Friday's Top Upgrades (and Downgrades)

Stocks go up, stocks go down -- and so do analysts' opinions of them. 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'll look at why one analyst is buying Kimberly-Clark (NYS: KMB) in bulk, while another tries on Crocs (NAS: CROX) for size, and we'll end the day with the letter "K" as we check out a new downgrade on tap at Key Energy (NYS: KEG) .

Paper or...
First up, Argus Research upped its rating on Kimberly-Clark to "buy" this morning. According to Argus, the company behind everything from Kleenex to Cottonelle to Huggies is worth at least 10 bucks more than it's currently selling for, and should hit $92 within the next 12 months.

Key to the buy thesis is K-C's ability to grow sales in emerging markets, where higher birth rates (than we see in the developed world) are combining with rising incomes to increase demand for all sorts of sanitary products. (Presumably, Huggies especially.)

This logic makes sense -- to an extent. K-C is growing quickly in the Asian and Latin American markets, for example, with sales up 67% over the past five years. (That's as compared to 11% cumulative sales growth in the U.S.) Problem is, even with all this developing-world growth, Kimberly-Clark is still only expected to grow earnings at about 8% per year over the next five years. That's probably not fast enough to justify the company's premium-priced P/E ratio of nearly 19.

Investors may have better luck investing in our second stock of the day, Crocs, which just won a new "buy" rating from the analysts at Benchmark. While warning that "near-term catalysts" are lacking at Crocs, they claim that the stock's share price is "certainly attractive." And it's easy to see why Benchmark would think so. Selling for just over 12 times earnings, Crocs shares look bargain-priced relative to analyst projections of 17.5% compound earnings growth.

The stock is not without risk, however. Last quarter's earnings report was strong enough, sure, but management's guidance for the current quarter spooked the Street big-time. With free cash flow plunging, the company now sports an enterprise-value-to-free-cash-flow ratio right in line with its growth rate -- 17.8%. So while on the surface things look good, beware what lies beneath.

Turn the Key. No -- the other way
And speaking of things to be wary of, FBR Capital decided this morning that it's time for a bit of caution at Key Energy. Back in April, a bad earnings report from Key sent the stock sliding off a cliff -- and set the stage for a similar downturn at rival Heckmann (NYS: HEK) . Now, FBR is ratcheting the stock back to a "market perform" rating ahead of Key's next report, due out July 26.

Most analysts expect to see Key report $0.31 in second-quarter profits, which would be an improvement over the $0.23 earned one year ago. FBR, however, appears to be positioning itself to defend against another disappointment. With its new price target set at $9 (just half of the $18 it used to think the stock was worth), FBR is valuing the company at just seven times consensus estimates for this year, and less than six times what the company's expected to earn next year.

If that sounds a bit conservative for a firm that most analysts expect will grow earnings at 12% per year over the next five years, well, it is -- and rightly so. It's been more than two years since Key generated positive free cash flow from its business, after all. Over the past 12 months, the company has burned through more than $118 million (while reporting GAAP profits of $123 million)!

Long story short, this stock is not as cheap as it looks. FBR is right to be cautious, and you should be, too.

Fool contributor Rich Smith owns shares of Crocs. The Motley Fool owns shares of Heckmann. Motley Fool newsletter services have recommended buying shares of Kimberly-Clark.

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