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.
And speaking of the best...
For some months now, we've been delving into the question of: "Whither memory?" Is the future of computer storage in the hands of low-cost, workaday hard disk drives manufactured by the likes of Seagate
This week, the tech wizards at RW Baird pronounced their vision of the future -- and the news is both good and bad (depending on how you look at it.)
Good news first
If you're a shareholder of one of the major SSD industry players -- STEC
Notes Baird: Verizon
Good news comes in pairs
It can't hurt that Baird's bullish stance on SanDisk was basically echoed by Applied Materials
Now, for the bad news ...
Let's go to the tape
Historically, Baird has been more often wrong than right on its recommendations. Over the four years that we've been tracking the analyst's performance on CAPS, fewer than half its computers and peripherals picks have outperformed the market. That's not particularly encouraging, but there's good news here as well: Recently, the analyst has gone on a real winning streak in these kinds of stocks; out of the 10 picks it currently has active, eight (including Apple and NetApp) are beating the market.
|
Company
|
Baird Says |
CAPS Says |
Baird's Picks Beating S&P by |
|---|---|---|---|
| Apple | Outperform | *** | <1 point |
| NetApp | Outperform | ** | 128 points |
And call me a crazy optimist, call me a Fool, but I think that in picking SanDisk this week, Baird has virtually assured itself of keeping that winning streak alive.
Why? Because the numbers practically demand it. With the average Wall Street analyst agreeing that SanDisk can keep its earnings growing north of 14% per year for the next half-decade, SanDisk looks a steal at a price of less than nine times earnings. When you consider that the company's free cash flow outpaces reported profit under GAAP by better than 20%, the stock looks even cheaper -- the price-to-free cash flow ratio here is just 7.1.
Foolish takeaway
The way I look at it, this gives investors in SanDisk today close to a 50% margin of safety on the stock -- even if Baird is wrong, and Wall Street is not overestimating the risk of NAND pricing erosion.
Now granted, if you're a glass-half-empty kind of a Fool, you can argue that stronger NAND pricing is actually sort of bad for SanDisk and its peers -- that for this industry to grow, and ultimately displace hard disk drives, you need prices to fall faster rather than slower to spur demand. But if Apple's already jumping in and doubling the size of its SSD memory needs, I'd argue prices have already probably fallen enough to get this boulder rolling downhill. And if Apple's upping of its NAND orders in consequence permits these companies to increase production and still earn a decent profit margin from the business, it may already be time to start writing epitaphs for the HDD makers -- and writing buy orders for SanDisk.
