This Just In: Upgrades and Downgrades

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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best...
Let's give three cheers for investment banker Citigroup, which has risen from the bottom rungs of Wall Street's prognosticators to reclaim its spot as one of the best. We'll welcome 'em back with a profile of Citi's latest pick:

Buy, buy, Akamai
In contrast to the negative note struck yesterday, when fellow big banker JPMorgan told us to sell Dell (NASDAQ:DELL), Citi takes a positively sunny stance on its latest prospect. According to the analyst, Akamai Technologies (NASDAQ:AKAM) is a "[market] leader" with a "strong [management] team." It's benefiting from reduced competition as the recession eats weaker players, and poised to capitalize on "an expanding revenue opportunity driven by broadband growth meeting online advertising, rich media and E-commerce, a best-in-class differentiated product set."

Sounds right to me. As fellow Fool Anders Bylund told us yesterday, Akamai's customers include "some of the fattest traffic creators in the world," including Apple (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and ... The Motley Fool itself.

Best of all, Akamai's cheap. Citi puts its valuation at an "undemanding 5X '09 EBITDA." But in fact, Citi says the business is even cheaper than that -- fully "20% of market cap" is made up of cash. Thus, this banker backs up its qualitative love of Akamai with a bona fide valuation thesis (my favorite). But is Citi right?

Let's go to the tape
Quite likely so. Judging from its performance on CAPS, Citi's slump appears to be ending. The analyst now ranks in the top 10% of investors, once again getting more picks right than wrong. Since the turn of the New Year, Citi's gone on an absolute tear for accuracy, outperforming the market with 70% of its latest picks. Notable winners include:

So basically, this banker's on a roll. Will yesterday's Akamai rec add to the momentum, or put a brake on Citi's performance? The former, I think. While I take a different approach to valuing the company, I ultimately reach the same conclusion Citi does.

Amid a miserable market, Akamai generated $220 million in free cash flow last year -- a 69% increase year over year. At this price, the business has an enterprise value of less than 13 times free cash flow. With profits projected to grow at nearly 11% per year over the next five years, today's price offers an adequate margin of safety.

Foolish takeaway
"Adequate" may sound insufficiently bullish when it's your hard-earned cash on the line. But here's the best part: As Citi points out, "[Akamai's] network footprint has been built out over the last several years and revenue growth should materially outpace future investments resulting in operating leverage."

Translated into English, Citi's saying that Akamai has already invested heavily in capital expenditures. Thus, future years could see Akamai produce free cash flow at a faster pace than the rate for GAAP profits (to which analyst estimates refer). So we're really looking at a business selling for a low multiple, but very likely to grow its free cash flow at a much greater rate. To me, that's got dirt cheap written all over it.