Tuesday's Top Upgrades (and Downgrades)

Updated

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 run the gamut from e-commerce to banking to aerospace, as two analysts initiate new buy ratings for eBay (NAS: EBAY) and Bankrate (NAS: RATE) , while a third storms the defense sector, and finds a bargain at Raytheon (NYS: RTN) .

Time to "snipe" eBay?
First up, Needham & Co. sees big things in store for eBay's PayPal unit -- hardly an uncommon opinion. Where Needham differs from the rest of Wall Street, however, is in its belief that eBay's Marketplaces unit can effectively compete with the juggernaut that is Amazon.com (NAS: AMZN) .

Predicting "solid Marketplaces growth" of at least 12% in 2013, Needham argues that eBay is well-positioned to raise guidance in the near future, an event that would almost certainly be hailed with additional upgrades on Wall Street -- but even if this is the way things play out, investors should be cautious about following the Street's lead on this one.


Priced at nearly 17 times earnings, and with no dividend to support the share price, eBay would have to grow significantly faster than the expected 13.2% annualized growth pace in order to justify its share price on a PEG basis. Even worse, eBay's actual free cash flow is a mere shadow of its GAAP-reported "earnings." Indeed, FCF for the past 12 months backed up barely 61% of the company's claimed net income. Long story short, as expensive as eBay looks on the surface, it's an even worse value down beneath.

Run from Bankrate
On the other hand, at least eBay isn't Bankrate, Canaccord Genuity's contribution to the list of buy-rated stocks this morning. Make no mistake -- Bankrate isn't as bad as it looks. Yahoo! Finance shows the company as unprofitable, and therefore tarred with a P/E ratio of "N/A." But in fact, the company generated a respectable $56 million in free cash flow last year. Even with a 22.5% growth rate, that's probably not enough to justify the high share price, but it's enough to at least give the stock a positive P/FCF ratio (albeit, at the nosebleed level of 32 times).

Canaccord thinks the price is justified by the company's "defensible position as the most popular
destination for consumer financial information on the Web," a position that has won Bankrate a "loyal, repeat-customer base." Until Bankrate learns to milk these loyal customers for more cash, however, the stock remains overpriced.

Raytheon: leading light in defense
Finally, we come to defense juggernaut Raytheon -- a stock anyone would be hard-pressed to call "overpriced." Resuming coverage of the defense sector today, Stifel Nicolaus quickly tossed aside such obvious names as Lockheed Martin and Northrop Grumman before alighting on Raytheon as the best bargain in defense.

At just 10 times earnings -- high-quality earnings, backed up by free cash flow that equals 95% of reported income -- and with a forward growth rate approaching 9%, the stock is at worst fairly valued today. Combine this discounted stock price with a strong dividend yield of 3.6%, and Raytheon actually looks like quite the bargain.

Fool contributorRich Smithholds no position in any company mentioned. The Motley Fool owns shares of Raytheon, Lockheed Martin, Northrop Grumman, and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com and eBay.

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

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Advertisement