Thursday's Top Upgrades (and Downgrades)
This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on.
Today, with earnings season in full swing, we're going to take a look at three stocks that recently reported their Q1 numbers: Time Warner spinoff TW Telecom (NAS: TWTC) , Cooper Industries (NYS: CBE) , and CVS Caremark (NYS: CVS) . Let's dive right in.
Time for Time Warner?
Internet service provider TW Telecom just keeps on growing. The company has consistently grown revenue and beat analyst expectations for the last few quarters. Earnings have been growing, too, culminating in a big earnings beat this week. And this morning, TW got its reward, in the form of an upgrade to "outperform" from Oppenheimer. But did the upgrade come too late?
After all, TW shares have gained a remarkable 50% already from their lows of October. At the 61.5 P/E ratio they sport today, the valuation is looking pretty stretched, even for a supposed five-year 21% growth rate. While it's true the company has better margins than larger ISPs like AT&T (NYS: T) , TW's share price more than reflects this already.
Long story short, the easy money here has already been made. It's "time" to seek bargains elsewhere.
An unusual suspect
Contrarian investors might want to take a close look at tools-and-electronics conglomerate Cooper Industries. The stock got downgraded to "hold" by Stifel Nicolaus this morning, yet the timing on this seems strange. Cooper delivered a big earnings beat yesterday, reporting $1.06 per share in Q1 profit, where only $1 had been expected. And it's not like the stock is all that expensive, either.
Priced at 16.3 times trailing earnings Cooper is expected by most analysts to grow earnings at nearly 14% going forward. (Indeed, the company raised guidance a bit yesterday, to the point where it's now basically confirming analyst expectations.) That's a good price to begin with, but when you add in the fact that Cooper pays its shareholders a 2% dividend yield, Cooper starts to look downright cheap.
Just what the doctor ordered?
Last but not least, we come to druggist CVS Caremark, which, like everyone and his brother, it seems, reported earnings yesterday and also -- like everyone and his sister -- beat analyst estimates soundly.
The news won CVS improved price targets from each of Mizuho Securities and UBS ($50 and $53 price targets, respectively), and Jefferies at $52. Jefferies calls CVS "one of the best places for new money," while UBS drops a strong hint that as good as CVS's news and guidance were yesterday, management was actually lowballing investors and could do even better than people think this year as it steals business from Walgreen (NYS: WAG) . That makes sense given Walgreen's untimely spat and ultimate parting of ways with Express Scripts.
Shareholders had better hope the analysts are right on this one, because at 18 times earnings, CVS shares look expensive relative to the 11% five-year average annual growth that Wall Street does expect. The good news, though, is that analysts probably are right about this one.
Consider: Over the past year, CVS generated $4.8 billion in free cash flow from its business -- about 37% better than what it reported as "net income." At this level of cash production, CVS shares sell for only 12.5 times annual free cash flow, which seems a fair price if you consider both the size of the dividend (1.7%) and the growth prospects that we know about (11%). Add in any un-expected growth, and the stock just might be a bargain.
Motley Fool contributorRich Smithholds no position in any company mentioned.
At the time this article was published
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