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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of worst... it was bad news for investors in LCD display manufacturer LG Display (NYSE:LPL) yesterday. Seems an analyst that was previously willing to sit back, watch LPL stock go nowhere but up, and "let the money ride," has finally decided enough is enough, and issued a downgrade.
The analyst in question: Topeka Capital. (Based, of course, in NYC).
And its new rating for LG Display: Sell.
It's hot in Topeka (but not for LG Display)
Observing that LG Display shares have run up 91% since hitting lows this past summer, Topeka argues that "LPL's stock has overshot to the upside over the past six months." According to the analyst, the share price has hit the "peak of this cycle," and now has nowhere to go but down.
Topeka now predicts the shares will fall to about $12 apiece over the course of the next year, and advises investors to exit, stage left, and move their money elsewhere in the LCD TV supply chain. Specifically, Topeka recommends "investors to swap out of LPL and into Corning (NYSE:GLW)" instead.
Right problem, wrong solution
Give the analyst some credit: Topeka is half right. Unprofitable on a trailing-12-month basis, and trading for a price-to-free-cash-flow ratio approaching 20, LG Display shares are clearly overpriced today. In fact, most analysts expect the company will see profits decline over the next five year, and by an average of 12% per year -- so it's hard to say precisely what price might be low enough to justify the risk of buying.
That said, shifting money from LG Display into Corning would be like jumping from the frying pan into a vat of molten glass.
Sure, a cursory examination of Corning makes the stock seem like a safe place to hide. For one thing, Corning's growing (12% a year) where LG Display is shrinking. Corning's balance sheet -- plump with $3 billion more cash than debt -- is solid. And of course, at a P/E of 10, and a projected growth rate of 12%, Corning looks like a bargain.
But looks can be deceiving. One major problem with recommending Corning, for example, is the fact that no matter what this company claims its "earnings" to be, real cash profits never quite measure up. Over the past 12 months, for example, Corning generated only $1.1 billion in free cash flow, versus $1.9 billion reported income -- $0.56 in cash for every $1 of supposed earnings. As a result, the stock's arguably much more expensive than its P/E ratio makes it look.
A better choice
That's not to say, however, that Topeka is entirely off base in recommending that you move money out of LG Display and into something else. You just need a different "something else."
So where should you move your money? A few possibilities suggest themselves. For example, if you like the idea of investing in LCD TVs, and simply don't like the idea of investing in the panel maker in particular, you might move downstream into retail. Shares of Best Buy (NYSE:BBY), for example -- a major purveyor of hi-def flat screen sets -- cost a very modest two times annual free cash flow (actually even a bit less than that). Even with expected earnings declines over the next several years, it seems hard to go wrong paying a price this low.
Alternatively, if you like the idea of investing in LCD screens, but think good things come in small packages, you might consider one of the major smartphone vendors. Nokia (NYSE:NOK), for example, uses Corning's Gorilla Glass in its new Lumia smartphones, and those have been selling out around the globe. The stock looks expensive to me on most traditional metrics, but there are some analysts out there who think Nokia might soon rise as high as $6 a share.
An even better bargain is Apple (NASDAQ:AAPL) -- again, a buyer of Corning's Gorilla Glass product. While the stock's been in a bit of a funk of late, you could argue that this simply makes it a better bargain than ever. Priced just above 12 times earnings, Apple's still growing like gangbusters, with most analysts predicting 20%-plus growth rates over the next five years. It's got gobs of cash lying around -- about $29 billion worth -- and no debt whatsoever. Plus, in pleasing contrast to Corning, Apple actually generates more free cash flow than it reports as net income -- $42.5 billion over the past year, or roughly $1.02 for every $1 in reported net income.
Before we wander too far afield in our search for value, let me reiterate: LG Display is overpriced. Topeka Capital is right to downgrade it. So really, this analyst is only wrong on the details. Once you get your money out of LG Display, make sure to reinvest it in a stock that promises a chance to keep that money growing.
Corning isn't that stock. But Best Buy, Nokia, or Apple just might be.
Fool contributor Rich Smith owns shares of Apple and Nokia. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 281 out of more than 180,000 members.
The Motley Fool owns shares of Apple, Best Buy, and Corning. Motley Fool newsletter services recommend Apple and Corning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.