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 is up on Northern Oil & Gas (AMEX: NOG), but feeling kind of middling about Middleby
"Good" news first
It's looking to be a good news/bad news/good news kind of day for Northern Oil & Gas shareholders. Yesterday, the Minnesotan oil producer announced that in the second quarter of 2012, it more than doubled both revenues and earnings ($0.70) over year-ago levels. On the one hand, that actually turned out to be a "miss," as earnings fell short of the analyst consensus. But on the other hand, it's good news, because Wall Street is giving 'em a pass.
This morning, oil analyst Global Hunter Securities rewarded Northern Oil's performance with an upgrade to "buy," and a target price of $27. Is it worth it? It really depends on how you look at the numbers. On the one hand, the shares appear inexpensive at 18.5 times earnings, with a 35% projected long-term growth rate. On the other hand, appearances can be deceiving.
Northern Oil may be "profitable," in a GAAP sort of way, but the company was still free-cash-flow-negative at last report, and gave investors no hard data on cash-burn in its earnings release, but rather an ominous statement about plans to "fund future capital expenditures through cash flow and its available borrowing capacity." [Emphasis added.]
The likely conclusion? Northern may be producing combustible oil and gas, but what it's burning is cash.
Middleby gets high marks
Contrast this with commercial oven maker Middleby. You've probably never heard of it, but if you've ever eaten at a restaurant, chances are your food came out of a Middleby oven. The company's expanding reach within the restaurant industry translated into a big jump in profits yesterday as Middleby beat earnings estimates with a stick.
Wall Street's of two minds on the company today, with RW Baird downgrading to "neutral" and a $106 target price, while Wellington Shields upgraded the stock to "buy" and projects $169 a share.
Wellington's more likely in the right on this one. With $147.2 million in trailing free cash flow, Middleby now sells for a mere 14.5 times annual cash profits -- quite a nice discount to presumed 22% long-term annual growth. Even valued on plain-vanilla GAAP earnings, though, the stock looks attractive at a P/E of 18.9.
Failure to fly
And finally -- and with apologies for ending on a down note -- we come to the curious case of FedEx. Arguably one-half of a "can't-lose" duopoly in the global parcel post market, you'd think everyone would love FedEx. Problem is, the company's popularity comes with a price too high for its profits to support.
This morning, Avondale Securities downgraded the stock to market perform, and cut $15 off of FedEx's target price (now $95), and it's right to do so. While the stock doesn't look expensive at less than 14 times earnings, and 14% long-term growth, remember that Northern Oil didn't look expensive, either.
FedEx isn't in quite as bad shape as Northern Oil, cash-wise. Indeed, it's free cash-flow-positive -- just not as "positively" as its earnings would suggest. With $2 billion in claimed GAAP profit, FedEx failed to muster up more than $828 million in real cash profit over the past year, putting its price-to-free-cash-flow ratio at a lofty 33.5.
At today's prices, FedEx shares simply fly too close to the sun. Unless free cash flow goes up, and soon, the shares are bound to come down.
Fool contributor Rich Smith holds no position in any company mentioned. Motley Fool newsletter services have recommended buying shares of Middleby and FedEx. Other Motley Fool newsletter services have recommended shorting Middleby.