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're looking at a couple of unexpected (and unconnected) upgrades for shares of Vail Resorts
Get thee to a mountaintop
With summer vacation season upon us, investing in ski resorts probably doesn't top many investors' to-do lists. But KeyBanc Capital Markets is no ordinary investor. Ranked in the top 5% of analysts we track, KeyBanc has absolutely crushed the market's returns with its farseeing recommendations in the hotel and leisure industry, outperforming the market by some 400 percentage points, combined, on picks like Vail.
In short, when KeyBanc tells you that Vail is a "buy," this advice bears consideration -- not necessarily acceptance, but consideration. As StreetInsider.com reports, KeyBanc thinks that coming out of one of "the worst snowfall seasons in history," things can only get better for Vail going forward. "A return to more normalized snowfall conditions should drive significant leverage in the model through a combination of both volume and price." Is that right?
In a word: No. While it's true that the past 12 months have been bad for Vail, with earnings of just $13.6 million, this company has really only averaged about $55 million annual profit over the past five years. A return to "average" earnings, therefore, would still have the company trading for about 28 times earnings. That's better than the 113 P/E Vail currently sports, true, but it's not cheap enough for the 14% long-term growth Wall Street expects Vail to produce. Not by a long shot.
Caution: Radioactive
As bad as KeyBanc's advice is on Vail, it pales in comparison to the truly radioactive stock pick that energy analyst Dahlman Rose just coughed up. Amex-listed Uranium Energy isn't profitable, and never has been. It generates no free cash flow -- and maybe never will. Nevertheless, Dahlman Rose is urging investors to buy this dog-with-fleas based on its firm conviction that "a nuclear renaissance was under way." One year after the Fukushima Daiichi disaster, that conviction seems a bit less than convincing.
Certainly, investors should feel free to hope that Dahlman is right. And the truth is that it had better be, because nothing less than a "renaissance" is needed if Uranium Energy is ever to become more than a black hole for investor cash. As Dahlman itself admits, "uranium prices are near the marginal cost of production." So it would appear there's no profit to be had anywhere -- for Uranium Energy, or for investors who follow Dahlman's advice.
Back up the truck
As it turns out, the only stock on today's list that seems to offer any chance of giving investors real profits is the one that just got downgraded. This morning, Robert W. Baird announced it was knocking Navistar down from "outperform" to "neutral" on worries that Thursday's Q2 earnings news will disappoint.
It might, but that's not necessarily a reason to avoid Navistar. Even if it does wind up missing earnings, this stock appears cheap. Shares are priced at a mere 1.3 times trailing profits (yes, you read that right), but the market appears cautious over the company's ability to generate free cash flow. The truckmaker's free cash flow lags far behind reported earnings, but the $475 million that Navistar did produce over the past year is still enough to price the stock at under four times annual free cash flow.
With long-term growth projected to average 17% over the next five years, this stock is anything but a "neutral" stock idea. It's a four-on-the-floor, pedal-to-the-metal, back-up-the-truck screaming buy.
Fool contributor Rich Smith holds no position in any company mentioned. His opinion notwithstanding, other analysts at Motley Fool newsletter services have recommended buying shares of Vail Resorts.
