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, our top trio of newsmakers includes newly buy-rated IBM (NYSE: IBM  ) and TiVo (Nasdaq: TIVO  ) -- but for FedEx (NYSE: FDX  ) , it's a downgrade in the mail. Let's unwrap the day's top ratings news, beginning with ...

Upping IBM
The day began with good news for IBM shareholders, with Barclays upping its rating on the stock to "overweight." According to StreetInsider.com, Barclays is banking on improved market share and "a new mainframe cycle" to boost earnings at IBM.

Barclays further praises IBM as being one of the few tech companies out there that's safe from "disruption" by Apple (Nasdaq: AAPL  ) , inasmuch as their markets rarely overlap. Considering what Apple just did to Samsung last month, that has to be a plus. But does it add up to a big enough reason to own IBM?

Maybe ... but it's not exactly a slam-dunk. At 16 times earnings, IBM shares sell for a pretty premium to the 11% long-term growth they're expected to produce. IBM's 1.7% dividend yield helps to close the gap between price and value. But on the other hand, the company's also carrying a net debt load nearly 10% the size of its own market cap. In the final analysis, IBM shares still don't look cheap enough to buy.

TiVo it!
On the third hand, at least IBM has profits, and a P/E ratio to go with them. You can't say the same about our second featured stock -- new Jefferies pick TiVo.

According to Jefferies, there's a new paradigm at work at TiVo, which "is seeing subscriber gains following years of declines" thanks to deals with cable operators to help "seamlessly integrate ... disparate sources of content" into their set-top boxes." The analyst thinks this is the beginning of a long-term growth trend at TiVo, but investors are going to be hard-pressed putting a price tag on this trend.

Currently unprofitable and burning cash, TiVo has no P/E to hang a value on. Sales were up last quarter, as Jefferies notes ... but only by 7%. And until TiVo starts turning those sales into profits, it's going to be hard to say for sure just how profitable the company might become -- or if it will succeed in becoming profitable at all. Long story short: Until the picture firms up on this one, TiVo remains a stock for speculators only.

FedEx fumbles
Last and least, we come to FedEx, which warned this morning that Q3 did not work out quite as well as it had hoped. Profits for the quarter are now expected to come in at about $1.40 per share, which will be below both the company's June-forecasted $1.45 to $1.60 range and the $1.46 FedEx earned in Q3 last year.

The news prompted a swift reaction from Wells Fargo, which just downgraded the stock to "market perform" and cut its price target to about $91 a share -- about 11% below the previous projection. Wells had been counting on a "cyclical rebound at FedEx Express" this year, but based on FedEx's revised guidance, Wells says it can "no longer hold this view." Should you?

At first glance, you might think so. After all, today's sell-off has brought FedEx down to the low, low price of just 13.4 times earnings. That seems cheap in light of the stock's projected 15%-plus long-term growth rate. Problem is, FedEx isn't nearly as profitable as it looks.

Earnings notwithstanding, true free cash flow at the company for the past 12 months stands at an anemic $828 million. That's less than half the $2 billion that FedEx claims to have earned under GAAP. And the resulting valuation -- nearly 33 times the amount of cash-profit FedEx generates in a year -- seems awfully rich for a company growing at 15%. If FedEx is growing slower than that, as now seems the case, the stock could be even more expensive than it looks.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of IBM. Motley Fool newsletter services have recommended buying shares of FedEx and creating a synthetic long position in IBM. The Motley Fool has a disclosure policy.


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