Tuesday'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 top headlines includes a new buy rating for Bristol-Myers Squibb (NYSE: BMY  ) and a higher price target for Finish Line (Nasdaq: FINL  ) . Meanwhile, one more analyst is kicking Coach (NYSE: COH  ) out of first class.

Bullish on Bristol
Let's not leave the best news for last today, beginning instead with Goldman Sachs' endorsement of Bristol-Myers Squibb. According to Goldman, Bristol-Myers "will be the fastest-growing drug company from 2013 until the end of the decade." This year will see the company bring a new anticoagulant drug to market, Eliquis, followed by the possible introduction of the daclatasvir hep-C drug in 2013.

Goldman sees this as the start of a trend of rapid product introduction -- and adoption -- that will help Bristol grow at 11% or more annually over the next five years. And while that may not sound like wildfire growth, it should be good enough to leave the rest of the pharmaceutical industry (currently pegged for 4% long-term growth) eating Bristol's dust for years to come.

The risk? Currently, Goldman's view on Bristol is something of an outlier. On average, the dozen-plus analysts who follow this stock still think Bristol will grow earnings at only about 1% -- not 11% -- going forward. If they're right, and Goldman's wrong, then Bristol's current 16-times-earnings valuation is going to look awfully pricey when the growth doesn't happen.

Is Finish line just getting started?
Coincidentally, our second featured stock of the day -- sports-footwear retailer Finish Line -- also trades for about 16 times earnings. This morning, Canaccord Genuity circulated a note doubling down on its buy rating on the stock and upping its price target two bucks to $28 a share.

Canaccord makes the call ahead of Finish Line's anticipated Sept. 28 earnings report, in which the analyst tells us to expect "solid growth in basketball (~25% of sales) and kids (~20% of
sales)." In terms of profits, the analyst predicts that lower capex spending will help to boost profit margins at the retailer. And investors should hope the analyst is right about that, because honestly, it's capex that's really keeping Finish Line from winning the race.

Consider: 16 times earnings isn't a lot to pay for a 16%-plus grower like Finish Line, especially with the company paying a modest 1% dividend yield to sweeten the deal. But Finish Line's real problem -- and the reason the stock has been stuck -- is that it's spent so much on capital improvements lately. The company spent more on capex over the past 12 months -- nearly $43 million -- than it's spent at any other time in the past five years. As a result, free cash flow at Finish Line has significantly lagged reported GAAP earnings, giving us a valuation that, at 21.6 times free cash flow, looks anything but cheap today.

And speaking of "not cheap" ...
Finally, and with apologies for ending on a down note, we come to fellow specialty retailer Coach, and the downgrade that Brean Murray just assigned to it. Coach shares closed at $62.60, their highest price in six weeks, and up a whopping 27% from the low hit on July 31.

That sound like good news, but according to Brean Murray, what it really means is that Coach is now within spitting distance of its price target on the stock, and this presented the analyst with a dilemma: Should it raise the price target, or lower the stock's rating?

Brean opted for the latter, arguing that "While we continue to believe the company's management is among the strongest in retailing, we are hard pressed to pay almost 15X next FY EPS" (and, incidentally, 17.3 times the profits Coach has actually earned over the past 12 months).

It's hard to argue with this logic. At more than 17 times earnings, Coach sells for a pretty premium to the 14% annual growth rate it's projected to produce over the next five years. Free cash flow is strong, though basically on par with GAAP performance, so there's no way to say the stock is actually "cheaper than it looks" from that perspective.

Result: If you agree with Brean that Coach is a best-in-class retailer for handbags, 17 times may be a fair price to pay for quality. Maybe. It's certainly not cheap, however, and it's probably not cheap enough to be worth buying at today's prices. Wait for a sale instead.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Coach. Motley Fool newsletter services have recommended buying shares of Coach and Goldman Sachs. The Motley Fool has a disclosure policy.


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