Friday's Top Upgrades (and Downgrades)

Stocks go up, stocks go down -- and so do analysts' opinions of them. This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on. Today, we'll look at why one analyst is putting Heinz (NYSE: HNZ  ) back on the shelf, while two more like the prospects at Cracker Barrel (Nasdaq: CBRL  ) and Fastenal (Nasdaq: FAST  ) . Without further ado...

Jefferies tires of waiting for Heinz
"Anticipation, anticipa-yay-shun, it's making me wait ..." carols the old Heinz commercial. Unfortunately, investors can be an impatient bunch, and with Heinz shares having spent the last year underperforming the rest of the S&P 500, investment banker Jefferies finally got fed up with the stock this morning, and downgraded Heinz to hold: "While the international businesses seem to do well, the North American Consumer Products division continues to struggle. After several attempts to improve this business, we prefer to move to the sidelines until the company shows some turnaround success. FY13 guidance was disappointing, in our view, with potentially all of the EPS growth coming from tax benefit."

Pretty harsh, huh? But Jefferies is right. Growth is getting hard to come by for Heinz. Per-share earnings declined 6% last year, with free cash flow falling more than twice as fast (to just $1.1 billion). Analysts expect Heinz to begin growing again next year, but foresee long-term growth coming in close to just 8%. Given this, the stock looks expensive at nearly 18 times earnings.

At these prices, Heinz is no buy at all. It might even be a sell.

All it's cracked up to be?
As down as Jefferies is on Heinz, analysts at Argus Research are just as up on the prospects for country-themed restaurant operator Cracker Barrel. CB announced Q3 earnings earlier this week that met expectations for revenues, while beating earnings estimates with a stick. With operating and net margins expanding nicely, management was able to turn a mere 4% rise in revenue into a 27% increase in net profit.

This was good enough to win the stock an upgrade to "buy" from Argus, and a price target hike to $72 -- suggesting there's a 20% profit to be made by buying CB today. Could that be right?

Actually, yes. And it might even be conservative. Priced at 16 times earnings, and paying a 2.7% dividend, CB may look a bit expensive relative to 10% projected growth, but looks can deceive. If you value Cracker Barrel on its free cash flow, which is even more impressive than its GAAP earnings, the stock sells for a much lower 12-times multiple. Between the dividend yield and the growth rate, there's plenty here to justify the stock's price today, and Argus' optimism about the future as well.

If only we could say the same about today's other big buy rating.

Fasten your seat belts
This one comes courtesy of the star stock analysts at Wunderlich, who this morning initiated coverage of Fastenal with a "buy" rating and the incredibly optimistic claim that the stock will hit $51 within the next year. Don't believe it.

You see, Fastenal differs from Cracker Barrel in one important respect: Whereas Cracker Barrel generates free cash at a rate better than 30% above what it reports as net income, Fastenal's free cash falls short of reported earnings by nearly half -- $199 million in cash generated over the past year, versus claimed GAAP profits of $379 million.

This being the case, you can argue Fastenal is much more expensive than it looks on the surface, but even on the surface, the stock's obviously overvalued. The stock costs 35 times earnings, and while its 18% growth rate is certainly impressive, it's nowhere near fast enough to justify such a rich valuation on the stock.

In short: While a fine company in its own right, and a very profitable one, the 35% rise in Fastenal's stock price over the past year has already rewarded investors richly for their patience. Now's not the time to buy more. Now's the time to send management a thank you note, and collect your winnings ... on your way out the door.

Fool contributor Rich Smith holds no position in any company mentioned. Motley Fool newsletter services have recommended buying shares of Heinz.


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