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 ...
Wall Street wizard Oppenheimer made a bit of a counterintuitive move yesterday. After acknowledging that "all of Motorola's businesses are facing strong headwinds that will get stronger in '09," the analyst nonetheless chose to upgrade Motorola (NYSE:MOT) shares to "outperform." In Oppenheimer's view, the stock price has fallen so low that the company now has "limited downside."

I disagree strongly with Oppenheimer's pick. But before I tell you why, let me show you the bull case for why you might want to follow this analyst's advice, and buy Motorola today. Simply put, Oppenheimer has a sterling record in the telecoms sphere. Alongside relatively few mistakes ...

... the analyst has produced profits for its clients with big winners like:

Impressive record, huh? It's almost enough to make a Fool overlook the fact that, overall, Oppenheimer gets more of its recommendations wrong than right. In fact, Oppenheimer ranks behind nearly 24,000 other investors we rank -- precious few of whom run their own investment banks. But what really has me pessimistic is the logic that Oppenheimer uses to justify its upgrade. Here's how Oppenheimer describes its "buy" thesis:

• Cost-cutting will save Motorola $1.5 billion this year -- more than most analysts expect.
• Motorola's cell phone business is "in bad shape [but] has only marginal impact on overall earnings."
• Meanwhile, no one's expecting much out of the non-cell phone side of the business, creating the possibility of an upside surprise.

I've got several problems with Oppenheimer's arguments. Let's start with the $1.5 billion. While I concede that the professional number-crunchers at Oppenheimer probably have a better handle on the savings Motorola will generate from its multiple layoffs and restructurings, I cannot help but note that last year, the company lost $4.2 billion -- with operating losses of $2.2 billion in the cell-phone division alone. Granted, two divisions -- one enterprise and the other home and networks -- remain profitable. But even if Oppenheimer is right about the $1.5 billion, and right, too, that the other divisions may surprise us, I still don't see these improvements getting the company back in the black.

But what really gets me is that "marginal impact" comment. Um, excuse me, but Motorola got 40% of its revenue from cell phones last year. Saying this doesn't affect "earnings" is only true in the sense that the cell-phone division hasn't added to earnings in two years.

Foolish takeaway
Of course, that's only how things stand today. And yes, Motorola does hope to unload the cell-phone division soon. But even if you assume this spinoff will happen, you cannot simply cut out the cell-phone division and say it doesn't matter to the health of the overall company -- not until it's gone. Why not?

Well, consider the most recent example of a major industrial company that tried to unload an unprofitable cell-phone business -- Siemens in 2005. Selling this business wasn't as easy as it sounded. Not only did Siemens reap nothing from the sale; it actually had to pay millions to Taiwan's BenQ to take the cell-phone unit off its hands, and agree to additional costs to help BenQ sell the gadgets.

In short, not only does Motorola's cell-phone division have a more than marginal effect on profits today, it could continue to depress them for years.