Friday's Top Upgrades (and Downgrades)

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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, we'll find out why Wall Street wants a seat at OpenTable (Nasdaq: OPEN  ) , but is hitting the eject button on Navistar (NYSE: NAV  ) and Zipcar (Nasdaq: ZIP  ) .

Come for the food, stay for the profits
First up is OpenTable, which on Thursday reported 15% sales growth and $0.42 per share in profits, meeting estimates for the former and beating on the latter. This was good enough to win the stock an upgrade to "outperform" from Oppenheimer, and a 17% increase in share price from investors.

Disconcertingly, reservation growth slowed sequentially from last quarter's 34% to 27% in Q2, but as relates, Oppenheimer sees revenues stabilizing in the near term, with "potential for upside in 2013" as the firm improves "US conversion rates." If that happens, Oppy believes OpenTable shares could hit $46 within a year.

So, a potential 14% upside from today's prices. That sounds nice, but before following Oppy's advice, consider the risks. At $40 and change, OpenTable shares already cost 42 times earnings. Even for the 23% annual profits grower that OpenTable purports to be, that's a pretty steep price. With sales slowing, and GAAP earnings actually down year over year, investors should take this analyst's projections with a healthy dash of salt.

Navistar falls
Speaking of numbers that may not be all they're cracked up to be, yesterday the SEC launched an investigation of Navistar, looking into the truckmaker's "accounting and disclosures." Navistar lent credence to the SEC's claims by pulling its 2012 guidance in response.

Bad news? Wall Street thinks so. This morning, Barrington Research downgraded the stock to "market perform," while UBS cut its price target to $28, though still rates it as a buy. With the stock now trading for barely more than one times annual profits, this smacks of overreaction to the news ... or not. While GAAP profits continue to look healthy at Navistar, actual cash flow from operations has been steadily shrinking for three years now, even as capital spending costs rise. Viewed conservatively, the stock now carries an enterprise value more than 25 times annual free cash flow, and when you consider that Navistar just lost 13% of its market cap in a single day, "conservatively" is probably how you want to play this one.

Zipcar slows down
And speaking of one-day disasters, we come finally to Zipcar, victim of a 34% shellacking of its stock price this morning. Both Needham and Oppenheimer downgraded the stock this morning, to various flavors of "hold." The reason: Last night, the rent-by-the-hour car service missed estimates for both revenues and earnings. And when we say "earnings," what we really mean is "losses." Zipcar lost a penny a share for the quarter, when Wall Street had been hoping for breakeven.

Seriously? A 34% drop on a $0.01 miss? That seems a bit harsh, considering that Zipcar is still GAAP profitable over the past 12 months, raking in a cool $1 million.

The problem, though, is that a million dollars isn't what it used to be, especially not when what it is now is the fruit of a whole year's labor for a company valued in excess of $400 million. (For the mathematically challenged, that's a 400-plus P/E ratio.) In short, it wasn't Zipcar's performance so much that doomed the stock. It was the price, which was too high, and probably still is today.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of OpenTable and Zipcar. Motley Fool newsletter services have recommended buying shares of OpenTable and Zipcar. 

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