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 feature a pair of new buy ratings for resorts operators VailResorts and SeaWorld Entertainment . But the news isn't all good, so before we address those two, let's take a look at why one analyst thinks that...

Micron will get smaller
Shares of NAND flash and DRAM memory maker Micron are moving lower today, hurt in part by a downgrade from analysts at MKM Partners -- but not hurt too much.

Although it's technically bad news, MKM didn't do as much damage to Micron's share price as it might have, a fact resulting from two things: First, the downgrade was only to "neutral," and not the dread "sell" rating. Second, despite downgrading the stock to hold, MKM says it still thinks Micron shares are worth $13 apiece -- and with the stock still trading south of $12, that's hardly horrible news. But is MKM right? Is there still some room for upside in these shares?

Sadly, probably no. On one hand, things aren't quite as bleak as they look at Micron. While technically "unprofitable" from a GAAP-earnings perspective, Micron actually is generating a bit of free cash flow from its business. Over the past year, the company produced $235 million worth of real cash profits, and while that still leaves Micron trading for a heady 52 times FCF, at least it's a positive number.

With a long-term growth rate estimated at just over 14%, it's hard to say why anyone would want to buy Micron at these prices -- and that's probably why MKM no longer is telling people to buy. That said, a valuation this high also leaves me scratching my head, and wondering why the analyst stopped short at a neutral rating, and didn't take the next, obvious step of downgrading all the way to "sell."

Vail: Climb this mountain?
Turning now to the good news of the day: Investors in Vail Resorts are running away from today's sideways market with a 1.6% pop, courtesy of -- you guessed it -- MKM Partners again.

MKM initiated coverage of the ski resorts stock with a buy rating and an $82 price target this morning. The question is, why?

At a price tag 90 times its trailing earnings, even Vail's robust 29% projected growth rate looks too gradual an incline to justify the stock's price. And yet, Vail generated just less than $126 million in real free cash flow over the past year. That's a number nearly five times as big as the firm's $25.7 million in reported GAAP income, and big enough to work the price-to-free cash flow ratio on this one down to just 18.2.

On a 29% growth rate, MKM's right -- this makes Vail stock an attractive vacation location for investor cash.

See the world, but not with SeaWorld
If only we could say the same about Busch Gardens operator SeaWorld Entertainment, just initiated at "overweight" by Barclays.

The Brit banker thinks this stock will sell for $40 a share a year from now, but with the stock already costing nearly $36, that hardly seems enough profit potential to justify a full-throated buy recommendation. The more so when you consider that SeaWorld may never hit that $40 price at all.

Remember, this stock already costs a pretty penny at more than 36 times trailing earnings. Its robust free cash flows ($169 million, trailing) mean SeaWorld's P/FCF ratio is quite a bit less -- about 20. But with a projected growth rate of only 8% going forward, and no dividend to recommend it, the stock looks like a less attractive deal than Vail's.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Vail Resorts.


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