Earnings season brings on a flurry of upgrades and downgrades, and it can be an all-day affair just to get through them all. Today we look at a packaging company, a semiconductor manufacturer, a commercial real estate company, and a multilevel health food marketing company. Should you pay attention to Wall Street's call?
|
Company |
Rating |
Reaction as of 1 p.m. EDT |
|---|---|---|
|
MeadWestvaco |
Upgraded from neutral to buy | Up almost 2.5% |
|
Cavium |
Upgraded from neutral to buy | Up almost 2.5% |
|
Apollo Commercial Real Estate |
Downgraded from buy to hold | Down more than 1.5% |
|
Herbalife |
Reiterated buy with a price target of $86 | Down more than 19% |
Source: Wall Street Journal Market Data Center.
MeadWestvaco
Longbow upgraded MeadWestvaco from neutral to buy.
- Why? MeadWestvaco posted great earnings and handily beat estimates on EPS. The company recently spun off its consumer goods and office products segment in a merger with ACCO brands.
- Justified? Yes. Spinoffs have a way of unveiling value in a bloated company. Though it is typically the spun-off company that benefits the most, this case is unique, as the spinoff was sold directly into a merger with ACCO. MeadWestvaco can now focus solely on its well-positioned packaging business for a wide array of consumer products.
Cavium
Mizuho upgraded Cavium from neutral to buy.
- Why? Mizuho cites improving fundamentals as a catalyst for improved earnings in the near-medium term.
- Justified? No. Mizuho is correct about Cavium's fundamentals. For a tech company, Cavium has a beautiful balance sheet: Cash handily covers total liabilities. But a significant drop in free cash flow between 2010 and last year warrants a slightly longer waiting period to see where the company is headed.
Apollo Commercial Real Estate
Stifel Nicolaus downgraded Apollo from buy to hold.
- Why? The company performed well year over year and is approaching Stifel's previous price target. The investment bank is also concerned that Apollo will have trouble replicating its yields as the current portfolio matures.
- Justified? No. This is a downgrade that says little about the future of the company. Looking at the financials, free cash flow has steadily grown over the last two years, though debt is something to keep an eye on.
Herbalife
Caris & Co. reiterated its buy recommendation on Herbalife, with a price target of $86.
- Why? After a great run-up for Herbalife over the last year, Caris anticipated strong earnings from the company.
- Justified? No. In what could be the worst timing ever to raise a price target, Caris was suffering from typical Wall Street groupthink. David Einhorn questioned the company's accounting practices during today's conference call, sending the stock cascading down until trading was halted. Herbalife's earnings, though seemingly strong, may not be quite so attractive, depending on how Herbalife accounts for its distributors.
Ratings are often based on short-term prospects and irrelevant to the long-term investor. However, we can use these to dig up useful facts about a company we may not have seen before. It's important not to let the ratings themselves color your opinion of a company. As Fools often say, it's better to do the research yourself and come to your own conclusions. Keep an eye on this series to stay in the know and save the rest of your day for coffee and Facebook.
