Friday'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, our top trio of newsmakers feature newly buy-rated Garmin (NAS: GRMN) , a 20%-off sale at Zumiez (NAS: ZUMZ) , and a promise of better pricing at Costco (NAS: COST) . Let's try them on for size.

Garmin finds a friend
First up, many folks have already written the obituary for Garmin, a dedicated GPS company in a world that's largely switched to smartphones for its navigation needs. This morning, however, one analyst came out and declared there's still a future for Garmin.

Sure, pure-play car GPS devices may be a dying market, but aside from "auto," Wells Fargo argues, Garmin is "showing solid growth in all of its [other] segments." Quoting the analyst as calling automotive "portable navigation devices" a "headwind," reports that Garmin's current share price already "fully reflects the state of the PND business and doesn't fully reflect the value of [Garmin]'s other businesses and net cash."

And Wells may be right about that. With a 4.4% dividend yield and a 13.4 P/E ratio, Garmin shouldn't have to grow much faster than the high-single-digits to make its stock "buyable." So with most analysts predicting 8.6% long-term annual profit growth at the company, it does look like Garmin's found its way into the value-stock ballpark. Meanwhile, the company's strong cash production (about 23% ahead of reported net income) and already tall cash pile (more than $1.3 billion, without a hint of debt) suggest the stock could be even cheaper than it looks.

While hardly the stock for growth seekers, Garmin looks like a fine candidate for any value investor's portfolio.

Street has trouble pronouncing "Zumiez"
Speaking of companies where growth has become an issue, specialty clothier Zumiez beat earnings handily in yesterday's report... but then flubbed the guidance test, warning that pro forma earnings will fall significantly short of analysts' hoped-for $0.56 per share in the current quarter.

The warning has analysts ducking and running for cover, with KeyBanc cutting earnings targets for the year, Wedbush slicing $4 off its target price (now $30), and Janney Montgomery Scott making the cruelest cut of all, a reduction in target price all the way down from $36 a share to just $29 -- 20% less profit than previously promised. Seeing that Zumiez is already selling for close to $29 post-sell-off, though, does this mean it's safe to hold onto the stock for another year? Not necessarily.

Zumiez, you see, sells for roughly 23 times earnings based on trailing-12-month results. (It's even more expensive when valued on free cash flow, of which it has less than reported net "earnings" might suggest.) Long-term estimates call for 20% earnings growth at the retailer, but that's still a bit short of what you'd need to call the stock fairly priced, and it's a number that could get rolled back if Zumiez follows through on its threat to earn less than expected this quarter.

In short -- down 10% on today's trading, Zumiez may have further to fall.

Costco could cost more in a year
Similarly, investors should think twice before jumping into Costco after yesterday's bullish report of 6% August same-store sales growth. For one thing, while certainly respectable, 6% is actually a deceleration from the 9% SSS growth rate that Costco averaged over the past year. For another, the analyst that upped its price target on Costco this morning -- McAdams Wright Ragen -- thinks the stock will hit $98 a share a year from now. Problem is, that's what Costco costs today (give or take a few pennies).

MWR says the stock's still worth holding onto, mind you. But at a share price of 27 times earnings, Costco costs a pretty penny for the 13% long-term earnings growth that Wall Street expects from it. True, unlike Zumiez, Costco is a superior cash generator. It churned out $1.9 billion in free cash flow over the last 12 months, even as it only claimed $1.6 billion of this money as GAAP "earnings." Unfortunately, even this level of cash creation isn't strong enough to justify the current share price.

Long story short: Costco's a hold at best -- and at these prices, might even be a sell.

Fool contributorRich Smithholds no position in any company mentioned. The Motley Fool owns shares of Costco Wholesale.Motley Fool newsletter serviceshave recommended buying shares of Costco Wholesale.

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