Monday'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 end-of-year upgrades for Bristol-Myers Squibb and PMFG , but a downgrade for Ferro Corp .

Bad news first
My Foolish colleague Seth Jayson recently asked whether specialty chemicals maker Ferro Corp was bound to disappoint Wall Street stock analysts next quarter. At least one banker isn't waiting around for the answer, though: Investment banker Monness, Crespi, Hardt & Co. is taking the final day of 2012 to issue a downgrade on the shares.

Previously bullish on Ferro, Monness cut its rating to "neutral" today -- and it's not hard to see why. Unprofitable today, Ferro Corp costs nearly 18 times next year's earnings estimates. Valued on free cash flow, the stock's arguably even more expensive than that. Once you figure cash and debt into the picture, the company's enterprise-value-to-free-cash-flow ratio works out to a lofty 29.5 -- quite a lot for a company that most analysts believe will struggle to achieve even 12% long-term earnings growth.

With no dividend to support its overpriced stock, Monness is losing faith that this stock will outperform the market in 2013. In all honesty, they're right to do so.

Bristol could boom
In happier news, we learned today that Atlantic Equities has pulled its "underweight" rating on Bristol-Myers Squibb and upgraded to "neutral." Here, again, the news seems to justify the move.

Over the weekend, we learned that the U.S. Food and Drug Administration has approved the Eliquis anti-clotting drug being developed by Bristol and partner Pfizer . That's certainly good news for Bristol and its shareholders. Even better news: The stock is cheap.

Sure, at first glance, Bristol's near-29 P/E may not look cheap. But consider: Bristol-Myers currently generates nearly $7.2 billion in positive free cash flow annually. At a $52.7 billion market cap, that works out to a stock valuation of only 7.3 times FCF. While Bristol isn't growing all that fast with a projected growth rate of less than 3%, its beefy 4.4% dividend yield is almost certainly enough to make up for the lack of earnings growth. Combined with the low valuation, I think the low yet positive growth rate is enough to make the stock a "hold" and perhaps even enough to justify buying a few shares.

An even better case can arguably be made for PMFG, a manufacturer of specialized equipment for the natural-gas industry. This morning, Needham & Co. upgraded the shares from "hold" to "buy" on a belief that "rising energy consumption" in emerging markets will boost demand for its products.

While PMFG, like Bristol, is a company currently weak on "profit," as GAAP defines the concept (in fact, it's currently reporting negative earnings), PMFG is generating plenty of profits where it counts -- on the cash flow statement. Trailing free cash flow at the company exceeded $17 million over the past 12 months. That works out to a nice, round valuation of 10 times FCF, with expectations to grow profit at roughly 15% per year over the next five years.

When you consider further than PMFG currently has more than $60 million in the bank, giving it an even lower enterprise-value-to-free-cash-flow rating, applying a "buy" rating to this one seems the right choice.

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

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