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 new buy rating for Juniper Networks , a sell for its archrival, Cisco Systems -- and in an entirely different industry...
A reprieve for General Dynamics
News that Congress has reached a new budget agreement to short-circuit the "sequestration" of defense spending has one analyst feeling mildly more optimistic about General Dynamics' chances. This morning, CRT Capital announced it was removing its sell rating from the stock, promoting GD to fairly valued, and adding a whopping $35 to its price target -- now $89 a share.
But is CRT jumping the gun? After all, by GAAP metrics at least, General Dynamics isn't even profitable anymore, having reported $268 million in losses over the past 12 months. How can the company be worth $89 if it isn't making any profit at all?
Well, actually, things aren't quite as bad as they look. (They are bad -- just not as bad as they look.) The big reason General Dynamics looks unprofitable today is that the company recorded $2.9 billion in charges to earnings about a year ago for ill-considered acquisitions in the IT sector -- acquisitions that actually cost that division's head his job. Since then, GD has been righting its ship, and today is once again generating positive free cash flow at the rate of $1.9 billion a year. So, from a cash perspective at least, the company is profitable.
Granted, I still don't think it's making enough money to be a stock worth owning. Even with $1.9 billion a year coming in the door, the stock trades for nearly 17 times annual free cash flow. With a projected growth rate of less than 7%, that seems pricey to me.
Will Juniper rocket?
And speaking of pricey, get a load of the stock that Mizuho Securities just recommended! On Wednesday, the Japanese securities firm picked Juniper to outperform the market, rating the stock a buy and assigning a $28 price target. If Mizuho is right about this, it means a 30% profit for investors who buy the stock today. Problem is... Mizuho is not right.
Juniper shares already cost more than 29 times earnings (and pay no dividend). That's if you even believe the earnings are worth all they're supposed to be worth. Free cash flow at Juniper is only $332 million, or 14% behind reported net income. So, arguably, the company is not in fact as profitable as it looks.
Against a projected growth rate for the next five years that is also, coincidentally, 14%, I'd say the stock's high valuation relative to earnings, and the low quality of those earnings, make for two strong reasons for ignoring Mizuho's advice. The analyst's recommendation notwithstanding, Juniper is not a buy.
Is there anything worth buying -- anywhere?
So, what can you buy? Perhaps, just perhaps, you're better off looking at the stocks that Wall Street hates -- and today, we've got one of those for you in the form of Juniper archrival, Cisco Systems.
This morning, as Mizuho was upping its rating on Juniper, Citigroup was marking down Cisco to sell. As Citi explains, Cisco is losing market share in the data centers of the world as customers move to more "open source" solutions for their switches. In routers, meanwhile, Citi sees Alcatel-Lucent threatening to steal share from Cisco.
To which I can only reply: Seriously? Alcatel is the big threat to Cisco? Perpetually money-losing, cash-burning Alcatel-Lucent is the bogeyman in the computer closet?
Seriously, folks -- I think Alcatel is too busy worrying about how to keep itself out of bankruptcy court to pose any real risk to Cisco's business. Fact is, even if Alcatel has products capable of competing with Cisco, the French company's total lack of any cushion in its profit margins means that Cisco can underprice the competition at will.
Meanwhile, Cisco stock itself continues to look very attractive indeed. The company's profitable, generates strong free cash flow, sells for only 11.3 times earnings, sits on a mound of cash $32 billion high, and is growing its earnings at a respectable 8% annual rate. Cisco even pays a dividend -- which at 3.2% is not just better than Juniper's 0% dividend, but even better than General Dynamics' 2.4%.
Whatever Citi may think of it, Cisco remains supremely buyable.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of General Dynamics.
The article Wednesday's Top Upgrades (and Downgrades) originally appeared on Fool.com.
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