Wednesday'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, we'll find out why analysts are revving their engines for Tractor Supply (Nasdaq: TSCO  ) and raising their "Zestimates" for Zillow (Nasdaq: Z  ) , but logging onto priceline.com (Nasdaq: PCLN  ) to name a lower price. We begin with...

"We don't sell tractors."
That's a standard line at Tractor Supply these days, but RBC Capital is OK with that. They didn't want to buy a tractor anyway -- they want to buy the stock. This morning, the Canadian investment banker upped its rating on Tractor Supply to "outperform," and set a price target of $105 on this $92 stock. Will it reach it?

Perhaps. Given enough time, it's entirely possible that Tractor Supply will grow into its valuation, and even hit the optimistic target RBC set for it this morning -- but don't hold your breath. Tractor Supply may be a fast grower. Indeed, analysts are projecting 18% long-term earnings growth at the retailer. But at 26 times earnings, its stock prices in this growth rate and more. Further complicating matters, Tractor Supply is an inefficient producer of cash, collecting barely half its reported trailing earnings of $260 million in the form of real free cash flow.

Strange as it sounds to say this, Tractor Supply is a stock long on sex appeal, but short on fundamentals.

What's the Zestimate on this stock?
Analysts at Canaccord Genuity gave housing-price website Zillow a vote of confidence this morning, raising their price target $3 to $45. This was despite the fact that Zillow saw earnings decline 19% last quarter.

In some respects, Zillow looks a lot like Tractor Supply. It sports a high P/E ratio (338.) Zillow's also growing swiftly -- Wall Street analysts project 50% annual earnings growth over the next five years. In one key respect, though, Zillow plows circles around Tractor Supply: It generates far more free cash flow than it reports as net income.

Zillow management neglected to include a cash flow statement in this quarter's earnings report (released yesterday). But investors needn't fret about that. Zillow has consistently reported stronger FCF than reported income for as far back as it's been reporting results. Last year, for example, GAAP net income was a mere $1.1 million; actual cash profits, in contrast, topped $7 million. More worrisome is the fact that even $7 million still leaves the stock trading at a triple-digit multiple to free cash. While Zillow's ability to generate FCF deserves applause, it probably still isn't enough to justify the firm's $1.2 billion market cap.

Name your own price. No -- too high. Try again.
If Wall Street is cutting Zillow too much slack this morning, though, they may not be cutting Priceline enough. (Slack, that is. With the share price down 16% and falling, they're certainly cutting the market cap enough).

Yesterday, Priceline confirmed that it beat earnings "on strong bookings." Sales, however, fell a bit short of estimates, and management compounded investor fears by warning that the current quarter's profits will fall short of Wall Street's hoped-for $12.82-per-share. (Priceline is guiding toward something more like $11.60.) Analysts are ratcheting back earnings estimates, and downgrading the stock -- Bank of America, for example, just cut the stock to "neutral." But does a one-quarter-long guidance reduction of 10% really merit subtracting 16% from the stock's share price? Does Priceline really deserve to be selling for 25% below its 52-week high?

No, not with a long-term growth rate that's still estimated at 23%, it doesn't. Whether you value Priceline on its $1.2 billion in reported earnings, or on its even more impressive $1.4 billion in actual free cash flow, either way the stock seems fairly priced for 23% long-term growth -- indeed, the stock is selling for only a 20-times multiple to free cash flow, so if the growth estimate is realistic, Priceline is actually selling at a discount right now.

Long story short, there's no need to short this stock today. Priceline still has a bright future ahead of it... just as soon as Wall Street finishes throwing its hissy fit.

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


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