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.
Alas, poor Cisco, (we thought we) knew it well
Here we go again, Fools. Once more, Cisco Systems
And yes, the news was bad. Once again, we're seeing Cisco cede share to Motorola
Discussing the earnings news Thursday, The Wall Street Journal pointed out how Cisco seems out of step with fellow tech giants EMC
Is Cisco sinking or seaworthy?
But ... is the ship really sinking at all? I don't mean to impugn the skills of the analysts making the downgrades this week. To the contrary, according to our data, Citi, Stifel, and Piper are all great analysts, ranking within or above the elite 10th percentile of investors we track on CAPS. But I do believe they're missing the point. Far from being a sinking ship, I see Cisco ready to set sail, and deliver greater profits to investors in the quarters and years to come.
Why? Really, it's a question of price. Earlier this week, as you may recall, I discussed a pre-earnings upgrade of Cisco made by some truly brilliant analysts at Avian Securities. At the time, I checked Avian's math and concluded that with a 10.7 enterprise value-to-free cash flow ratio, and 12% growth projections on the stock, Cisco did indeed look modestly underpriced.
Sure, some investors may criticize Avian's decision to upgrade the stock just hours before earnings as "bird-brained." But I stand by my endorsement of the call. In fact, I'm doubling down on it. Here's why:
If Cisco's numbers this week had showed the company was shedding free cash flow, thus hurting the valuation on the stock, then yes, I'd be inclined to "downgrade" the stock myself. But in fact, the opposite is true. According to Cisco's cash flow statement, operating cash flow in the first half of fiscal 2011 exceeded the amount Cisco churned out in fiscal H1 2010 by $302 million. Capex rose as well -- up $244 million -- but this still leaves Cisco $58 million richer than it started out. It raises the company's rate of free cash flow generation, even as a frustrated (and misguided) Mr. Market chops the price of the company by 13%.
Result: Post-sell-off, Cisco now sells for an enterprise-value-to-free-cash-flow ratio of not 10.7, but 10.2.
Put another way, thanks to last quarter's guidance, we already knew to expect a weak report from Cisco this week -- and that's exactly what Cisco gave us. What we did not know was that despite the tough environment, Cisco would be able to grow its free cash flow, even as investors decided to shrink its price by 13%. Yet that's just what happened.
Call me stubborn, call me a Fool -- but I'm going to have to disagree with Wall Street this week. To me, the sell-off at Cisco makes the stock look more buy-able than ever.
Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where unlike any of the bankers who downgraded Cisco yesterday, he's actually ranked in the 99th percentile -- to be precise, ranked No. 682 out of more than 170,000 members. The Motley Fool has a disclosure policy.
Juniper Networks is a Motley Fool Big Short short-sale recommendation. The Fool has created a bull call spread position on Cisco Systems. Motley Fool Alpha has opened a short position on Juniper Networks. The Fool owns shares of EMC. Motley Fool Alpha owns shares of Cisco Systems.
Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.