Thursday's Top Upgrades (and Downgrades)

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on. Today, our top headlines include a new-and-improved price target for LeapFrog (NYSE: LF  ) alongside downgrades for Harley-Davidson (NYSE: HOG  ) and Abercrombie & Fitch (NYSE: ANF  ) . Let's hop right in.

LeapFrog could hop higher
Early educational toy maker LeapFrog beat estimates on both the top and bottom lines yesterday, then topped off the performance by raising guidance for the rest of the year. Its latest estimate: profits as high as $0.66 per share, as much as 10% above analyst estimates. So, naturally, the stock is down 15%. Huh?

Something doesn't make sense here, and sniffing an opportunity, analysts at Ascendiant Capital are "leaping" upon it. Already quite bullish on the stock, Ascendiant is now predicting LeapFrog shares will hit $15 within the next 12 months -- more than a 50% gain from today's post-sell-off prices.

It could happen. LeapFrog shares look cheap at 17 times trailing earnings, versus long-term growth estimates of 20% annualized. Give the stock $0.66 in profits this year, and the P/E drops to 15 -- an even bigger discount. Frog legs for your portfolio? Delicious!

Harley gets "booted"
A similar earnings blowout was sighted at Harley-Davidson yesterday, where profits soared 30% as a long, hot summer spurred higher U.S. demand for the ultimate topdown convertible. Unfortunately, management isn't convinced the good times will keep rolling, and says it remains "cautious in our expectations for retail sales globally in an environment of greater economic uncertainty."

They're not the only ones. This morning, analysts at Longbow took Harley's blowout quarter as a chance to take profits, downgrading the shares to "neutral." They may be right to do so. Even as Harley rode high on the hog, profit-wise, sales in Q2 fell short of estimates, and management is guiding toward a 9% to 17% year-over-year decline in unit shipments in Q3.

Such a slowdown bodes poorly for Harley's chances of hitting consensus expectations of 19% long-term profits growth. It suggests that even at 15 times earnings, the stock may be fully priced.

Keep your shirt on, Abercrombie. No one wants to see that
Weak guidance is also to blame for this morning's 15% sell-off at Abercrombie & Fitch. The company updated investors on sales trends last night, confirming that sales grew only 4% in the most recent quarter, while same-store-sales actually fell 10%. Abercrombie is warning investors to expect as little as $0.15 per share when it reports earnings two weeks from now. That's about half of what analysts were expecting to see it earn, and they're punishing A&F rather severely for the shortfall.

Earnings for the full year look similarly weak, perhaps as little as $2.50 per share, or 25% below expectations. On the one hand, this could actually be viewed as good news. After all, trailing-12-month results have A&F selling for a whopping 24.5 P/E. Up the earnings to $2.50 (or better) and the P/E here falls to 11.5 (or lower). On the other hand, Abercrombie still isn't generating any free cash flow whatsoever from its business. Until it shows us the money, this company's earnings may not be worth much more than the thin 10-Q crepe paper they're printed on.

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


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