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 upgrades for both Century Aluminum and Deutsche Bank . But the news isn't all good, so let's start off with a few words on why...

Someone's yelling "timber!" at Plum Creek
Forest manager and forestry products seller Plum Creek Timber beat analyst estimates (with a stick, of course) Monday. Earnings for the first fiscal quarter came in at $0.35 per share, or close to 10% better than expected. Revenue of $340 million also topped estimates.

On the other hand, while management expressed overt confidence in its "longer-term" prospects, its warning that Q2 earnings will fall short of consensus estimates, and that full-year profits could miss the mark, has analysts worried. This morning, DA Davidson downgraded Plum Creek stock to underperform -- and call me a worrywart, but I think it's right to do so.

While many investors own Plum Creek primarily for its strong dividend yield (3.2%), the simple fact of the matter is that Plum Creek stock looks pretty pricey for its growth potential. The shares currently cost about 40 times trailing earnings. Yet most analysts agree Plum Creek is unlikely to grow earnings much faster than 15% per year over the next five years; in fact, earnings over the last five years have contracted, rather than grown.

Long story short, even with superior free cash flow ($262 million versus $230 million in reported net income), the shares look expensive to me. All else being equal, this suggests they should indeed underperform the market until their valuation gets more reasonable. Davidson is right to downgrade.

Deutsche Bank ist wunderbar!
Better news greeted shareholders of Teutonic megabanker Deutsche Bank this morning. The bank reported Q1 profits of 1.7 euros yesterday, up 21% from year-ago levels. Management says it has a plan -- Strategy 2015+ -- to deliver "robust financial performance, with substantial profit growth," and it's delivering on that. Additionally, the company says it now ranks among "the best-capitalized banks in the world in our global peer group," and is well-positioned to survive another financial crisis, should one emerge.

Everyone and his brother seems to like the news. At last report, no fewer than six separate analyst houses have upgraded Deutsche, most announcing various flavors of buy recommendations. Are they right to do so?

At first glance, the upgrades look risky. Yahoo! Finance still has the company trading at 142 times trailing earnings, which seems a bit high. On the other hand, though, a poll of projections on stock research site S&P Capital IQ has DB selling for about 10.6 times what it's likely to end this year earning ($4.31 per share). These earnings are expected to more than double by 2016, and the stock's therefore selling for only about five times the earnings it might make three years from now.

While the future's never certain, if all goes according to plan, today's price looks low enough that a buyer could conceivably be looking at a "double" on his investment three years from now.

Century Aluminum is golden
Last but certainly not least -- you've probably all heard by now about the steal of a deal ("steel of a deal?") that Century Aluminum got yesterday, when it agreed to take an unwanted smelter off of Rio Tinto's hands for essentially no cost. Century will pay $61 million cash for RT's Sebree smelter... but get a business with $71 million in working capital in return.

That was good news, and sent the stock soaring yesterday. Today, Century shareholders got even more good news as Cowen & Co. announced that they think Century will soon ink an official agreement with power suppliers Kenergy and Big Rivers Electric, to obtain power at affordable prices. According to Cowen, this single agreement will suffice to make Century's Hawesville smelter profitable -- and keep it in operation.

Cowen sees this as a positive, and is upgrading the shares to buy. Me... I'm not so sure.

Right now, Century's a money-losing operation -- and hence the hesitation over Hawesville. But even next year, analysts foresee profits coming in only high enough to get the stock's P/E down to 13. With long-term earnings growth still expected to average only 7% per year, the P/E simply looks too high to justify a buy. To me, at least. Obviously, Cowen disagrees.

But they're wrong.

Motley 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.

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