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.

All it's cracked up to be?
What do you do when one of the smartest minds of Wall Street makes what appears to be, by all indications, a completely bone-headed call? When it tells you to buy a stock you've examined, and re-examined, and re-re-examined -- and always thought a dog of an investment?

Personally, I take the analyst's record as a clue, and head back to re-re-re-examine the reason I disliked the stock in the first place to see if I somehow got it totally wrong. And this, Fools, is why today I'm going to be taking yet another look at the prospects for that darling of the Telecom Boom Era, and that standard-bearer of the flat-panel TV industry of today: Corning (NYSE: GLW). Because, against all odds, Standpoint Research up and recommended the darn thing Friday.

Let's go to the tape
Why am I willing to give Standpoint -- and Corning -- the benefit of the doubt, after so many years of finding the stock wanting? Mainly because of the analyst's record. Over the years, I've learned to trust Standpoint's hunches (mainly because they align with my own quest for deep value). According to CAPS, 63% of the time Standpoint says a stock will beat the market, it goes on to do just that; a record so good, it's lifted Standpoint into the elite ranks of Wall Street's Best analysts, outperforming more than 96% of investors on the market.

Indeed, there are very few areas of the market where Standpoint underperforms. Unfortunately for Corning investors, one of those just happens to be the one in which Corning resides: communications equipment:

Of the five picks Standpoint has made in this sector over the past two years, four are underperforming the market. So it's all well and good when Standpoint tells us that the reason you should buy Corning is that it's "under-performed the S&P-500 by 1000 bps since August 4 ... underperformed the Nasdaq by 1500 bps [and] .... is undervalued by more than 20%." But the "20%" that concerns me is Standpoint's record for "20% accuracy" in the communications equipment space.

According to the analyst, Corning is on track to earn between $2.00 and $2.20 in 2012, and should be worth "11x-12X" that number. Even better, "if GLW goes back in favor, we could take out the three-year high of $27 from 2008 and the five-year high of $29 from 2006. If we were going to set a 2012-2013 price target (as opposed to 2011-2012 …), it would be $27-$29."

Shedding some like on Corning
That sure makes Corning sound attractive. But here's the thing, Fools: This glassmaker's earnings still aren't all they're cracked up to be. True, Corning has made progress since I panned it for generating "negative free cash flow" a few years back. Operating cash flow is on the upswing, while capital expenditures have trended down for two years straight. That's commendable, and gives reason for optimism.

Still, at just under $2 billion annually, Corning's free cash flow remains only a shadow of its ballyhooed (and I'd argue, inflated) $3.2 billion in GAAP earnings. If Corning looks cheap at 9.1 times earnings and 11% annual growth, it looks a whole lot more expensive at 15 times free cash flow.

Foolish final thought
Recent weeks have seen a series of concerns raised about Corning's business. Last quarter's earnings report showed that LCD glass prices are now falling faster than volumes can rise, taking a toll on Corning's revenue. Oppenheimer recently warned that volumes are also at risk, as the Netflix-ization of television-viewing habits draws consumers away from large-screen flat-panel TVs, and focuses their eyeballs instead on smaller, less-glass-intensive mobile viewing devices such as Apple's iPad and the slew of "me-too" devices issuing from Samsung, Research In Motion, and the like.

Sure, Standpoint would probably argue these risks are now "baked into" Corning's stock price. But me, I look at the continuing failure of free cash flow to support GAAP earnings at the company and reply: "No. These earnings are still undercooked."

My advice: Put your Corning-ware back in the oven. And don't take it out until the free cash flow has finished rising.