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 the rally begin. On Monday, RBC Capital Markets finally relented in its pessimistic stance on Garmin (NASDAQ:GRMN) shares, removing its "underperform" rating and raising the GPS maker to "sector perform." Investors were suitably ebullient, and bid Garmin up 3% early in the day.

And yet, it's not as if RBC's thinking is particularly original. The analyst pointed out that the stock is down 75% from its 52-week high -- a fact readily visible to any Fool with enough sense to click over to Motley Fool CAPS. Yet RBC doesn't seem to think that this valuation is cheap enough to actually justify buying the shares. 

RBC's still in the skeptics' camp, citing "weak demand, price competition, and diminishing opportunities for its Nuvifone" in a smartphone market already amply supplied by rivals such as Apple (NASDAQ:AAPL), Research In Motion (NASDAQ:RIMM), Motorola (NYSE:MOT), and Nokia (NYSE:NOK).

And yet, in what looks to be a clear valuation-driven decision, RBC states the obvious: Garmin's currently selling for a price-to-earnings ratio of 4.5, and the valuation only gets cheaper when you net out the firm's cash on hand. For what's arguably the market leader in personal navigation devices, that's awfully cheap. And even if RBC doesn't think it's quite cheap enough to buy, it's certainly too cheap to sell.

But is RBC right?

Let's go to the tape
Reviewing the banker's recent record, I note right away that its predictions on Garmin rivals Apple and Research In Motion (RIM) are both performing poorly. And yet, RBC is still ranked in the top 15% of investors tracked by CAPS. And in the analyst's defense, neither its Apple pick nor RIM has been on the scoreboard very long. Look back a little further, and you'll note that RBC has shown itself capable of generating some pretty sizable profits if you give its predictions a little time to play out:

Truth be told, I agree with RBC's worries over competition from the big tech names. But I also agree with its valuation work. I honestly don't see how buying Garmin at today's depressed price can do anything but return big profits.

I mean, forget about the ultra-low P/E ratio that RBC cites. It depends on net earnings as calculated under GAAP -- and these far overstate Garmin's true free cash flow. And yet, if you focus on the free cash flow, you'll see that Garmin's still generating better than $500 million annually. This puts the company's enterprise value-to-free cash flow ratio right at 6.1. To me, that's not just cheap; it's dirt cheap.

Foolish takeaway
Is Garmin the greatest business on the planet? No. Does it face a whole host of smart, well-funded competitors? Yes. But the company's shown itself capable of fits of genius, and the simple fact of the matter is that the company's stock price overstates the danger to its business.

RBC's right. Garmin's not a sell. In fact, to my mind, it might even be worth buying.