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, our headlines include an upgrade for Anheuser-Busch , but a downgrade for Boston Beer , while Limited Brands gets a lower price target.

Is this Bud really for you?
Let's start off with the "good" news. Suds czar Anheuser-Busch disappointed investors yesterday with a fourth-quarter report that showed it missing earnings while only meeting expectations on revenue. Nevertheless, Credit Suisse pronounced the news good enough this morning, and announced it's upgrading Bud to outperform. Is that the right call?

I don't think so, and I'll tell you why. On the surface, Bud looks vastly overpriced with a P/E ratio of nearly 21, and a projected growth rate of less than 8%. The company's a strong cash producer, true. But even with $10 billion in trailing free cash flow, the price-to-free cash flow ratio on this one only drops to 15. And if you ding the company for its debt load (nearly $37 billion net of cash), the EV/FCF ratio goes right back up to nearly 19.

Any way I look at the stock -- and even factoring in its modest 1.4% dividend yield for good measure -- Anheuser-Busch looks vastly overpriced for its prospects. Credit Suisse may think this one will outperform the market, but I'd bet on the opposite.

Sam Adams: Brewer, patriot, lousy stock
One thing I'll say in Bud's defense, though: At least it's not Sam Adams. Living proof that a better product does not necessarily equal a better investment, Sam Adams-brewer Boston Beer costs half again as much as a share of Bud when valued on its P/E -- 35.5. But even worse than that, Sam generates less free cash flow than it claims as GAAP earnings, with the result that its price-to-free cash flow ratio works out to a staggering 68 times.

Even with a superior growth rate -- a rate, by the way, that got called into question last week when Sam warned that fiscal 2013 earnings could come in as low as $4.70 a share, versus the $5.05 Wall Street was expecting -- 68 times earnings is way, way too much to pay for this stock.

It's not just me saying that, either. This morning, analysts at Williams Capital cut their rating on the stock to "market perform." My only quibble? Williams didn't go nearly far enough with its downgrade. If there's any beer stock you should be selling today, it's Boston Beer.

Limited potential
Last but not least, we come to Limited Brands -- a stock I'd love to own at the right price, but a stock I warned Yahoo! Finance readers to avoid in a column published earlier this month -- and before earnings came out.

So far, that looks like a bum call. Since that column ran, Limited shares are actually up almost 2%, helped in no small measure by yesterday's report of fourth-quarter earnings that exceeded analyst estimates by $0.02. Limited's share price strength may not last, however.

Reporting earnings yesterday, the company also laid out its guidance for the current quarter, and the coming year, you see. And according to the company, first-quarter 2013 earnings could come in as low as $0.40 per share (versus analyst estimates of $0.51). Full-year earnings, which Limited warns could be as low as $2.92 per share, would miss the consensus number ($3.24) as well. Indeed, even the top ends of Limited's guidance range -- $0.45 for the quarter, $3.12 for the year -- fall significantly short of consensus estimates, suggesting an "earnings miss" is all but assured.

No wonder, then, that analysts at Canaccord Genuity cut their price target on Limited to $42 this morning, and declined to endorse the shares. Fact is, at a P/E ratio of 20 times earnings, and a growth rate of only 11.5% (a growth rate that, once again, has been called into question by the company itself), Limited looks a whole lot more like a sell than a buy.

So tic-tac-toe... that makes three sells in a row.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Boston Beer. The Motley Fool owns shares of Boston Beer.


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