing, they missed the stock's 4% jump in price, of course, but better late than never, right?

Both Collins Stewart and Davenport agree on the downside risks in investing in TI. Says Collins:

[Texas Instruments] is unable to locate a buyer for its merchant baseband business and [will probably shutter the division]. Lacking scale, we believe that [Texas Instruments] will eventually lose its largest custom customer Nokia (NYSE:NOK). ... For [calendar year 2009] we expect revenues to decline 35% to $8.1 billion or twice as worse as industry performance. Operating income should decline almost 80%. We do not expect meaningful positive year-on-year comps until summer of 2010.

Similarly, Davenport worries that the "Nokia transition, increased competition in wireless [create] headwinds ... that go beyond just the current economic conditions. Thus, while we are raising our rating on [Texas Instruments] shares from Reduce/Sell to Neutral, we would not be buyers of [Texas Instruments] shares at this time."

But it's not all bad news. Davenport applauds TI's cost-cutting efforts:

[Texas Instruments] announced that it will make an additional reduction of roughly 12% of its global workforce ...  to a previous restructuring that had been focused on the wireless business. ... The two actions combined should provide cost savings of about $700 million annually when completed (expected 3Q '09). We expect these actions to help EPS by roughly $0.10 per quarter once fully implemented.

Weighing the pros and cons, both analysts decided that there's no point in selling TI at today's depressed price, and upgraded the shares to the equivalent of a hold rating. But should you? Keep holding the shares, that is?

Let's go to the tape
According to CAPS, Collins Stewart isn't exactly the sharpest semiconductor-stock-picker in the drawer. At last report, the analyst was getting 55% of its picks wrong overall. In the semi space in particular, Collins' performance looks something like this:

Meanwhile, Davenport's record is both better than Collins' -- and a bit more sparse. Intel is the only pure-play silicon stock we find on Davenport's scorecard right now. Perhaps, though, we can interest you in some nice gold picks?

In other respects, the analysts' records look remarkably similar. Both rank in the 70th to 80th percentile of investors tracked by CAPS. Both have accuracy ratings less than 50%, and neither analyst did super well with its last bearish bet on Texas Instruments. Collins netted a whopping two points worth of market outperformance by betting against TI, while Davenport pocketed three points.

And of course, both analysts are still opining negatively on the stock -- only a little less so than they were last week. So considering their records, allow me to voice a contrary view on Texas Instruments.

Buy the numbers
Do things look rough for Texas Instruments in the near term? Sure they do. But I submit to you that a lot of this bad news has already been priced into the stock. It sells for a little more than an 8 P/E, and an enterprise-value-to-free cash flow ratio of a little more than 9. On average, analysts expect the company to emerge from its current crisis and proceed to post long-term profit growth of nearly 9% per year.

Personally, I have little doubt that Texas Instruments will survive the downturn and go on to achieve that growth. TI has some $2.5 billion in cash and short-term investments on its balance sheet and no long-term debt. It has another $650 million in longer-term investments (incidentally, just enough to cancel out the company's underfunded pension obligations). In short, the company seems well-capitalized, and judging from its better-than-net-earnings free cash flow numbers, it will continue to add to that cash stash.

While I do not see a huge margin of safety in the stock at today's price, there is some. And if Texas Instruments can keep on surprising analysts -- if it can, for example, exceed the growth rate they're positing for TI in particular, and achieve the higher long-term growth rate posited for the semiconductor industry at large (12%, give or take) -- then the shares could be offering a pretty nice value at today's price.