This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we've got a new buy rating on tap for Textron (TXT), but for Google (GOOG) and Marvell (MRVL), the news is less than marvelous.
Good news first
So let's start with the "good" news: Industrial conglomerate Textron reported underwhelming earnings on Wednesday. Sales were up 7%, just short of estimates, while earnings came in $0.03 shy of what Wall Street was expecting -- just $0.48 per share. Management blamed a blip in business jet sales in July and August, but says things picked back up in September and are on track to produce better numbers in Q4. But investors weren't buying it.
Textron shares slid 11% Wednesday before selling pressure subsided yesterday. They're down again today (but then again, isn't everybody)? Meanwhile, one analyst, at least, is looking at the sell-off as a big, fat, buying opportunity. This morning, JP Morgan announced it's initiating coverage of Textron at buy.
Why? At less than 18 times earnings, the stock's a screaming bargain if Textron comes anywhere close to hitting the 31% annualized growth rate Wall Street has it pegged for. Problem is, Textron dropped the ball last quarter, and there's no guarantee it will pick it back up in Q4 -- management's protestations to the contrary notwithstanding. Free cash flow at the firm remains anemic, with actual cash profits backing up less than 80% of the company's claimed "GAAP" earnings. Long story short: be careful about going long this stock.
Google news next
Enough has been said, and written, about Google's earnings snafu already to fill an e-book -- and a couple extra hard disk drives to boot. I won't bore you by going through the details again. Suffice it to say that Q3 numbers weren't good, and Google's troubles were compounded when the company it hired to file its earnings report with the SEC, R. R. Donnelley (RRD), goofed and let the cat out of the bag early.
That's going to be a PR nightmare for Donnelley going forward, but honestly, Google did a lot of the damage to itself. There'd be a whole lot less wailing and gnashing of teeth if the news Google accidentally released early were of the "good" variety. And recognizing that it's the numbers that count, analysts on Wall Street are lining up to bash the stock. So far, both Bank of America and Oppenheimer have downgraded the stock to neutral. Oppenheimer highlights the costs of subsidizing Nexus tablet computer purchases, as well as losses at Google's Motorola subsidiary, as obvious problems. The analyst also isn't particularly enthused at how fast profit margins are falling in Google's core advertising business. While revenues were up here in Q3, the company earned less "per click," with the result being a less profitable operation overall.
Considering the size of Google's goofs yesterday, a mere two analyst downgrades actually isn't as bad as what we might have seen today. But as more analysts dig into the numbers, and begin to realize that Google at 20 times earnings and 15% long-term growth is no great bargain, expect more downgrades to follow.
Less than Marvell-ous
Speaking of downgrades, we come finally to Marvell Technology. Marvell did its best to outdo Google's bad news with a one-two punch of pretty poor tidings of its own yesterday: Not only did the company cut sales estimates drastically, it also announced its CFO has left the building. (Coincidence?)
The double dose of bad news has so far netted Marvell at least two downgrades on Wall Street, as both FBR Capital and Deutsche Securities head for the exits. (StreetInsider.com says it's also tallied downgrades to neutral from each of Credit Suisse, Lazard Capital, and JP Morgan. Worse, Bank of America and CLSA have downgraded to underperform.) The shares, predictably, are down 14%.
If you ask me, though, this selling has all the hallmarks of a panicked overreaction on Wall Street. Sure, Marvell is hitting some potholes in the road -- chasms, even. PC sales are down, and that's doing a number on its hard disk drives business, for example. Even so, management went out of its way to note that its networking, mobile devices, and SSD businesses -- all growth businesses, I think you'll agree -- remain healthy.
Most analysts have the company pegged for 14% long-term earnings growth once things turn around. For a stock that costs only 10 times earnings -- and barely seven times forward earnings -- that's an awfully big margin of safety. The phrase "buy when there's blood in the streets" springs to mind. And today, Marvell's looking awfully red.