Friday'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, we're looking at a new upgrade for ConAgra (NYSE: CAG  ) , a less-than-grand opening for Burger King (NYSE: BKW  ) , and are checking for nails at Goodyear Tire (NYSE: GT  ) . Let's take the good news first, beginning at the top with why...

UBS says ConAgra is a buy
UBS weighed in on the U.S. food industry this morning, starting with an upgrade to shares of ConAgra. According to the Swiss megabanker, the maker of Chef Boyardee, Wesson, and Blue Bonnet is eminently buyable at today's prices, and likely to gain another 12.5% over the course of the year as it rises to hit $31 a share. Combined with a healthy dividend payout of 3.7%, that's a 16% gain -- easy!

Or is it so easy? After all, while shares of ConAgra have admittedly lagged the rest of the market over the past 52 weeks, this doesn't necessarily make them cheap. To the contrary, with a projected long-term growth rate of just 6.6%, ConAgra shares that cost nearly 25 times earnings actually look pretty pricey. Add in the company's net debt load -- currently just shy of $3 billion -- and ConAgra's actually trading for closer to 30 times earnings.

Long story short, I'd rather be short this one than long.

The King is cheap! Long live the King?
In other UBS news, the Swiss megabanker also took a close look at Burger King this morning... and came away unimpressed. Of course, with UBS initiating coverage of the burger joint with a $15.50 price target, you'd think this would imply a buy rating. (If you haven't noticed, at $14 a share, Burger King costs roughly 10% less than the price target today.) Instead, the analyst rates BK only a "neutral."

Why is UBS so dubious about the stock's prospects, when it thinks BK stock is worth so much more than it costs today? It's hard to say. Because in fact, when you value the company on its free cash flow -- $302 million, according to S&P Capital IQ -- the company almost looks attractive at a price of just 16.2 times trailing free cash flow.

The big problem with Burger King is the company's sizable debt load. At last report, BK was stuffed to the buns with more than $2.6 billion net debt. Factor this into the valuation, and the company's EV/FCF ratio rises north of 25, while its forward P/E ratio is said to be about 21. In either case, the stock looks no better than fairly valued for its growth prospects, and unlikely to outperform the market.

Goodyear: Bad idea?
And speaking of overpriced companies with too much debt: Goodyear Tire. The stock's struggling today, punctured by a downgrade to "hold" by KeyBanc Capital Markets. KeyBanc cites a string of worries, from expiration of a Chinese tire tariff introducing uncertainty over tire prices to a recent trend in prices going lower to another recent trend of raw materials costs going higher.

Adding to the uncertainty are other Wall Street analysts, who according to both Yahoo! Finance and S&P Capital IQ are telling investors to expect 46% compound annual earnings growth at the company over the next five years. Yes, you read that right. Forty-six percent growth, for five years in a row... for a tire company.

Sure, if true, 46% growth would make this 13 P/E stock a screaming bargain. But I ask you, does this sound realistic? Does it sound like it's even anywhere within the realm of possibility? If Goodyear succeeds in growing earnings at 46% a year, as predicted, then by 2018, the company will be earning something like $1.9 billion a year -- a number several times what Goodyear has ever earned, at any time in its history. (And this coming from a company that's been burning cash for three years running.)

In short, whatever else you think about Goodyear, one thing is certain: It's not as cheap as everyone seems to think it is. Not even close.

Fool contributor Rich Smith holds no position in any company mentioned.


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