This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

Today, we're looking at a series of new moves on Wall Street: a big downgrade for Procter & Gamble (NYSE: PG  ) , followed by bullish pronouncements on Vertex Pharmaceuticals (Nasdaq: VRTX  ) and NVIDIA (Nasdaq: NVDA  ) . Let's dive right in.

Lather, rinse, downgrade
Procter & Gamble may be one of the biggest names out there in consumer goods, but the bigger a company gets, the harder it is to grow more. Criticizing a "lag" in P&G's "organic sales and market share" relative to competitors, Wells Fargo cut its rating on the stock to "market perform" this morning. (Not an uncommon sentiment.)

Sure, P&G is a steady dividend payer. Some might even call its 3.5% divvy generous. But at 20 times earnings, that dividend payout comes at what I think is a steep cost. Wells thinks P&G needs to improve profit margins on its sales in order to juice growth significantly, but so far, P&G has posted back-to-back declines in full-year operating margin, and currently squeezes less profit out of its sales than at any time since 2006. The stock's certainly not a buy at these prices, and it might even be a sell.

Vertex breathes a sigh of relief
Happier news greeted shareholders of Vertex Pharmaceuticals this morning, after data from "an ongoing Phase 2 study of VX-809 and KALYDECO ... showed significant improvements in lung function ... among adults with cystic fibrosis." This "statistically significant" clinical data promoted two analysts, ISI Group and JMP Securities, to up their ratings on Vertex to buy.

ISI crunched the numbers and concluded Vertex is worth $68 a share. JMP jumped even farther ahead and set a new price target of $100. Whichever number you believe, both analysts are looking smart this morning, as the shares leaped nearly 50% in response to the news (and the buy ratings). But are there any more gains in store?

Perhaps. You see, even at 39 times earnings, Vertex doesn't look that expensive relative to Street expectations for the company. On average, analysts see this company growing earnings at upward of 50% per year over the next five years. That's more than fast enough to justify the P/E if Vertex can hit the growth target. And while it's true the company only recently turned profitable, and lacks much of a history of profit-making to judge by, its 4.4 price-to-sales ratio isn't all that much richer than the mid-two-times ratios at Pfizer (NYSE: PFE  ) or Johnson & Johnson -- both pegged for single-digit growth themselves. Whether future years see Vertex follow its growth path solo, or get acquired by a larger rival hungry for revenues to replace those that have fallen off the patent cliff, either way, Vertex sits on the cusp of opportunity.

Enter NVIDIA
And speaking of opportunity, over at Nomura Securities they're seeing a lot of chances to profit from the sell-off in chip stocks. NVIDIA, the premier name in graphics chips, has lost nearly 40% of its market cap over the past year. In Nomura's opinion, this gives the stock a "valuation hard to ignore."

Here's how the numbers break down: "Trading at a 20% yield on enterprise value to free cash flow ... and 1x ev/sales, it is the same level where the stock bottomed in 2010." Worst case, Nomura says if you broke up the company and sold it for parts, NVIDIA would fetch a higher stock price ($13) than it currently sports. Meanwhile, "GPU and Mobile segments" are both "improving." So chances are the company is worth quite a bit more as a going concern.

How much more? Nomura points out that the EV/FCF ratio on this one (about 5.8 times, by my calculation) is nearly half the valuation investors are paying for comparable chipmakers. If all NVIDIA accomplishes is just to close the gap with its peers, therefore, we could see the stock nearly double. If the stock were to achieve the same enterprise value as peer Texas Instruments (NYSE: TXN  ) , on the other hand (15.2 times FCF, and upgraded to only neutral by Nomura today), we'd be looking at gains in excess of 160%.

For the record, I think Nomura's making a good call on NVIDIA -- and I'm on the record saying so, recommending the stock in my public CAPS portfolio, and owning the stock in my personal account. But if you want even more detail on why NVIDIA makes for a compelling buy, you can read all about it in the Fool's new free report: "The Next Trillion-Dollar Revolution."

Whose advice should you take -- mine, or that of "professional" analysts like Wells Fargo, ISI, and Nomura? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.

Fool contributor Rich Smith owns shares of NVIDIA. He also has public recommendations available on more than 60 other companies. Check them out on Motley Fool CAPS, where he goes by the handle TMFDitty -- and is currently ranked No. 350 out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Vertex Pharmaceuticals, Pfizer, Procter & Gamble, and NVIDIA. Motley Fool newsletter services have also recommended creating a diagonal call position in Johnson & Johnson and writing puts on NVIDIA.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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