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 headlines include upgrades for Navistar (NYSE: NAV  ) and Hibbett Sports (Nasdaq: HIBB  ) . On the other side of the classroom, Strayer Education's (Nasdaq: STRA  ) target price just got smacked with a ruler.

Bad news first
Let's start with that one. Once a star student in the for-profit education business, Strayer shares are getting held back this morning by a target price-cut at R.W. Baird. While still maintaining a "neutral" rating on the stock, Baird reduced its price target for Strayer from $88 to $48 a share today. In related news, JPMorgan Chase has downgraded the stock to neutral.

Why? This one's not that hard to figure out. On Friday, Strayer reported a 70% plunge in profits on 9% lower revenues. Worse, the company reduced guidance for the coming year, predicting profits could come in as much as 10% below consensus estimates. Management also suspended payment of its dividend -- which at a yield of 8.6%, had been the primary reason many investors were interested in the stock in the first place.

What they're left with today is a stock selling for a bit less than seven times earnings, growing a bit slower than 6% a year, and paying no dividend whatsoever. It's not exactly an expensive stock, but it's not nearly as attractive as it looked Thursday, when the dividend was still intact.

Wish Upon a Navistar?
In happier news, Navistar scored a big upgrade to "outperform" this morning. The truck maker has been making big moves toward reducing costs in recent weeks, laying off workers and talking about asset sales. Barron's predicts the efforts will yield a higher share price in the coming year. Now, it seems the analysts at R.W. Baird agree as well.

But the problem with Navistar, as it's always been, isn't the stock price. It's the debt load.

Bearing a $4.5 billion debt burden, against just $681 million in cash, it's hard to see Navistar's billion-dollar-and-change market cap under the pile of IOUs. It's also hard to see, though, how Navistar is going to be able to plow its way out from under this debt. So far this fiscal year, the company's generated a whopping $96 million in free cash flow. Annualized, that works out to maybe $130 million a year, for an enterprise value-to-free cash flow ratio of 40.

That's an awfully high price to pay for a company expected to grow earnings at just 5.2% per year over the next five years, no matter what R.W. Baird says. Caveat investor.

Is Hibbett a winner?
 Sad to report, it appears our third and final analyst recommendation will be a similar strike-out for investors. This morning, Needham & Co. announced it's upgrading shares of sporting goods chain Hibbett Sports to "buy." The question is, "Why?"

Priced at nearly 22 times earnings, Hibbett looks a bit expensive even assuming the company hits Wall Street's expected 15.5% long-term growth rate. The stock's no great bargain from a free cash flow perspective, either, actually generating a bit less cash profit than what it claims as "net income" under GAAP. And of course, the company pays no dividend whatsoever.

True, Hibbett's got one thing in its favor that the other stocks discussed so far do not. It's debt free, or near enough so as to make no difference. As such, it's probably the best stock idea Wall Street's thrown out for us today -- but still not good enough to be worth your money.

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Strayer Education. 


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