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." But in "This Just In," we don't simply tell you what the analysts said -- we show you whether they know what they're talking about. We've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Speaking of which ...
As I was saying, it was already a busy week for tech stocks by the time Thursday rolled around. Yesterday, Credit Suisse initiated coverage on eight computer firms in a row. In addition to the banker's blockbuster buy pronouncement on Apple, which we discussed yesterday, StreetInsider.com tells us that Credit Suisse has slapped sell ratings on:
(Nasdaq: DELL)-- in need of "a transformation," but lacking prospects for either revenue growth or margin expansion to pay for it.
(NYSE: LXK)-- suffering from "declining revenue" and headed for lower profitability, since "2010 represented a peak for [operating margin]".
The banker also sidelined IBM, NetApp, and Xerox at neutral, and awarded shiny new buy recommendations to Hewlett-Packard and EMC
Good call, bad timing
No sooner had Credit Suisse issued its buy recommendation than EMC filed a report with the SEC, announcing that it had been the victim of a hack attack. Specifically, "an extremely sophisticated cyber attack" was mounted against EMC's RSA computer security subsidiary. The attack succeeded in stealing "information ... related to RSA's SecurID two-factor authentication products" -- information that "could ... be used to reduce the effectiveness of a current two-factor authentication implementation" that RSA markets to its customers.
For a company whose business is keeping other companies safe from Internet hackers, admitting it's suffered such an attack itself has to be embarrassing. It's almost certain to cause at least some EMC customers to consider alternatives to RSA -- namely, archrival Vasco Data Security
If RSA = 4.3%, does EMC = "buy?"
Fortunately, RSA's fiasco need not doom EMC. In recommending the stock, Credit Suisse paid scant attention to the company's RSA subsidiary. Instead, the banker focused on EMC's flagship storage business, predicted to grow "20%-plus ... per annum," its networked storage operations, where growth is expected to average 10%, and of course the virtualization subsidiary VMware
While RSA is a very profitable subsidiary, it's really just a bit player at EMC, contributing just 4.3% of total company revenue last year. Unless the litigation risk here is much greater than I imagine, I doubt yesterday's news will scare investors away from the stock.
Buy the numbers
Credit Suisse happens to be right about EMC. (Not a surprise, since it's one of the top 10%-rated stockpickers we track on CAPS.) Despite its 29 P/E, EMC is a whole lot cheaper than it looks on the surface. Dig a little deeper, and you'll find that EMC generates twice as much free cash flow as it reports as its "net income" under GAAP.
Thus, with a price-to-free cash flow ratio of just 14, EMC looks entirely reasonably priced relative to consensus growth estimates of 15%. And if Credit Suisse is right in its analysis, and the company can grow faster than it's promising to do, EMC could even turn out to be significantly underpriced today.
In short, while the news of RSA's hack attack is worrisome, it's not a dealbreaker. I agree with Credit Suisse: Whatever the ultimate outcome of the RSA debacle, EMC still = "cheap."
VMware is a Motley Fool Rule Breakers pick. Apple and VASCO Data Security are Motley Fool Stock Advisor recommendations. Heartland Payment Systems is a Motley Fool Hidden Gems recommendation. The Fool has written puts on Apple. Motley Fool Options has recommended a bull call spread position on Apple. The Fool owns shares of Apple, IBM, and EMC.
Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 541 out of more than 170,000 members. 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.