Friday'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 upgrades for both industrialist Aixtron and fashionista bebe stores . But the news isn't all good, so let's start off with a few words on...
Famous Dave's famously bad day
The week's ending on a sour note for Famous Dave's shareholders, who awoke this morning to find their stock downgraded -- to sell! -- by analysts at Feltl & Co. For anyone who owns the stock, that's a development about as welcome as finding a fly in the cole slaw. But was the downgrade justified?
Earlier this week, Dave delivered a profit miss and a revenue shortfall, relative to Wall Street expectations. Sales were down more than 2% year over year in Q1, with same-store sales at franchised locations in particular down more than 6%. Profits, on the other hand, practically evaporated -- down from $0.11 a share a year ago to a mere penny today.
Investors seemed happy to forgive all this, however, and today, Dave's shares actually sell for a bit more than they did before all the bad news came out -- but I think investors need to take a closer look at the ingredients here. Dave pays no dividend. It's loaded down with $21 million more debt than cash, and it sells for nearly 23 times earnings, despite being pegged for just 12% annual profits growth over the next five years.
Granted, Dave's is generating a fair amount of cash, with $6.9 million in positive free cash flow reported for the past 12 months . But even so, the nicest thing I can say about the stock is that with a price-to-free cash flow ratio of roughly 12, Dave's might be fairly priced for a growth rate of 12% -- but not for 90% profits shrinkage. For this stock to have any chance of success, Dave simply must reverse the results we saw this week, and start growing again.
Aixtron: Not as bad as it once was
Next up, we have an upgrade from Northland Securities, which this morning removed its underperform rating from LED manufacturing equipment maker Aixtron and upgraded to market perform.
Why? Well, the high-profile announcement that ANN had managed to cut its carbon emissions by 20% in just a few years, largely by installing LED lighting in its stores, may have perked up companies' interest in LEDs recently. In theory, at least, this should result in greater demand for the widgets and greater demand for the machines that make the widgets, which Aixtron itself manufacturers as well.
Still, it seems a tad optimistic to be upgrading Aixtron on theory and hope, what with the stock still deeply unprofitable, burning cash , and priced at a staggering 59 times the profits it might earn next year. Northland might think the stock's down as far as it will go, and that it's time to stop selling.
Me, I'm not convinced.
Has bebe hit bottom?
Speaking of stocks in search of a bottom, investment banker Janney Montgomery Scott upped its rating on bebe stores to buy today. StreetInsider.com has the analyst pointing to "increased confidence" in management, "improved product," better "inventory management" as signs of better days ahead for bebe. Meanwhile, Janney sees bebe's big bank account limiting "downside risk" to the stock.
In general, the analyst thinks "the worst is behind for BEBE, and we expect trends to improve moving forward." But once again, I'm not so sure Wall Street is right about this.
On the one hand, sure, bebe has a fair amount of cash in the bank -- $157 million in greenbacks and not a lick of debt. On the other hand, though, at last report the company was still burning through its cash at the rate of $48 million a year. Revenues are still falling. Profits have proven elusive at bebe, and most analysts see losses continuing into 2014 at least.
Long story short, while it's certainly high time for a turnaround at bebe, I'm not seeing any evidence that it's happening just yet.
The article Friday's Top Upgrades (and Downgrades) originally appeared on Fool.com.Fool contributor Rich Smith has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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