Thursday'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've got a new buy rating on tap for Zillow (NAS: Z) , and another for Safeway (NYS: SWY) . On the downside, Halliburton (NYS: HAL) just got drilled after reporting a decline in third-quarter profit.
Drilling down on Halliburton
Let's start with that last one, first. Yesterday, oil services bellwether Halliburton confirmed that a slowdown in drilling activity cost it a 12% decline in profits in Q3 2012. This, despite a 9% rise in income.
Why? Contrary to what you might think, the boom in natural gas production in America hasn't been great news for Halliburton. As gas supplies soar, prices fall, and producers cut back on their drilling to try to cut the supply glut. According to oil analyst Global Hunter Securities, Hally's trying to mitigate the damage by "stacking crews" -- i.e., idling equipment rather than lower rates to chase new business, to "further drive down industry pricing."
On the one hand, this is probably good for the oil services industry in general. On the other hand, Global Hunter worries that with "close to a million horsepower collectively sitting in yards across" North America, there's a lot of capacity still out there, and it's going to take a lot of new drilling, and a lot of time, to work through all that capacity.
Result: The "18.1% long-term profits growth" that a lot of investors were hoping to see from Hally has already fallen to nearly 15% in most analyst estimates. It could fall even further before all the damage is done.
Funny name, serious potential
In happier news, one stock getting the nod from Wall Street this morning is Zillow -- a company with a funny name, but serious ambitions to dominate the world of online homebuying research.
Zillow got a boost from analysts at Goldman Sachs this morning, when the Wall Street megabanker (fresh off a boffo earnings report of its own) announced it was initiating coverage of the real estate website with a "buy" rating. As StreetInsider.com described the recommendation, Goldman loves stocks "connected to the businesses that benefit most from the growth in mobile usage," and particularly stocks with "subscription models like Zillow's ... An early investor in mobile, Zillow has developed a strong value proposition for both consumers and advertisers, and that coupled with additional levers of future growth through increased agent penetration, ARPU, and vertical and product expansion puts us at Buy."
And there's no denying Zillow has the potential to make homebuying easier, and cheaper, for consumers. The problem here is that the stock itself isn't exactly cheap. Valued well in excess of $1 billion, Zillow earned just $2.3 million in profits over the past year. It's growing briskly, and generating lots of cash. But even so, the stock's triple-digit P/E ratio (444, at last count) brings two words to mind: "irrational exuberance."
A safer investment
That being the case, maybe investors are better off looking for a more traditional value stock, and one that's on sale. And if that's what you're in the market for, does Imperial Capital ever have a deal for you! This morning, the analyst initiated coverage of grocer Safeway. Predicting that this $16.50 stock will hit $23 a share within a year, Imperial thinks Safeway is priced to outperform the market handily over the next 12 months.
It may be right.
Costing less than eight times earnings, Safeway looks bargain-priced for the near-10% annualized profits growth that Wall Street expects it to produce. Quality of earnings is strong, with Safeway actually generating slightly more positive free cash flow than it reports as GAAP profits. Best of all, Safeway pays its shareholders a monster 4.4% dividend every year -- and makes enough profit that, if it were of a mind to, it could actually triple that dividend at will, and still have cash left over.
It probably won't do that, of course. In fact, with $6.4 billion in debt on its books, Safeway would arguably be better off paying down its debt-load rather than spending more money on dividends. But the cushion between profits and dividend payout means at the very least, Safeway's dividend should be rock-solid safe.
The article Thursday's Top Upgrades (and Downgrades) originally appeared on Fool.com.