Tuesday'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 Shoe Carnival , but downgrades for each of ExxonMobil and Universal Technical Institute .
Shoe Carnival stumbles, doesn't fall
No two ways about it: Shoe Carnival's fourth-quarter earnings report yesterday looked like a disaster. Revenues dropped 16% sequentially to an "adjusted" $0.16 per share, while earnings were down 73%. The dismal results only met analyst earnings estimates, and actually fell short on revenues. Meanwhile, same-store sales are projected to decline as much as 4% year over year in the current quarter.
And yet, this morning, analyst Standpoint Research looked at Shoe Carnival's results and called the stock a buy. With shares that stumbled not at all on the earnings news, actually perking up on the upgrade and trading 1% higher today, it appears investors agree. Are they right?
I'm not so sure they are.
I mean, on one hand, yes, priced at roughly 14 times earnings, paying a 1% dividend, and projected to grow at 15% annually over the next five years, Shoe Carnival shares do look attractive at first glance. And if fourth-quarter results looked poor in comparison to third-quarter results, the year-over-year picture's not so clearly bad. While earnings were down from fourth-quarter 2011, sales, at least, were up a good 13%.
Still and all, for me the story here all comes down to cash production -- or rather, the lack of it. Even if Shoe Carnival is still reporting decent "earnings," the company's free cash flow number has turned firmly negative. FCF at the company has been declining for three years running, and last year, for the first time in eight years, Shoe Carnival burned cash rather than generating it. Personally, that's not a trend I want to invest in -- or a stock I want to buy.
Could it be that the right way to invest today is to buy stocks that Wall Street tells you not to buy? If you think that's the case, then you might want to take a look at good old ExxonMobil, subject of a downgrade to "perform" at Oppenheimer this morning. Oppy may be worried by the effects of a big pipeline rupture in Arkansas last week. But investors should focus on whether the stock itself is still intact.
Priced at just 9.4 times earnings, Exxon shares are pegged for only 3.5% long-term earnings growth. On the other hand, they pay a decent dividend (2.5%), and the company's a rich producer of free cash flow -- $21.9 billion over the past 12 months.
Is that good enough, though, to justify owning the stock? Maybe -- if all you're looking for is a steady income stream paying out more than the local bank will give you for holding on to your savings account. Growth-wise, though, I still see Exxon's potential as limited. Even with its strong cash production, this stock costs close to 19 times annual free cash flow, after all. When you get right down to it, therefore, I actually agree with Wall Street on this one. As the preeminent producer of a product the world needs to keep running, Exxon may not necessarily be a stock you want to sell -- but it's simply too expensive to recommend buying anymore.
A Universal, Technical... sell rating
I find myself even more in agreement with today's featured sell rating -- this one hailing from the analysts at Argus Research, and targeting vo-tech educator Universal Technical Institute. The company just lost backing last month from a bank that had been providing educational loans to its students. But the real problem here is the valuation.
Universal Technical, you see, costs a whopping 39 times the profits it earned last year. It's even more expensive relative to next year's projected profits -- 55 times the forward P/E. And it's even more expensive relative to the real cash profits that it's not earning. Free cash flow at the firm, which in recent years had soared as high as $30 million, is now a miserable negative $1.3 million.
Although the company's generous 3.2% annual dividend yield may tempt dividend investors, the risks here look simply too great to justify a buy recommendation -- or even a hold. Universal Technical is now rated a sell by Argus, and it deserves the failing grade.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Tuesday's Top Upgrades (and Downgrades) originally appeared on Fool.com.