Monday'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 big new buy rating for Tesla Motors , an even bigger sell for Joy Global , and a slightly higher caloric content for Cheesecake Factory . Let's dig in.

First up: Tesla
Elon Musk's popular electric car company won another endorsement Monday when analysts at Global Equities initiated coverage of the stock with an "overweight" (i.e., buy) rating. With the stock already up more than 200% over the past year, Global sees Tesla hitting the gas (figuratively speaking) again this year, and roaring ahead to $150 a share. But is that realistic?

After all, unprofitable based on its trailing-12-months' results, Tesla already sells for more than 100 times what it's expected to earn next year. Global-E's new price target suggests that a 150 times multiple to those expected earnings is more appropriate. And yet, that's nearly five times the 33% long-term average annual profits growth rate that analysts project for Tesla stock -- a rate it's hard to ascribe real meaning to, given that Tesla doesn't currently have any profits to grow.

Free cash flow at the firm... well, there isn't any of that, either. Rather, Tesla burned through more than $380 million in negative FCF over the past year, so it's actually burning cash even faster than it can tally up the burn and report it as GAAP losses.

Long story short, seeing as Tesla has tripled in price despite losing money over the past year, there's every reason to suspect Global Equities is right, and the stock will tack on 50% more in stock price gains over the coming year. It doesn't mean that investors should pay these high prices, however -- because eventually, reality is going to catch up, and even this electric car stock will run out of gas.

No Joy
Relative to Tesla's cash-burning ways, you might think Wall Street would love a free-cash-flow-positive company like Joy Global a bit more -- but you'd be wrong. This morning, analysts at Axiom Capital initiated coverage of the mining equipment maker with a sell rating, and for one simple reason: The worm has turned on the mining supercycle.

As Axiom explains, "global mining CAPEX grew more than +27% compounded during the last mining supercycle ('01-to-'12)." But it's expected "to fall an unprecedented -19% compounded '12-to-'15 due mainly to deteriorating commodity market fundamentals." Axiom notes that Joy's sales tend to closely approximate gains and losses in overall global mining equipment spending -- on the order of 98% correlation. As a result, what's true for the global industry should be true for Global as well -- and this means a steep, sustained falloff in revenues over the next few years. Axiom notes that last time the mining industry got unpopular, Joy, "known then as Harnischfeger Industries ... went bankrupt."

Ominous words indeed. But you don't even have to buy this doomsday scenario to know that all is not well with Joy Global.

Right now, Joy's generating real cash profits of only $0.32 for every $1 it reports in earnings. So while the stock may look attractive at a "P/E" ratio of less than 8, it looks less attractive when viewed as a 24 price-to-free cash flow stock. With long-term earnings growth projected at 9% over the next five years, the stock looks overpriced to me. If Axiom's right, and earnings go down 19% annually, instead of up 9%, the stock could be even riskier than it already looks.

May I see the dessert menu, please?
So... sour news all around so far. Let's end, then, with something a bit sweeter. Cheesecake Factory scored a hike in price target from analysts at Miller Tabak today. Miller's saying the stock, currently priced under $42 a share, is worth closer to $45 -- and recommends buying it.

I don't agree necessarily, but I'm at least not as worried about this stock falling as I am about Tesla and Joy. Here's why:

Priced at 22 times earnings, Cheesecake Factory looks expensive for its 14% growth estimates. But the stock's not quite as bad as it looks. Unlike Tesla, and unlike Joy Global, Cheesecake generates more free cash flow -- $114 million -- than it reports as net income -- just $103 million. It's also got a rock-solid balance sheet, showing $31 million more cash than debt, and to top it all off, Cheesecake Factory pays its shareholders a modest 1.2% dividend.

Mix it all together, stir well, and bake at 350 degrees for 15 minutes and here's what I think you get: Cheesecake Factory stock costs about 18.5 times the amount of cash it generates in a year. Between the dividend and the growth rate, I think it's modestly overpriced today. I'd want to see the stock price fall by about 20% or so before buying in at current growth estimates, or else I'd want to see evidence that the company can keep growing at the 22% rate it grew profits last quarter -- sustainably, and over a multiyear time frame.

In short, the stock's not well-enough "done" for my taste right now, but reset the timer and check back in a few weeks. So far, this is the most appetizing analyst rating Wall Street has put on the menu today.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors.


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