Tuesday'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 trio of newsmakers includes just-downgraded Charles Schwab (Nasdaq: SCHW  ) , a sort-of downgraded Hasbro (NYSE: HAS  ) , and new buy-recommendation Viacom (Nasdaq: VIA  ) . Let's dive right in.

Schwab sinks
Discount brokerage pioneer Charles Schwab underwhelmed investors with an earnings report that merely met estimates last week. Adding insult to injury, these same investors saw the stock they could have bought instead -- rival E*TRADE (Nasdaq: ETFC  ) -- report earnings just a few days later, beating expectations by a factor of two. Now, in a double-whammy, Schwab shareholders are taking another hit as analyst Stifel Nicolaus downgrades the broker to "neutral."

It's nothing personal, though, explains Stifel. At 21 times earnings -- earnings expected to grow at just 14% per year going forward -- Schwab simply costs too much. A share of E*TRADE, meanwhile, can be had for just 17 times earnings. And that price earns you a chance to ride the stock's coattails as E*TRADE posts 22% annual earnings growth over the next five years.

Eat your heart out, TD AMERITRADE (with 13% estimated growth).

Hasbro gets put in a box
Speaking of stocks that aren't exactly wowing investors this week: Hasbro. Calling Q1 earnings "weaker than expected," analyst Needham & Co. cut its price target on at America's premier toymaker by 7%. The analyst still thinks Hasbro is a buy, however -- just at a lower price.

Why? As recounted by StreetInsider.com this morning, Hasbro had previously warned analysts to expect weak earnings in Q1 due to the fact that "the 14-week 1Q would feature an extra week of fixed costs ... with little in terms of offsetting revenues." Management has assured us that "FY 2012 revenues would be back-half weighted," though. Needham is taking a Reaganesque approach to the promise, trusting the company to be true to its word and deliver stronger profits later this year, but scaling back its expectations a bit until it has a chance to verify that statement.

More aggressive investors, though, may want to take a gamble on this one today. With a price slightly more than 12 times earnings, long-term growth pegged at 8.5%, and a generous 4% dividend yield to make up the difference, Hasbro looks at worst fairly priced today -- and possibly a bargain.

A viable option?
Last but not least, we turn to Viacom, newly buy-rated by analysts at Maxim Group. Unlike Schwab and Hasbro, Viacom hasn't released earnings yet (and won't until next week). But if you ask Maxim, earnings are a sideshow at this stock in any case. The real reason to buy Viacom today is its potential to turn into a leveraged buyout.

As the analyst explains: "Viacom is buying back another 10% of its stock this year, after buying back 11% over the last two years. ... We estimate that the company could buy back 36% of its stock back over the next four years and is well placed to be even more aggressive." With Viacom expecting to produce "operating income per share growth of 17% [compound annual growth rate] over the next four years," Maxim seems to think the company may -- and possibly should -- decide to take itself private.

The numbers back Maxim up. At 15.6 times "earnings," Viacom may not look like too great a bargain. But Viacom is one of those special companies that generate stronger free cash flow than they reports as net income under GAAP. With $2.4 billion in annual cash profit and a 14% long-term growth rate, you could argue that Viacom is a buy at 10.5 times FCF. This supports the case for Viacom buying back stock. It may argue even more in favor of the company going entirely private.

Fool contributor Rich Smith holds no position in any company mentioned. Motley Fool newsletter services have recommended buying shares of TD Ameritrade Holding, The Charles Schwab, and Hasbro. Motley Fool newsletter services have recommended creating a bull put spread position in TD Ameritrade Holding.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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