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 …
RBC Capital Markets initiated coverage on Hewlett-Packard (NYSE:HPQ) yesterday. Praising the computer maker's "diverse revenue portfolio, recurring book of business, stronger margin profile and solid management team," RBC predicted that the stock will beat the market over the long term.

What about the short term? (We're busy people here.)
Well, if your focus is on the short term, then: (a) you're probably better off trawling the discussion boards at Yahoo! than reading the Fool, and (b) you'd also best look somewhere other than HP for short-term profits. According to RBC, Hewlett-Packard's in for a rough 2009, in which a "deep recession" will depress revenue 5%, allowing HP to make $3.71 per share in pro-forma earnings.

Both of these numbers are worse than what Hewlett-Packard management promised us in last quarter's earnings conference call, but just about smack-dab in the middle of the range of Wall Street estimates. It's also worth pointing out that among the two dozen analysts who track HP professionally, "buy" recommendations now outnumber "holds" and "sells" four to one.

I admit, Fools -- in the past, I've expressed considerable skepticism of Wall Street's herd mentality on stocks. But when it comes to HP, I've got just one thing to say:

"Moo"
Now mind you, I've got reservations about joining the crowd on this particular pick -- especially since RBC is now leading the charge. Although the analyst has a respectable record overall, outperforming almost 87% of all investors we track, it owes much of its success to a series of brilliant calls that had absolutely nothing to do with computer hardware:

Not only are these three recommendations crushing the S&P's returns handily on a relative basis, absolute returns have also been phenomenal -- each of the stock picks above has doubled for investors who followed RBC's lead.

That said, the analyst's record on stocks that make or sell computer hardware is a bit more equivocal:

^RBC also beat the market by 18 points on a previous recommendation of Apple.

Buy the numbers
Still, like I said, when all is said and done, I'm forced to hold my nose and follow RBC's lead on recommending HP today. Why? Because the numbers just look too good to pass up.

Last year, Hewlett-Packard reported earning more than $8 billion in profit on nearly $119 billion in sales -- for a net-income margin 66% higher than archrival Dell (NASDAQ:DELL). That gives HP a price-to-earnings ratio (P/E) of less than 10, based on its current market cap -- and that's the bad news.

The good news is that as great an earner as HP has proven itself to be, it's even more profitable than its GAAP numbers let on. You see, while HP reported "accounting earnings" of $8 billion last year, it generated roughly $9.3 billion in free cash flow -- meaning its ability to generate cash above its level of investment outstrips its "accounting profit" by about 15%. This gives HP an enterprise value-to-free cash flow ratio of less than 9, which looks to offer a reasonable margin of safety, relative to consensus analyst expectations of 11% profit growth over the next five years.

Foolish takeaway
Is 2009 going to be a rough year for computer shops like HP? I have every confidence it will be. Yesterday's durable goods numbers notwithstanding, I don't see this recession ending any time soon, and HP will feel the pain right along with the rest of us.

That said, for investors willing to endure a little short-term pain in hopes of reaping long-term gains when the economy turns around, today's price offers you a chance to own a quality computer maker at a discount price.