Monday's Top Upgrades (and Downgrades)

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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 top trio of newsmakers includes newly endorsed salesforce.com (NYS: CRM) , now-upgraded Cemex (NYS: CX) , but for Groupon (NAS: GRPN) shareholders, a low-priced "daily deal" they would rather not have received.

A boost in "Sales"
Markets are starting to pull out of last week's slump this morning, and one stock leading the way is on-demand software provider salesforce.com -- recipient of a big boost in target price from the analysts at Wunderlich.

Arguing that the shares have "traded sideways" for too long (you can see what they're talking about right here, showing today's share price right about on par with what the shares fetched six months ago), Wunderlich thinks the time has come for a "major valuation step up." And yet, it behooves investors to wonder themselves: How much more up can expectations for this stock climb?


Already, shares sell for 76 times the profits Salesforce is expected to earn next year (and for infinity times the profits it isn't currently earning). True, when valued on free cash flow, the stock's a bit less expensive. But even so, 38 times free cash flow isn't exactly "cheap." Indeed, even if Salesforce succeeds in growing at the 28% annual rate that analysts project for it, 38 times FCF looks a bit pricey.

Long story short: For Wunderlich's prediction to pay off, it has to be right that investors who are already overpaying for Salesforce stock, can be convinced to overpay even more.

Cemex: Rock-solid value?
A better bet may be found in Imperial Capital's recent upgrade of Cemex shares. While technically, all Imperial did today is remove its "underperform" rating and upgrade to "in-line," the modestly bullish call may be worth a closer look.

On the one hand, yes, Cemex is not currently profitable (much like Salesforce is not currently profitable). On the other hand, the $1.6 billion in free cash flow that Cemex generated over the last 12 months means that at 5.4 times FCF (or even at a more conservative enterprise value-to-free-cash-flow ratio of 16), the stock's hardly overvalued. Analysts on average believe Cemex can grow its profits at close to 22% per year over the next five years. If management delivers on that promise, or even just comes close to fulfilling it, Cemex shares could be a much better bargain than Salesforce.

Is Groupon a bargain?
Continuing today's theme of companies that look "unprofitable," yet generate copious cash flows, Groupon this morning got the back of Wall Street's hand, when analysts at Ascendiant Capital cut their price target 30% to a mere $3.50 per share.

Citing "uncertainties with ... staff turnover and competition," Ascendiant argues that "weakness in controls and slowing growth are likely to bolster continued skepticism as to Groupon's valuation, growth prospects, and profit potential despite its now lower valuation and multiples." Bad news for current shareholders, no doubt -- but longer term investors may rejoice at this revelation, as it suggests a chance to buy Groupon at even better prices.

Remember: While technically unprofitable, Groupon is still generating loads of cash from its business -- about $330 million over the past year alone. In stark contrast to Groupon's price tag on IPO day, the resulting valuation of just 8.5 times annual free cash flow today looks enticingly cheap. Ascendiant may not be willing to bet on a rebound at Groupon, but if you decide to spin the wheel at today's prices, the winnings could be huge.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of salesforce.com. Motley Fool newsletter services have recommended buying shares of salesforce.com. Other Motley Fool newsletter services, however, have recommended shorting salesforce.com.

The article Monday's Top Upgrades (and Downgrades) originally appeared on Fool.com.

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