Wednesday's Top Upgrades (and Downgrades)


Stocks go up, stocks go down -- and so do analysts' opinions of them. This series looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we'll find out who "likes" Facebook (NAS: FB) and examine an upgrade for Aeropostale (NYS: ARO) and a downgrade for Dell (NAS: DELL) . Let's dive right in.

They "like" me! They really "like" me!
Ever since its botched IPO last week, it's seemed like the poor folks at Facebook ("poor" in a figurative sense only) haven't a friend in the world. The stock's down 16% from its IPO price. Down a whopping $10 from the first price at which it traded ($38). But this morning, the social network finally found a friend. Even more amazing, Facebook didn't even have to pay this friend to "like" it.

After seeing the stock sell off sharply these past few days, investment banker Needham & Co. has decided it's finally safe to get back in the water. This morning, the analyst -- which did not underwrite the offering, by the way -- has initiated coverage of Facebook with an "outperform" rating, calling the stock "an option on the World." (Whatever that means.) According to Needham, though, while the stock's an obvious buy at some price, the problem is picking the right price.

Assigning a $40 price target to the stock, Needham says the stock is worth less than it sold for just a few days ago, but quite a bit more than what the shares fetch today, and that it could be worth even more in the future. After going through some convoluted mathematics, the analyst concludes Facebook could ultimately capture $14 billion in annual revenue and earn operating margins in the neighborhood of 50% on these revenues. That works out to about $4.5 billion after taxes.

So does 20 times earnings (Facebook's current market cap) sound like a fair price to you? Before you answer, remember that Facebook currently has only about $4 billion in annual revenue and less than $1 billion in annual profit. How long it will take to grow into a 20 P/E ratio is still anybody's guess.

Aeropostale: back in fashion?
Next up, at 24 times earnings-that-it's-already-earning, Aeropostale costs quite a bit less than Facebook. This morning, analysts at Imperial Capital took a look at the company's performance, its "strong brand," and its "healthy growth opportunities," and predicted that Aeropostale will go on to "outperform" the S&P 500 over the next year. Is Imperial right?

Maybe not. Last week, Aeropostale announced a 35% decline in quarterly earnings on significantly weakened profit margins. At a share price 24 times what the company earned over the past year, with long-term profits growth expected to average less than 12% (and currently heading in the wrong direction), the stock doesn't look like much of a bargain.

Long story short, the company may have all the "growth opportunities" that Imperial sees, and more. But if it fails to execute on them ...

Is Dell doomed?
And speaking of companies that failed to execute: Dell. The former titan of the PC world is encountering difficulties in its quest to remake itself as an IT star on the order of IBM (NYS: IBM) or even Hewlett-Packard (NYS: HPQ) . To the contrary, yesterday's earnings report showed a 4% revenue drop leading to a 33% plunge in profits at Dell. The news prompted swift reaction from Mizuho Securities, which downgraded Dell to "neutral" and slashed its price target by a full quarter -- to $15 a share.

On the plus side, though, this suggests about 21% upside from the share price that investors have driven Dell down to, post-earnings -- and that's not as crazy as it sounds. Priced at just 6.9 times trailing earnings post-sell-off, Dell already looks attractively priced relative to long-term growth estimates of 7.5%. And with Dell generating $4.2 billion in annual free cash flow (33% ahead of reported earnings), and boasting a balance sheet packed with $4.7 billion net cash, the stock is arguably even cheaper than that.

Could be Wall Street is souring on Dell's chances at the very moment the stock's become a bargain.

Fool contributorRich Smithholds no position in any company mentioned. The Motley Fool owns shares of Aeropostale and IBM.Motley Fool newsletter serviceshave recommended buying shares of Dell. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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