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, we'll try to get a good read on McGraw-Hill's (NYSE: MHP  ) latest buy rating, examine why Express (Nasdaq: EXPR  ) got downgraded, and check out the new and improved price target for Time Warner (NYSE: TWX  ) . Let's dive right in.

Open your textbooks to page 64
With the new school season now in full swing, let's open our examination of Wall Street's picks with a look at educational materials printer McGraw-Hill. UBS just initiated coverage of the stock with a buy rating and a $64 price target. Chances are, though, it's not the business of printing textbooks that attracts it.

Sure, McGraw-Hill Education is the company's biggest division by revenues. But when it comes to profiting from revenues, the 41% operating profit margin at the firm's Standard & Poor's ratings division puts Education's 14% margin to shame. (McGraw's S&P Capital IQ division does pretty well, too -- producing $0.30 of operating profit for every revenue dollar it takes in.)

Impressive figures, right? But they don't necessarily make the stock a buy, despite what UBS thinks. Trading close to a 52-week high, and priced at more  than 17 times earnings, McGraw-Hill looks only fairly priced based on its 12% long-term growth estimates and 1.9% dividend yield. In fact, if it weren't for the fact that its S&P unit is one of the three most powerful credit raters in the world, you'd almost have to call the stock overpriced. In short, this is a great stock to keep an eye on, in hopes of buying on a pullback. At today's prices, though, there's no compelling reason to rush out and buy on UBS' say-so.

Express on a train to nowhere?
On the other hand, if you're looking for an idea with a bit more potential, look no further than the stock that SunTrust Robinson Humphrey just downgraded: Express. SunTrust thinks this trendy clothier has lost its mojo and is worthy of no more than a neutral rating today. Me, I look at the numbers and see something entirely different.

Priced at a low, low seven times earnings ratio, and boasting positive free cash flow that's actually a bit stronger than its reported earnings, Express, according to most analysts, is on a path toward 17% annualized profits growth over the next five years. But even if they're wrong, and SunTrust is right that growth won't hit that heady target, the stock looks buyable. Fact is, at today's prices, Express would be a deal even at a growth rate of just half what's expected.

It's a bargain, pure and simple.

Tune in to Time Warner
Last but not least, we just learned that the analysts at Canaccord Genuity are doubling down on their buy rating for Time Warner, and upping their price target a whopping 29%, to $53 per share.

According to the analyst, there are a number of catalysts on the horizon that could drive the stock higher, beginning with an acceleration of growth expected in the fourth quarter of this year, followed by a "likely" increase in Time Warner's 2.3% dividend next year, followed by "TWX’s fastest growth [likely in] 2014-2015 (with the bulk renewal of Turner affiliate deals)."

All that said, there's the old saying about "wishes and fishes" to consider. Right now, based on the numbers Time Warner is producing today, the stock really doesn't look like much of a bargain at nearly 18 times annual profits, and a growth rate of just 11.5%. Even with the dividend tossed into the mix, Time Warner looks to be a stock far short of fairly priced... and unlikely to come anywhere close to the 29% profit potential that Canaccord is promising investors.

My advice? There's enough value in much-maligned Express shares to more than make up for the lack of value in the two picks that Wall Street actually likes. Stick with Express, and let the analysts buy their recommendations themselves.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of McGraw-Hill.


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