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 upgrades for both Viacom and Seagate . But the news isn't all good.

A slow day for Active Network
It's an "up" day for Wall Street so far, but Active Network shares aren't sharing in the joy today. Earnings are due out after the close, but yesterday's announcement that Active CEO Matthew Landa is retiring probably doesn't bode well for the numbers.

Perhaps recognizing this, analysts at RBC Capital are taking the "discretion is the better part of valor" approach to the stock, and downgrading Active to "sector perform." This seems to me a prudent move -- at least until we get a look at Active's latest numbers.

Because to be perfectly honest, the numbers we've got to work with right now don't look so good. Active is unprofitable on a trailing-12-month basis. It's priced north of 25 times what analysts hope it will earn next year. And while the stock's projected 25% annual growth rate may make the stock look fairly priced if the numbers come out looking good tonight, you really have to wonder: If the numbers are going to be good, then why is the CEO jumping ship right before they come out?

Tune in to Viacom?
In happier news, Viacom announced yesterday that its earnings were down 18% from last year in Q1, coming in at just $0.96 per share. Revenue was down 6% as well. That's not keeping analysts at Wunderlich Securities from upgrading the stock (to "buy"), however.

Why not? Well, consider: At 13% annualized growth projected over the next five years, Viacom looks pretty nicely priced at less than 16 times earnings, and a 1.7% dividend yield. Free cash flow at this firm is generally strong, exceeding reported "net income" as calculated under GAAP in each of the past three years.

As a result, while Viacom's revenue may be down at bit, and its profits down quite a bit more, the company as a whole still looks attractive, and its stock, bargain-priced.

Viacom shares have beaten the market by more than 20 percentage points over the past year. At today's prices, they look likely to keep on beating the market.

Opportunity knocks at Seagate
Last but not least, hard disk drive maker Seagate beat earnings estimates yesterday, reporting $1.26 per share in profits where only $1.15 had been expected. Revenue, too, topped expectations. This outperformance has analysts at Needham upgrading the stock (again, to "buy") in response, praising Seagate's "solid quarter and impressive cash flow," and setting a price target of $45 per share.

Given that $45 is only about $5 more than what the shares cost right now, that doesn't seem an unrealistic target. Indeed, with Seagate shares currently fetching just five times trailing earnings, and perhaps seven times what the company is expected to earn next year, the valuation looks pretty cheap, and should have room to run...

The key worry here is that most analysts now think Seagate will see its earnings shrink over the next five years, with profits falling 7% annually on average. However, given that Seagate's trailing results now show free cash flow exceeding reported income quite handily (as opposed to lagging net income, as was the case last year), it seems the company's doing quite a bit better than expected.

Long story short, should Seagate surprise the skeptics, and find a way to keep growing its earnings where everyone expects it to contract, the stock really could be as cheap as it looks -- and Needham could be right to recommend it.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends The Active Network.


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