This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines are all tech, all the time, as Wall Street announces new buy ratings for LSI (LSI) and Leap Wireless (LEAP), while BCD Semiconductor (BCDS) gets downgraded to hold.
"Bad" news first
Let's tackle that downgrade first off. This morning, Stifel Nicolaus announced a downgrade of semiconductor maker BCD -- but for no fault of its own. Rather, Stifel is reacting to yesterday's announcement that Diodes (DIOD) will pay $151 million to acquire BCD in an all-cash transaction.
Now here's the strange thing: While ordinarily, BCD would not interest me -- it's unprofitable, not growing particularly fast, and burning through its cash at a frightful pace -- Diodes says it has agreed to pay $8 a share for BCD. That's more than 7% higher than the price BCD shares fetch this morning, and the acquisition, according to Diodes, is likely to close in Q1 2013, or at worst in early Q2.
So a 7% in about three months, four at the latest? That works out to an annualized return of somewhere between 21% and 28%. Seems to me, the potential for gain here is still big enough to justify holding BCD... and maybe even buying a bit more.
LSI's "buy" is no lie
Now let's turn to the stocks the Street apparently thinks you should be buying. LSI comes up first, the subject of a new buy rating from Wunderlich Securities, and most obviously, this one looks tied to the troubles that rival Marvell (MRVL) is having with its patent portfolio.
But LSI may also be worth buying in its own right. The stock trades for a bit over 23 times earnings -- less, if you net out its $643 million in net cash. LSI also generates a surprising amount of free cash flow. FCF for the past 12 months came to $217 million, or about 26% more than the "net income" LSI reported for the period.
Put these two facts together, and what you're looking at here is a stock trading for an enterprise value of less than 15 times annual cash profits -- but expected by most analysts to grow profits at a rate of about 18% per year over the next five years. That's a very attractive price, and seems to offer about 20% upside from today's share price of $7.
Leap for joy?
Our second new buy rating of the day comes courtesy of Janco Partners, which initiated coverage of Leap Wireless with a "long-term buy" rating this morning. Janco sees Leap as a potential buyout target as America's wireless industry continues to consolidate. As the analyst points out, Leap's low market capitalization -- just $500 million and change -- makes it small enough that any number of larger could buy it as a "tuck in acquisition." What's more, Janco is projecting a pretty big premium to today's share price if a buyout should occur, establishing a $16 price target on the stock.
Needless to say, that's an attractive proposition for a stock that currently trades barely above $6 a share. Still, you kind of have to take a buyout on faith to justify buying this one.
Leap has no profits, after all, and if you trust Wall Street's estimates, no chance of earning a profit next year, either. What Leap does have is debt, and it's got that in spades -- about $2.6 billion more debt than it has cash in the bank. Meanwhile, Leap's burning increasingly taller piles of cash as it struggles to stay afloat in an intensely competitive industry.
My advice: This one's simply too hot to handle. While a buyout is possible, I say let someone else do the buying. You can find better places for your money.
Motley Fool contributor Rich Smith has no positions in the stocks mentioned above.
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