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 top headlines feature a lower price target for The Fresh Market , two higher price targets for Pandora Media , and a new buy rating for AMC Networks . Let's get the bad news out of the way, beginning with...

Fresh Market goes stale
Premium grocer and Whole Foods wannabe The Fresh Market shocked that other market (the one for stocks) yesterday with an earnings report that showed the company falling short on profits in the third quarter and guiding even lower for the remainder of this year. The Fresh Market's $0.23-per-share profit missed estimates by $0.03. Revenues likewise fell short of the mark. Worst of all, projected full-year earnings ($1.42 to $1.47) now suggest the company could miss its full-year target by a dime or more.

The bad news prompted analysts at Sterne Agee to immediately pull their buy rating and downgrade The Fresh Market to neutral -- and investors aren't taking the news any better. As of this writing, The Fresh Market shares are down 19% and continuing to fall. But is that the right call?

Sadly, I fear it is. Based on its most recent numbers, The Fresh Market shares now sell for more than 28 times trailing earnings... and 205 times free cash flow. Either of those valuations would be a stretch if The Fresh Market were likely to succeed in hitting consensus projections for 20% profit growth over the next five years. And now the company appears to be saying it won't grow even that fast.

The stock's valuation is quite simply indefensible -- and Sterne Agee is right to downgrade it.

Pandora not boxed in
And speaking of crazy valuations: Pandora! Actually, this one's pretty interesting, because according to two separate analysts, this one's valuation is about to get even crazier.

The Internet music specialist reported mixed earnings results last night -- pro-forma profits of $0.06 (but a GAAP loss) and better-than-expected revenues of $181.6 million. Management further confirmed that it's on track to meet consensus expectations for $187.3 million or so in revenues for the full year, but it may miss on earnings. Further out, Pandora gets more optimistic, predicting beats on both revenues and earnings in 2014.

In short, it was hardly a spotless report. Yet with both RBC Capital Markets and Canaccord Genuity praising the results and raising their price targets on Pandora today (to $35 apiece), investors are trusting the "experts" and bidding up Pandora shares by a good 3%.

Which is a big mistake. Huge.

Unprofitable today, and priced at what will be nearly 120 times earnings even if Pandora hits its numbers next year, this company is having the devil's own time earning a profit from its business. Revenues are growing, true, but the bigger they grow, it seems like Pandora loses more money and burns more cash. Its trailing-12-month GAAP net loss is approaching $53 million, more than three times the loss recorded in 2012 on a revenue gain of about 115%. Meanwhile, capital spending is growing and cash flow from operations has turned negative.

The analysts may think these trends make the stock worth more than it currently sells for. I disagree.

AMC: Running, not walking, and live, not dead
Last but not least, we come to a stock I actually do like, and it's Walking Dead show-runner AMC Networks. Goldman Sachs just initiated coverage of the shares with a buy rating and a $71 price target that promises 21% upside to today's prices.

Goldman is quoted on this morning praising AMC's plan to "scale" its scripted original programming, take ownership of more of its intellectual property, and expand its business internationally "by adding a large portfolio of channels in Europe and Latin America, which would become another avenue for monetizing AMCX's wholly owned original programming." All of these sound like wise moves -- and the price is right, too.

Costing just 17 times earnings today, AMC looks bargain-priced for the 27% annualized profits growth that Wall Street expects it to produce over the next five years. True, free cash flow at the company is currently subpar. True, AMC carries a boatload of debt. Still, viewed under the harshest possible light, factoring in both weaker-than-earnings FCF numbers and $1.6 billion in net debt, the worst I can say about AMC stock is that at an enterprise value to free-cash flow ratio of 26, it may be only slightly undervalued relative to its growth prospects.

But undervalued it is -- and that's why Goldman is right to rate it a buy.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends AMC Networks, Pandora Media, The Fresh Market, and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market.

The article Friday's Top Upgrades (and Downgrades) originally appeared on

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