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, our headlines include an upgrade for Coinstar and a new buy rating for Deckers Outdoor . And on the bad-news side...

Mondelez International gets a downgrade
Let's tackle that bad news first. Bright and early Wednesday morning, analysts at Argus Research issued a downgrade on Kraft spinoff Mondelez International . But why?

Priced at 13.8 times earnings, Mondelez shares trade for about the same valuation as prior partner Kraft. They pay a 4.5% dividend yield, whereas Kraft pays none. Perhaps best of all, analysts project 12.1% annualized earnings growth for Mondelez, a rate nearly twice the 6.3% expectation for Kraft.

On the other hand, it's not all good news for Mondelez. For one thing, the company brings with it a heaping helping of debt -- $26 billion, net of cash on hand. (For its part, Kraft's debt pile is a slightly less dizzying $9.3 billion tall.) As a result, if you were to factor debt into the equation, Mondelez's price (plus debt)-to-earnings ratio would actually come out closer to 22 than to 14. Even with 12% growth, and even with a 4.5% divvy, that's a pretty pricey proposition. Argus is right to shy away.

Up on Deckers
Next on deck: Deckers. The Uggs bootmaker sports a shiny new buy rating this morning, courtesy of Janney Capital, which just initiated coverage with a $50 price target., which reported the rating, quoted Janney as pooh-poohing the firm's "recent challenges" as "transitory." According to the analyst, a combination of fashion trends, price elasticity, and higher costs for sheepskin is hurting Deckers' profits in the short term. In the longer term, however, Janney says Deckers' brand is far from "death." To the contrary, the analyst says Deckers "maintains brand relevance." It's extending its brand into new categories of product, hoping to see sheepskin prices decline in 2013, and boasts a solid financial position that should see it through to the eventual turnaround.

Personally, though, I'm not sure where Janney is getting all this. While Deckers' financial position -- $62 million cash, $275 million debt -- isn't exactly critical right now, it's far from ideal. Net debt at the firm makes up more than 15% of Deckers' market cap. Meanwhile, even as Deckers' income statement purports to show $155 million in annual "profit," the firm's actual performance over the past year (as reflected in the cash flow statement) shows cash burn of more than $7 million.

Result: Free cash flow negative, and debt-positive, Deckers isn't nearly the bargain Janney makes it out to be. Not yet, at least.

Drop some money on Coinstar?
Last but not least, we come to Coinstar, maker of the omnipresent coin-exchange machines in the front of your local grocery store, and owner, too, of the Redbox brand of DVD rental kiosks.

Coinstar scored an upgrade to "outperform" from Northland Securities this morning, alongside a price-target hike to $62. And finally, here, we find an analyst upgrade I can support.

Priced at less than 11 times earnings, growing these earnings at nearly 17% annually, and with a balance sheet nearly clean of all debt, Coinstar looks cheap from the get-go. But in fact, it's even cheaper than it looks. Coinstar, you see, reported earning only $159 million in GAAP profits over the past year, but in fact, it generated $279 million in real free cash flow.

Result: At a price-to-free cash flow ratio of just 5.5, with percentage growth prospects nearly three times that number, Coinstar is decidedly cheap today. Feel free to drop some money on it, just like Northland says.

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above.


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