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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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.
I'm back! (Did you miss me?)
Is it just me, or did Goldman Sachs start -- and finish -- its summer vacation a bit early? A couple of weeks ago, we were discussing the company's surprise return to the stock exchange industry -- which was a "surprise" mainly because Goldman neglected to tell us it had ever stopped covering Nasdaq OMX
On Tuesday, Goldman announced to great fanfare its resumption of coverage on all three stocks, giving STEC a "neutral," SanDisk a "buy," and Micron a "sell." Explaining its ratings, Goldman admitted that STEC is "well positioned in the enterprise storage segment" but worries that rivals such as SanDisk are beginning to eat away at its market share. Meanwhile, the analyst believes that "tight supply dynamics in the NAND flash market" and "strong secular demand" from the explosion of smartphones and tablet computers will result in "higher profitability" for SanDisk.
Last, and least, Goldman names Micron the odd man out in this race. In a series of insults, the analyst calls DRAM price assumptions unrealistic, investor expectations too high, and Micron itself in poor position to take advantage of the success of the iPhone as well as the multiple me-too products issuing forth from the likes of Research In Motion
I think Goldman's ratings only one-third right today -- and I'll tell you why.
Actually, I've already told you why I think STEC's overrated, and why I agree with Goldman that SanDisk is "remarkably cheap." Today I'd like to focus on Micron instead, since it's the one member of this smartphone-chip triumvirate that I've not yet had opportunity to examine.
Let's go to the tape
The first reason I disagree with Goldman on Micron is that the analyst simply doesn't have much of a record to brag about in this industry. We've been watching Goldman's performance on semiconductor picks for well over a year now, you see. And the sad truth of the matter is that for every time Goldman has gotten a pick right in semis, it's gotten another one wrong; its record for accuracy in the industry is only 50-50. Goldman was right about ON Semi but wrong about Xilink. Varian outperformed, but PMC-Sierra didn't.
Most telling of all, though, is Goldman's record on Micron itself. The analyst recommended buying the stock in June of last year. But any investors who followed Goldman's advice back then are now sitting on a 31-percentage-point loss to the market.
Doh!
Call me a pessimist, call me a Fool, but I think Goldman has Micron all wrong again. Consider: Right now, Micron shares sell for the low, low price of just 6.2 times earnings. Cheap, right? But it gets better. As Micron's cash-flow statement clearly shows, the company is underestimating its cash earnings when reporting profits per GAAP accounting standards. Fact is, Micron's $1.86 billion in annual free cash flow eclipses its reported profits by a Fool-y 23%. Valued on these cash profits, Micron is selling for just 4.8 times free cash flow!
Foolish final thought
I admit that Goldman could be right in terms of the big picture here. It's possible that DRAM prices will fall. It's also possible that Micron's competitors will outmaneuver it. If that happens, analyst estimates of 11% long-term growth for Micron could prove to be overoptimistic. But so what?
Let's make this really simple: At a P/FCF ratio of less than 5, Micron would have to have analysts overestimating its growth rate by a factor of two to make these shares anything less than a screaming bargain. If you think Micron's headed for a fall of such catastrophic proportions, then by all means, follow Goldman's advice and sell. If, on the other hand, you think Goldman's perhaps been too long away from the semiconductor game, and misreading the risk, buy.
