Wednesday'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, we're going to look at new upgrades for United Technologies (NYS: UTX) and Panera Bread (NAS: PNRA) , along with a downgrade at McDonald's (NYS: MCD) . Let's dig in!
It's been a long year of underperformance for shareholders of United Technologies. But like the saying goes, "good things come to those who wait." According to one analyst at least, investors may not have to wait much longer to be rewarded for their patience in UTC.
Yesterday, the aerospace and elevators giant announced earnings that grew 23.5% in comparison to last year, topping Street expectations by a dime a share. Revenues were down slightly, and management warns that this could be a "tough year" as the company undergoes a major restructuring effort (including the incorporation of Goodrich (NYS: GR) ). But that's not keeping investment banker Argus from recommending the shares.
This morning, Argus upgraded UTC from hold to buy and predicted shares of this $80 stock could top $96 within a year -- a clean 20% gain. They may be right. At 14.6 times earnings, and with a modest 2.4% dividend yield, UTC already looks fairly priced on a P/E basis. When you consider further that GAAP accounting actually understates the amount of cash that UTC churns out annually (better than $5.5 billion over the past 12 months), the stock actually starts to look pretty cheap.
Please forgive the typo, Panera
In other news, it's time for the analysts at Miller Tabak to take a bow and claim credit for a prescient price target hike on Panera Bread. Last week, as you may recall, analysts at Miller argued Panera's earnings news could spark a quick run to $175. Nonetheless, the analyst couldn't quite bring itself to recommend buying the shares, but stood pat at hold. Today, Miller threw that caution to the wind.
After getting a good look at Panera's numbers -- $1.40 per share, versus an estimated $1.35 -- and its prediction of even greater per-share profits over the course of the rest of this year ($5.63), Miller officially upgraded its rating to buy, and tweaked its price target upward for good measure. Previously valuing the company at $175 per share, Miller now says that last digit should read "8." $178 per share within a year.
And yet... even if Miller turns out to be right about its new-and-improved number, Panera stock looks more than a little pricey. A $178 price tag on a $5.63 EPS -- if Panera succeeds in hitting that number -- would work out to 31 times current year earnings on a stock that grew earnings 28% last quarter, and that's expected to slow down even further to about a 19% rate of long-term growth. Miller may now be convinced of the buy thesis at Panera.
That doesn't make the stock any less overpriced.
And speaking of overpriced, Panera isn't the only fast-food joint reporting earnings this week. Just two days ago, McDonald's reported Q1 earnings that met Wall Street's estimates for both revenue and profit... even as they confirmed fears of a drop in net profit margin.
Balancing its upgrade on UTC, Argus downgraded McDonald's shares this morning, and now calls McDonald's only a hold -- but the stock might not even deserve that much. At 18 times earnings, McDonald's looks cheaper than Panera. Unfortunately, McDonald's is cheaper for a reason: growth. As in, sub-10% growth prospects that have the Golden Arches looking kind of droopy next to the 28% spurt that Panera just produced, and even the 19% long-term estimate for Mickey D's upscale cousin.
Even McDonald's tidy 2.9% dividend yield isn't beefy enough to bridge the valuation gap here. Blue chip or no blue chip, McDonald's doesn't deserve a price/earnings to growth ratio of more than 1.8 (factoring in the dividend, 1.3 would be more appropriate). While like the fast-food industry it pioneered, McDonald's isn't going away anytime soon, at this valuation it's not likely the stock will go anywhere fast, either.
Fool contributorRich Smithholds no position in any company mentioned. His reservations aside, though, The Motley Fool does own shares of Panera Bread, andMotley Fool newsletter serviceshave recommended buying shares of Panera Bread and McDonald's.
At the time this article was published