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 downgrades for both Children's Place and Boingo Wireless , but a higher price target for Crocs . Don't mind the gators, though. Let's wade right in, beginning with a look at why...

Crocs are stylin'
An earnings beat by plastic shoemaker Crocs last week is translating into a higher price target on Wall Street this morning. On Thursday, Crocs announced 10% fourth-quarter sales growth on the back of a big jump in European and Asian sales. Analysts at Imperial Capital say the stock "is well positioned to generate double-digit sales and EBITDA growth over the coming years given continued efforts to broaden its product assortment, aggressively grow its specialty retail store footprint, further develop its Internet business, and move into new geographies globally."

Imperial points out that Crocs sells for a "significant" discount to the P/Es found at other shoemakers. (Nike, for example, costs more than twice Crocs' 10.2 P/E, while the average company in this industry costs about 12 times earnings.)

Personally, I wasn't thrilled with Crocs' report, which showed weakened free cash flow -- not a trend I like in stocks that I own. Also, at a 10.2 P/E valuation, and a 10% projected growth rate, it's hard to see much value here. But with Crocs' balance sheet showing $304 million more cash than debt, and Imperial projecting 12% earnings growth both this year and next, Crocs could still surprise us. The cash balance means Crocs' ex-cash P/E ratio is about 24% less than its unadjusted P/E. And the growth rate -- assuming Imperial is right about it -- suggests Crocs could be growing about 20% faster than most investors are counting on.

Result: The potential for significant outperformance in the stock, and a higher price target from Imperial.

Children's Place is lowered
Less optimistic is the new rating on Children's Place this morning, as it gets downgraded to neutral by Janney Montgomery Scott. Janney warns that "lower-end consumers" are getting pinched by higher taxes and stagnant earnings. Combine this with "aggressive sectorwide discounting" and "deeper" promotions by rivals and Children's Place alike, and Janney sees the company ending this year with only $3.48 per share in profit -- down 5% from what the analyst was previously projecting.

With Children's Place shares currently costing 17.5 times earnings, that's a disturbing prediction. Most analysts already see the stock scoring only 8% annual earnings growth over the next five years, which suggests the stock is already overpriced. Slow that growth rate further, as Janney now advises, and a pricey stock becomes even more so.

That said, I don't think there's any need to panic here. No matter what the GAAP numbers say, Children's Place is still doing a fine job of churning out cash -- $117 million in free cash flow over the past year, or nearly twice what its income statement suggests the stock is "earning." At a $1.1 billion market cap, this works out to about a 9.3 times price-to-FCF valuation, which, while a bit rich for an 8% grower, isn't unreasonably high.

Long story short: Janney's new neutral rating looks about right to me. But there's no burning need to rush right out and sell the stock.

Boingo loses its bounce
If onlyI could say the same about the last, and least, stock on today's list: Boingo Wireless. Last week, the provider of mobile Wi-Fi hotspots at places like airport terminals announced fourth-quarter earnings that missed Street estimates by half -- just $0.03 per share earned, versus $0.06 expected.

The company compounded the miss with a projection of a potential loss in the current first quarter 2013, followed by a full-year profit of only $0.03 to $0.08. That means that this stock, which currently reads at "31.2" for its P/E on Yahoo! Finance, and carries a forward P/E ratio of 39.3, could potentially cost you as much as 223 times what it earns this year, if earnings come in at the low end of guidance. Pretty pricey.

On the plus side, it's true that Boingo often generates free cash flow in excess of reported net income, so the picture may not be as bleak as it looks. But analysts at Ladenburg Thalmann don't seem inclined to give Boingo the benefit of the doubt. This morning, they downgraded the stock to neutral, and assigned a $6.50 price target. (That's about $0.19 below where the stock trades today.)

So far, Boingo shares have already lost 25% of their value over the past 52 weeks, so selling at this point is going to hurt. Still, when you weigh the risks of potentially getting stuck owning a triple-digit P/E stock (growing at less than 20%) versus the potential rewards of finding out (once Boingo files its 10-K report containing updated cash flow information) that the stock isn't quite as overpriced as it looks, I still think the negatives outweigh the positives. If I were an owner, I'd cut losses and abandon ship on this one today.

Fool contributor Rich Smith owns shares of Crocs, but he holds no other position in any company mentioned. Motley Fool newsletter services have recommended buying shares of Nike. link

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