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.
DRAM the torpedoes
It's earnings season on Wall Street -- and chips are "in focus" (as they say in the biz). As you've probably heard by now, big name on campus Intel reported last night. But since everyone else in the investing world is probably writing about that one now, I'll try to give you something new. Let's review the slew of recent ratings on rival chipmaker Micron Technology
Everybody seemed to have an opinion about Micron yesterday. According to Forbes, prices on DRAM memory modules have dropped precipitously, as weak demand for PCs joins rising supply on the market to become "lethal" to profit margins. Forbes characterized this as bullish for leading PC manufacturers Apple
But turning that argument on its head, analyst Robert W. Baird upped its rating on Micron yesterday, rating the stock an "outperformer" and nearly doubling its target price on the stock to $15 per share. Dismissing Forbes' concerns as overblown, Baird declared that DRAM production will decline early this year, "stabilizing DRAM pricing trends." Then Baird swallowed Forbes' other contention whole, arguing that even if prices don't drop, the PC makers will still buy more DRAM. (Impressive juggling there, Baird.)
Echoing Baird's bullishness, Sterne Agee agreed that "DRAM pricing will start to moderate and stabilize over the next couple months." PC sales are set to expand as well, says Sterne, and will incorporate more DRAM to boot. Conclusion: Sterne also upgraded Micron to "buy."
Any other takers?
Noticing that the bandwagon had begun to fill up, Wedbush Morgan and Morgan Stanley took the opportunity yesterday to toss in a couple of "me-toos." Both already rate Micron a buy, and Wedbush rushed to add that "FY 2011 free cash flow will be positive for Micron." Morgan Stanley agreed that with the drain on operating cash flow from DRAM capital expenditures down 30%-50% from to 2010, free cash flow certainly is a possibility.
I know, I know. You're waiting for the other shoe to drop, right? I mean, Micron hardly wowed us with its earnings report last month. With Wall Street sounding unanimously uber-bullish about Micron, that must be my cue to tell you they're all wrong. (I've certainly made such arguments in the past.)
Yet I actually agree with the analysts this time. Mostly.
I mean, Baird's argument that falling prices will spur DRAM demand, but stable prices won't do anything to crimp demand, sound a bit too much like wishful thinking to me. In fact, if you take a look at the analyst's record, Baird hasn't exactly been a model of consistent, logical (or successful) thinking in its past semiconductor picks:
Baird's Picks Lagging S&P by
||Outperform||****||54 points (picked twice)|
||Outperform||***||88 points (!)|
Baird's shown itself four times more likely to be wrong on its semiconductor recommendations. It even got Micron wrong the last time it picked it.
On the other hand, Sterne Agee has proven its ability to pick winners in this space two times out of three. Wedbush seems similarly skilled. And call me gullible, but I think these proven performers outweigh Baird's anemic record in the semiconductor space -- especially when I look at Micron's numbers.
I mean, "cheap" doesn't begin to describe this company, Fools. First off, the P/E on this stock is a lowly 5.5, but that's just the start of the good news. With $2.5 billion in trailing free cash flow, and a net $600 million more cash than debt, Micron currently carries an enterprise value barely three times its annual free cash flow (3.1, to be precise). For a company that most folks on Wall Street agree will grow its profits at close to 12% per year over the next five years, that's flabbergastingly cheap.
To me, Micron's rock-bottom valuation explains -- and justifies -- the passel of Wall Street analysts who've suddenly decided that the stock is worth twice what it cost last week. It's cheap enough that I might just pick up a few shares myself. At the very least, I intend to place a big ol' "buy" rating of my own on the shares on Motley Fool CAPS. You should, too.
Rich Smith does not (yet) own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 722 out of more than 170,000 members. The Motley Fool has a disclosure policy.
Intel is a Motley Fool Inside Value recommendation. Apple is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Apple, and Texas Instruments.
Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.