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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, 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.
Today, we're going to take a look at three high-profile ratings moves on Wall Street, which on Wednesday handed out upgrades for Alcatel-Lucent (NYSE: ALU), Starbucks (Nasdaq: SBUX), and Regions Financial (NYSE: RF).
Alcatel gets a reprieve
First up: Alcatel. Local banker Societe Generale pulled its sell rating on the French telecom equipment firm Wednesday.
As you may recall, Societe Generale first went negative on Alcatel in the wake of its blowout earnings results in May. Since then, things have gotten quite a bit worse for Alcatel, with the firm ultimately losing nearly half its market cap over the course of 2011. SG apparently believes we've seen the dark before the dawn, however, and with Alcatel now trading for the near going-out-of-business price of just $1.78 per share, the stock's been punished enough.
I disagree. The stock has more debt than cash on its books already and is burning cash like mad, with negative free cash flow topping $560 million over the past 12 months. Key customer AT&T (NYSE: T) is strapped for cash in the wake of its failed T-Mobile buyout, which should constrain its purchases of telco equipment in the near term. Meanwhile, over in Europe, Alcatel rival Ericsson (Nasdaq: ERIC) just reported extremely weak results for Q4 and warned that a slow economy has local telecoms reluctant to spend on upgrades -- which has turned out to be bad news for Ericsson's LTE business and could be bad news for Alcatel as well.
Result: Investors are shrugging off the upgrade and selling down Alcatel by 8% today.
Starbucks: Drunk with optimism
Much has been written in the few hours since Starbucks confirmed its decision to go into the alcohol business. But if you ask Oppenheimer, this new (and controversial) business gambit pales in comparison to Starbucks' other advantages. Upgrading the shares to "outperform" this morning, the analyst cited the brewmeister's ability to lock in low prices on coffee beans, plus incremental growth from its alliance with Green Mountain Coffee Roasters on K-Cups, as boosting the prospects for profit growth.
Oppy now pegs Starbucks as a candidate for $56 a share within the next 12 months -- potentially an 18% profit from today's prices. Personally, I think that's a stretch. The shares already cost 30 times earnings, while most analysts on the Street see Starbucks falling short of 20% earnings growth over the next five years. With free cash flow at the firm once again lagging reported earnings, I think anyone buying Starbucks today risks waking up with a hangover in 12 months' time.
Should you bank on Regions Financial?
Last but not least, we travel to Regions. This mid-size banker reported a $602 million loss yesterday, leading analysts at Bank of America to downgrade the stock -- but only the analysts at B of A. Elsewhere, we find RBC Capital Markets upgrading the shares to outperform, while Jefferies, which rates Regions a hold, upped its target price to $5 a share.
StreetInsider.com quotes Jefferies as upping RF to "a higher multiple [to forward earnings] to reflect continued progress on credit." And Regions' business is improving. Last quarter's loss was a function of goodwill writedowns taken when Regions spun off its Morgan Keegan brokerage subsidiary. But for that charge, Regions would have earned $0.09 per share -- $0.02 ahead of analyst estimates. With the shares now trading for about 11 times projected 2012 earnings and pegged for 10% long-term growth on Wall Street, a hold rating looks appropriate here.
Whose advice should you take -- mine, or that of "professional" analysts like Jefferies and RBC? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.
