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This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, in a mostly dour outlook, we'll be focusing on new downgrades for Caterpillar (NYSE: CAT ) and Tesla (Nasdaq: TSLA ) , followed by a bit of good news for shareholders of Johnson & Johnson (NYSE: JNJ ) . Let's dive right in.
Stuff Cat back in the bag?
Construction and mining equipment maker Caterpillar paid out its regular quarterly dividend last night. It wasn't much -- only $0.52 per share -- but if you ask Wall Street's analysts, you should probably take the money and run.
Citing weakness in Cat's construction equipment business outside the U.S., Jefferies downgraded the shares to hold this morning, and set an $85 price target on the shares. According to StreetInsider.com, Jefferies also warns of foreign exchange rates hurting U.S. dollar-denominated profits, and says "global mining markets have softened," with the result being that Jefferies is dialing back expectations for "2012, 2013, and 2014 EPS" by about $0.50 apiece. Fellow analysts at Longbow agree, and reduced their own rating for Caterpillar to neutral this morning.
But while it's true that near-term prospects look doubtful, longer-term-focused investors should think twice before following Wall Street's lead on this one. At just a hair above 10 times earnings, Caterpillar shares look bargain-priced for its consensus 17% long-term growth estimate. And while Cat's next dividend payment isn't due for another three months, at a 2.6% annual yield, it's worth waiting around for.
Tesla needs a tune-up
In contrast to Cat, whose shares have slipped 26% over the past year, shares of Tesla are on a run -- up 18%, and beating the S&P 500 by around 8 percentage points. Unfortunately for shareholders, though, Wall Street is starting to have second thoughts about Tesla's road-worthiness.
This morning, ace analyst Wunderlich Securities announced it was cutting its rating on the electric car maker to sell and slamming the brakes on price expectations as well. Somehow, at some point in the past, Wunderlich had gotten its optimism gauge stuck at $49. With the shares still far short of that goal, Wunderlich is dialing back expectations, and telling investors they will likely be able to pick up Tesla shares for as little as $28 apiece one year from now.
How likely is that? Really, your guess is as good as theirs. The company has no clear record of profits on which to base a valuation (or a target price). While it does finally have a product for sale (the Model S sedan), and optimistic predictions about the number of units it will sell this year, no one's yet certain how profitable the car will be for Tesla. If all goes well, the stock could be worth its current valuation of 51 times forward earnings. On the other hand, if all goes not-well...
Johnson & Johnson: The patient will live
So you can see why Wunderlich might be having second thoughts about Tesla. Meanwhile, other analysts are having second thoughts about Johnson & Johnson -- but they're thoughts of a happier nature.
Apparently undisturbed by J&J's middling profits gain in Q2 (3%), or its reduction in forward guidance (to a below-consensus $5.00), analysts at Jefferies (yes, them again) upped their target price for the drugmaker to $76. The analyst, which was recommending J&J even before earnings, says the shares look both "attractive" and "undervalued." Analysts at RBC Capital Markets agree, upping their price target to $76 a share, 9% above previous estimates. Investors, however, should be wary of letting themselves get infected by this contagious optimism outbreak.
On the one hand, yes, J&J's 3.6% dividend yield is certainly attractive. But at 19 times earnings, the shares already look pricey for a stock that most analysts agree will struggle to reach mid-single-digit profit growth over the next five years. While a deep-moated franchise like J&J may be able to hang onto its premium valuation, it's hard to argue that the shares are undervalued or likely to rise much without serious improvement in growth rates. Until that happens, the dividend may be the most you can expect to gain from an investment in Johnson & Johnson.
Fool contributor Rich Smith holds no position in any company mentioned above, but The Motley Fool owns shares of Johnson & Johnson and Tesla Motors. Motley Fool newsletter services have recommended buying shares of Tesla Motors and Johnson & Johnson. Motley Fool newsletter services have also recommended creating a diagonal call position in Johnson & Johnson.