Wednesday'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 heavy industrialists Manitowoc and Terex . But the news isn't all good, so before we get to those, let's find out first why one analyst thinks...

Wells Fargo is all dried up
Markets are up marginally this morning, but shareholders in one company -- Wells Fargo -- aren't sharing in the relief rally. So why are investors shunning Warren Buffett's favorite bank?

The primary reason appears to be a downgrade from Atlantic Equities. You see, the U.K.-based stock research firm cut Wells Fargo to underweight this morning, from its prior rating of neutral. But the good news here is: The downgrade doesn't look justified.

In addition to Buffett's seal of approval, you see, there are concrete, objective reasons to believe that Wells Fargo isn't deserving of an underweight rating -- the functional equivalent of a sell. Priced at only 11.5 times earnings, Wells stock is cheaper than that of rivals Bank of America or Citigroup, yet it pays a 2.9% dividend yield, orders of magnitude greater than what BofA or Citi pay.

Wells is also growing steadily, posting 16.7% compound earnings growth over the last five years, and projected to keep growing at better than 8% (perhaps much better, if history is any guide) over the next five years. While not exactly cheap, to my Foolish eye the stock looks appropriately priced for its combined total return ratio. In short, the stock may only be a hold, but it's definitely not a sell -- or an "underweight", either.

Mighty Mani
Next up, shifting gears from banking to heavy industry, is crane-maker Manitowoc. Ace investment banker Stifel Nicolaus just initiated coverage of the stock with a buy rating and a $25 price target -- and they just might be right about that.

Sure, on the one hand, Manitowoc shares look kind of expensive at $19 and change today. But consider: While the stock sells for 23 times earnings, analysts on average -- not just Stifel -- see Mani growing its earnings at upwards of 40% per year over the next five years. That's incredible speed for a company this size, and if Mani management can achieve it, the stock could be cheap at 23 times earnings or even a bit more.

Free cash flow at the firm, a primary focus of mine, isn't quite up to the level I'd like to see, lagging reported net income by a few million dollars. But even so, the price to free cash flow ratio on this one works out to less than 25 times, and even factoring debt into the picture, the worst I could say about the stock is that, at an enterprise value to free cash flow ratio of 43, it might be getting close to fair value.

Long story short: Mani's a hold at worst, a buy at best.

Terex is terrific
Of course, the stock I really like today is Stifel's other recommendation in the construction equipment space: Terex.

Like Manitowoc, Terex scored a buy rating from Stifel today (and a $44 price target). Like Manitowoc, Terex also looks expensive on the surface, with a P/E ratio that soars to 34 and beyond. Un-like Manitowoc, though, growth predictions for Terex are much more down to earth, with most analysts expecting the company to rumble along producing 10% or less profit growth over the next five years. Admittedly, that doesn't sound like much of a reason to own a stock selling for 34 times earnings, but wait -- this story gets better.

Reporting less than $107 million in GAAP profits last year, Terex actually generated more than three times as much real cash profit -- free cash flow -- as the GAAP accounting standards let it record as net earnings. As a result, the company's real free cash flow was $344 million, and its price to free cash flow ratio a mere 10.3. That may be a bit high for a 9.5% projected growth rate, but on the other hand, 9.5% growth should be a much easier target to hit than 40%.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, and Wells Fargo.


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