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'll be looking at why Paccar (NAS: PCAR) got sent packing this morning, while AIG (NYS: AIG) and Google (NAS: GOOG) got their price targets hiked.
Bad news first
We begin with Paccar, recipient of a downgrade to "neutral" this morning at the hands of RW Baird. At 11.5 times earnings, and a 13.5% projected growth rate, Paccar certainly doesn't seem overpriced. Regardless, Baird says the truckmaker's stock is likely to be stuck in neutral over the course of the next 12 months, actually declining a few cents in value, and ending up at $39 a share. Why?
There are a couple of reasons to think Baird may be right about this one. For one thing, while "11.5 times earnings" certainly sounds cheap enough, it doesn't take into account the fact that Paccar carries nearly $5 billion in net debt on its books. Factor that into the valuation, and the stock's actually selling for more than 15.5 times its "enterprise value."
And the situation could be even worse than that. You see, while technically profitable and booking "earnings," Paccar actually doesn't generate any real cash profit these days. To the contrary, free cash flow at the firm came to negative $402 million over the past 12 months. In short, not only is Baird right about Paccar not being a "buy" anymore -- it might even be a sell.
In happier news, today also saw a couple of positive developments for stocks, megainsurer AIG among them. This morning, analysts at UBS lifted their price target on the stock from $34 to $36 in the wake of AIG's successful repurchase of shares from the U.S. Treasury.
Why did AIG buy back its stake? Why does UBS like the move? The numbers tell the tale.
Right now, AIG sells for an ultra-low P/E ratio of 3.0 -- a price almost too cheap to believe. But, even if you don't believe it (or don't believe the company can repeat this year's profits and keep its P/E so low), analysts' projections for next year's earnings still have the stock trading for a forward P/E of less than 10.
If AIG succeeds in hitting its targets, and further manages to deliver the 20% annual earnings growth rate that Wall Street is expecting, then the stock's a bargain at any P/E in the single-digits. The only real mystery here is why UBS didn't take the next logical step, and assign a full-fledged "buy" rating to these very cheap shares.
It's certainly cheaper than our other hi-profile price target hike of the day. This morning, Canaccord Genuity cited strong trends in ad pricing as supporting a higher valuation on Google, and increased its price target more than 20%, to $850. But, try as I might, I just can't justify the price.
Google, you see, is expected by most analysts to be headed for 15% annual earnings growth over the next five years. That's certainly a respectable pace, but it may not be fast enough to support the high price Google shares already command.
Consider: With $12.8 billion in annual free cash flow (FCF), and an enterprise value (EV) of $211 billion, Google currently sports an EV/FCF ratio of 16.5 -- just a skosh over what many value investors would like to pay for a 15% grower. Meanwhile, a more traditional "PEG" valuation of the stock looks even less attractive, inasmuch as the company's $11.1 billion in net income gives Google a P/E ratio of more than 22 -- significantly higher than the growth rate. So depending on how you look at it, the company's at best slightly overpriced, at worst vastly overvalued -- but in no case any sort of a bargain.
Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Google and American International Group. Motley Fool newsletter services have recommended buying shares of PACCAR, Google, and American International Group.
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