This Just In: Upgrades and Downgrades: Alcatel Lucent SA (ALU), Nokia Corporation (NOK)

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.” Today, we’ll show you whether those bigwigs actually know what they’re talking about. To help, we’ve enlisted Motley Fool CAPS to track the long-term performance of Wall Street’s best and worst.

Morgan Stanley (NYSE:MS) goes all in on Alcatel
With all the grace of a Bolshoi ballerina, investment banker Morgan Stanley spun on a dime Friday, deftly ditching its earlier conviction that Alcatel Lucent SA (NYSE:ALU) is a disaster of a stock and upgrading the shares from underperform to outperform.

According to Morgan, Alcatel may have lost a CEO last week, but it’s got several things going in its favor:

• A debt refinancing that gives it a “substantial cushion” of $8.4 billion “gross cash”
• The potential to raise even more cash through asset sales
• An “ambitious” plan to cut $1.7 billion in annual operating costs
• A revival in wireless infrastructure spending by major U.S. telecoms such as AT&T Inc. (NYSE:T), which last year announced plans to spend $22 billion annually on capital investment.

In Morgan’s opinion, this all makes Alcatel “attractive” again. Predicting the company is back on a path to generating “sustainable cash flow,” Morgan says the shares will hit $2.67 within a year. But is the analyst right about that?

Facts are stubborn things
Investors weren’t particularly impressed by Alcatel’s earnings report last week, after all. Despite a late rally on Morgan Stanley’s bullish report, the shares still ended down nearly 5% for the week — and for good reason. Q4 earnings featured a 1.3% decline in sales and an $0.80 per-share loss. Free cash flow ($474 million) turned positive for the quarter, but was still decidedly negative ($907 million) for the year.

This latter fact calls into question Morgan’s optimism about the company’s ability to produce mere “cash flow,” as opposed to true free cash flow (which is cash from operations, minus capital expenditures). Remember — last year’s Q4 showed positive cash from operations at Alcatel as well, but the company still ended up in the red for full-year 2012.

What’s more, last year’s Q4 saw Alcatel actually generating better cash from operations ($668 million) than it reported this year ($541 million). Far from showing a trend toward improvement, as Morgan seems to suggest, what we’re really seeing at Alcatel is less cash from operations, more need to spend on capital investment… and greater cash-burn, as the “free” cash flow number just gets more and more negative.