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 a pair of retail downgrades for shopping center staples Bed Bath & Beyond and PetSmart . But the news isn't all bad, so why don't we end the week on a bright note, and look first at why one analyst thinks...
comScore deserves a touchdown
Investment banker Cantor Fitzgerald upped its rating on market researcher comScore to "buy" this morning, predicting the stock will hit $20 within a year. As StreetInsider.com reports today, Cantor is endorsing comScore because "the company seems to be gaining traction with new offerings, including validated Campaign Essentials (vCE), Digital Analytix, and Media Metrix Multi-Platform."
Even so, that's not much of an endorsement -- I mean, a "buy," but only a $20 price target? After beating earnings by a penny yesterday, comScore shares have already surged 16% to north of $18. That means there's only 8 percentage points' worth of daylight left between where the stock's at now and where Cantor hopes it to be 12 months from now -- less than the average annual gain on the S&P 500. On the other hand, Cantor may actually be a bit too conservative in its price target.
At first glance comScore's stock isn't much to look at. Despite "beating earnings," the company still did lose money last quarter. Net losses for the past 12 months now amount to $13 million. But here's the thing: Despite what GAAP might have you believe, comScore actually did generate lots of real cash profit -- $43.5 million in free cash flow for the past year.
This means the stock now sells for only a bit more than 14 times trailing FCF. What's more, with plenty of cash in the bank, comScore's enterprise value-to-free cash flow ratio is even lower -- just 13. So even if comScore grows its FCF at just a fraction of analysts' consensus 49% annualized "profits" growth rate, the stock still looks cheap to me at today's prices.
Bed Bath beyond fair value
Not so with Oppenheimer's twin retail downgrades today. Let's turn first to Bed Bath & Beyond, subject of a downgrade to "perform" (aka hold) at i-banker Oppenheimer.
After gaining 22% since the beginning of March, Bed Bath is still a couple of dollars shy of the $71 price target that Oppy originally set for it. The analyst is leaving that price target unchanged, but cutting its rating one notch -- and I think it's right to do so.
Why? Well, first and most obviously, Oppy's prediction of strong short-term gains in the stock has basically played out as planned already. There's certainly something to be said for taking profits once you've earned them. And to be honest, I've serious doubts Bed Bath has any more profits in store.
Priced at 15 times earnings, and with weak free cash flow that doesn't fully back up reported earnings, Bed Bath shares look slightly overpriced to me, based on their 12% projected earnings growth rate. With little upside left in the shares, but overvaluation remaining only moderate, I think the analyst is making the right call here. Bed Bath's a hold at best, and no longer a buy.
PetSmart must sit, stay
Bed Bath isn't the only retailer in Oppenheimer's doghouse, however. This morning also saw the analyst downgrade shares of pet supplies superstore PetSmart -- and once again, to "perform."
Like Bed Bath, PetSmart shares have enjoyed a nice run lately, if not quite as long or as steep. And yet, with only 10% since early April, I actually think there might be more potential in these shares than we see at Bed Bath.
Consider: 19 times earnings isn't a huge price to have to pay for PetSmart's 15% growth rate and 1% dividend yield. Plus, in contrast to Bed Bath, PetSmart is actually a pretty smart free cash flow producer. Over the past year, it's generated more than $514 million in cash profit, versus reported net income of less than $390 million.
Fact is, if you value the company on its free cash flow, PetSmart's price-to-free cash flow ratio of less than 14 actually appears underpriced for 15% growth and the 1% divvy. In short, while the upside here may not be as great as we could see at comScore, it's a heck of a lot better than what Bed Bath offers, and quite possibly worth buying into.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond and PetSmart.
The article Friday's Top Upgrades (and Downgrades) originally appeared on Fool.com.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.