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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Never a dull moment at Deutsche
Investors pleased with Research In Motion's (NASDAQ:RIMM) third-quarter earnings report Thursday got downright excited when, post-good-news, All-Star analyst Deutsche Securities pulled its sell rating and upgraded the stock. Observing that Research In Motion's "reported Q3 revenues of $3.9b [exceeded both] our estimate and consensus [while] EPS of $1.10, beat our estimate and consensus of $1.05," Deutsche conceded that "RIM has proven it has carved out a profitable niche in the mid-term, meriting a Hold rating."

Explaining its now-less bearish assessment, Deutsche praised RIM's "improving unit outlook for the Feb quarter" and argued this foreshadows a "potential ramp in China" sales. Moreover, the potential for "success in the consumer market and lower than anticipated decline in handheld pricing" suggests that "RIM may also be able to deliver upside on margins through better bill of materials pricing and improved opex control."

Um, so why did you have it rated a sell before?
Good question. All things considered, investors probably would have preferred to hear Deutsche's advice on these points before RIM reported its earnings Thursday -- and before the stock spiked 10%. Hey, nobody's perfect, and Deutsche more so than others ...

Of course, this banker does get some things right, and in fact, Deutsche's pessimism on RIM was somewhat justified. Even after Friday's startling rise in stock price, Deutsche's September sell rating still beat the market by some eight percentage points before it was pulled:

Still, in this regard the RIM rec was less the rule than the exception. Our CAPS records reveal that within the Computers and Peripherals industry, only 43% of Deutsche's recommendations beat the market -- and that's the good news. When picking Communications Equipment stocks, Deutsche guesses wrong nearly twice as often as right.

But enough flagellating Deutsche for failures past. What does the banker think about RIM's future?

Do tell
Although it's no longer advising investors to sell the stock, Deutsche isn't ready to join the RIM bull camp just yet. According to Deutsche, RIM's Storm 2 smartphone is attracting only "modest interest from Verizon (NYSE:VZ) subs." Meanwhile, "competing smartphone products are narrowing the gap in features and mindshare."

Yet despite this pessimistic prognosis, Deutsche seems to think it too risky to sell the shares outright today -- and based on RIM's guidance last week, I agree. In the near term, RIM expects to achieve somewhere between 21% and 27% revenue growth in Q4, while earnings per share could rise as much as 45%. That's significantly higher than most analysts were expecting pre-earnings, and about twice as fast as most people believe RIM can grow over the long term.

Foolish takeaway
With numbers like these, I have to wonder if Deutsche -- surprised at the disappearance of its sell thesis -- isn't falling behind the curve once again. With $1.6 billion in trailing free cash flow, a balance sheet brimming with $2.4 billion in cash, short- and long-term investments, and no long-term debt whatsoever, I put RIM's enterprise value today at roughly $33.4 billion -- just 21.5 times annual cash earnings

If RIM achieves "only" the 19% long-term growth most people expect of it, that seems a fair price to pay. But if the company achieves the growth it's promised us, I suspect we could see long-term growth projections hiked in tandem -- pushing this "growth" stock into attractive territory, and making RIM an honest-to-goodness "buy."