Monday's Top Upgrades (and Downgrades)

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 upgrades for both old-tech Dow Chemical and new-tech Riverbed Technology alike. The news isn't all good, however, so before we get to those two, let's find out why it may be...

Time to bury Agrium
Like the rest of thefertilizer industry, shares of Agrium got punished last week on news that the breakup of the global potash duopoly might put a crimp in its business. More diversified Agrium didn't fare as poorly as potash-centricPotashCorp and Mosaic . Its shares still took a hit of 9%, however, and are falling again this morning on news that analysts at Stifel Nicolaus have decided to throw in the towel and remove their buy endorsement. But was that the right call?

Probably... yes. But not for the reason you might think.

Producing each of nitrogen, phosphate, and potash fertilizers, among other things, Agrium's business is split at least three ways at both the retail and wholesale levels. As such, it's going to be significantly less affected than PotashCorp or Mosaic by the duopoly development. Hence, I'm not sure the stock deserves to be punished right alongside PotashCorp and Mosaic.

But that doesn't mean I'd buy the stock, either. Seems to me, if you want an excuse to sell Agrium, all you really need to do is look at the stock price: 8.6 times earnings looks to be a wee bit too much to pay for a 5.3% grower with a 2.4% dividend, like Agrium. The more so when you notice that Agrium only generated about $421 million in real free cash flow over the past year -- a mere fraction of the $1.5 billion in GAAP "earnings" it reported.

That discrepancy between earnings and free cash flow, I think, combined with the high price you're being asked to pay for either flavor of profits, is reason enough to avoid Agrium today.

Dow Chemical reacts positively
One company with an agro-science angle to it that's not being affected by the potash kerfuffle is Dow Chemical (which gets about 11% of its revenues from sales of crop protection chemicals, seeds, traits, and other plant biotechnology products).

Dow is opening the week higher on an upgrade to buy from Argus Research, which thinks an improving global economy will be especially helpful to Dow, and foresees sales of certain commodities businesses adding cash to the company's coffers, as well. What's more, this looks like the kind of analyst upgrade I can get behind.

Priced at a bit more than 16 times earnings, Dow appears at first glance to be a bit expensive given its 9.4% projected earnings growth rate. Dow, however, in contrast to Agrium, generates quite a bit more cash from its business than its GAAP numbers reflect. Free cash flow for the past 12 months amounted to just under $4.36 billion -- about 45% more than GAAP earnings suggest. That works out to a 10.1 price to free cash flow ratio (13.3 once you figure debt into the mix).

Toss in a 3.5% dividend yield, and Argus's suggestion that selling non-core subsidiaries could generate cash to pay down the debt a bit, and this stock looks like a winner.

An upgrade runs through it
And finally, a bit of rare good news for long-suffering Riverbed Technology shareholders: Someone finally likes the stock!

After watching the networking tech stock fall 19% over the past year, as the rest of the stock market ran away from it, analysts at Oppenheimer have decided that enough is enough, and it's time to start buying Riverbed again. I couldn't agree more.

While the company's 555 times price to earnings ratio will certainly give some value investors a severe case of the willies, the fact remains that with $251 million in positive free cash flow to its credit, and that free cash flow number continuing to grow steadily, Riverbed looks like a bargain at just 10.5 times its annual cash profit. Even if the company fails to live up to analyst expectations for 19% long-term profit growth -- even if it produces results only half that good -- I'd say the stock looks attractive at today's prices. Oppenheimer may or may not have picked the absolute "bottom" at which to buy this stock. But even if it bounces around, and drops down a bit more, I think the stock's cheap enough to buy already.

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


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