Monday'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 upgrades for PNC Financial (NYSE: PNC  ) and Kraft (NYSE: KFT  ) , but Oshkosh (NYSE: OSK  ) just got the boot.

A downgrade, b'gosh!
Speaking of which, we might as well get the bad news out of the way first. This morning, independent analyst Standpoint Research downgraded truck maker Oshkosh to hold. Nothing against the company, mind you. It's just that, after hitting a recent 14-month high, and beating the market by a good 10 percentage points over the past four months, Standpoint thinks the stock costs too much to continue holding today.

And of course, they're right about that. At a valuation of less than 13 times trailing earnings, Oshkosh may not look too expensive relative to consensus projections of 14% growth. However, valuing the company like this risks overlooking a couple nagging details -- such as the fact that Oshkosh carries roughly $565 million in net debt, and the fact that it's currently bringing in new free cash flow at just 60% the rate it claims to be "earning" profits.

These two factors mean that Oshkosh is actually a whole lot more expensive than it looks, and too expensive to buy, by far.

Does PNC deserve an A?
And speaking of stocks that cost too much, Oppenheimer chimed in this morning with a decision to upgrade PNC Financial, America's fifth-biggest bank by assets, to outperform. According to Oppy, PNC's recent purchase of the U.S. retail wing of Royal Bank of Canada will bring "an increase in net interest income, or income collected on loans, of 10 percent to 12 percent" in the second half of this year.

Even so, most analysts on Wall Street agree that PNC is unlikely to grow its earnings much past the low-to-mid single digits over the next five years. Given that the stock costs more than 13 times earnings, this growth rate looks a bit slow. And while PNC's 2.5% dividend isn't exactly miserly, neither is it big enough to bridge the gap between the stock's price… and its value.

Long story short, Oppenheimer has high hopes for PNC shares hitting $75 within a year. Those hopes are unlikely to be rewarded.

Does America spell cheese "C-H-E-A-P"?
And finally, Warren Buffett may be selling his stake in Kraft, but over at RBC Capital Markets, folks think they're quite a bit smarter than the master investor -- and just assigned an outperform rating to the stock.

Priced at more than 20 times earnings, but expected to grow at less than 11% per year going forward, Kraft shares look mighty expensive already. But according to RBC, the shares are a bargain at $40 a change, and will hit $44 within a year -- plus a 2.9% return via dividend payments. If RBC's right, the combined 13% profit should reward investors nicely. Problem is, RBC is not right.

Like PNC, Kraft lacks the kind of growth rate needed to justify its high P/E ratio. Like Oshkosh, Kraft is generating (slightly) less free cash flow than it reports as net profit under GAAP, and toting a sizable debt load to boot. And like both of the companies discussed up above, it's not a good place to put your money right now.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of PNC Financial Services.


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