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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 Moody's (NYSE: MCO ) , now-downgraded Under Armour (NYSE: UA ) , and for Oracle (Nasdaq: ORCL ) -- another increase in price target. Let's begin with why Wall Street is ...
Feeling better about Moody's
Credit rater Moody's, which gained notoriety back in 2009 as one of the primary culprits in America's mortgage meltdown, returned to the headlines last week with a threat to downgrade U.S. debt if Congress can't get its budget under control. That wasn't the only news Moody's was making last week, though. The analyst also announced raised its guidance for this year's profits, saying it will earn as much as $2.86 per share on 13% revenue growth in 2012.
This news, plus a generally upbeat market for corporate bond issuances (and Moody's ability to charge for rating them), helped win the analyst an upgrade to "buy" from Benchmark Capital this morning. According to StreetInsider.com, Benchmark made the call based on "a surge in bond issuance, along with strong growth prospects at Moody’s Analytics," and an expectation that Moody's will earn at least $2.83 per share.
Hitting this number should bring Moody's P/E ratio down to about 15.7, from its current level of nearly 18. With the stock expected to post 14% annual earnings growth over the next five years, and paying a 1.5% dividend yield, the price looks fair.
Taking the "under" on Under Armour
It's certainly a fairer price than the 62 times earnings investors are asked to pay for a share of Under Armour. This morning, the premium priced purveyor of premium-quality sportswear got hit with a downgrade to "hold" by the folks at Argus Research. We don't know the details on this one yet, but what we do know is enough to justify Argus' negativity on the stock.
With $100 million in trailing "earnings," but precisely zero positive free cash flow to back up these supposed profits, Under Armour isn't just expensive -- it's wildly overvalued for a company that, while growing sales steadily, shows little ability to generate cash for its shareholders.
Nearly four times sales. Nine times book value. Thirty times EBITDA. Pretty much any way you look at it, Under Armour is overpriced -- and Argus is right to downgrade it.
Predicting an upgrade
Last but the-opposite-of-least, we come to Oracle -- a company that you'll remember also featured prominently in Friday's column. Last week, it was BMO Capital Markets upping its opinion of the stock and raising its price target to $33. This week, Oracle's scored yet another bump in price target, with Oppenheimer seeing BMO's price target and raising it (and Oracle) $3 more -- to $36.
And once again, Wall Street is right to be raising its sights on Oracle.
Priced at 11 times free cash flow today, and with growth estimates hovering around 11%, the stock's at worst fairly valued. Add in a modest 0.7% dividend yield, and Oracle actually starts to look cheap. For the premier provider of database software on the globe, it's a bargain price worthy of a full-fledged upgrade, and not just a price target hike. So why didn't Oppenheimer didn't give it one?
Because they already rate Oracle a buy.
Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Oracle and Under Armour. Motley Fool newsletter services have recommended buying shares of Under Armour and Moody's and creating a bear put spread position in Under Armour.