Friday's Top Upgrades (and Downgrades)

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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, it's a quiet day on Wall Street, as the analysts digest their turkeys (double entendre intended). But we do have a few changes in sentiment to report.

Telecom Italia (NYSE: TI  )
With its stock down 14%, it's been a rough 12 months for the Italian wireless and wireline telecom operator so far. But TI is getting a reprieve from analysts at HSBC this morning, as they cancel its underweight rating, and upgrade to neutral.

What's to like about TI? Well, there's the 6.2% dividend yield, to start with. While not currently "profitable" as GAAP calculates such things, Telecom Italia is generating a fair amount of cash -- $6.5 billion over the past 12 months, in fact. That cash flow, if TI can maintain it, should be sufficient to both keep the dividend secure, and give the stock a very tempting price-to-free-cash-flow ratio of just 3.

On the down side, TI has a couple of big problems to contend with. First, it's got a very large debt load -- about $43 billion net of cash, or nearly four times the company's own market cap. TI also appears to have limited ability to grow its way out of the debt. Analysts on average estimate the company will only grow profits at about 0.5% per year over the next five years. That's below the rate of inflation, and suggests the company's actually becoming steadily less profitable over time.

Cablevision (UNKNOWN: CVC.DL  )
Next up -- or rather down -- is U.S. cable provider Cablevision, which while still buy-rated at Wunderlich, just got its price target cut by 20%, to $20 even.

Disappointing news? Sure. But even at the lower price target, Wunderlich's still promising its clients about a 43% capital gain on Cablevision stock -- plus another 4.3% in dividend checks -- over the next year. That's quite a nice gain... if it happens.

Unfortunately, I don't think it will. You see, Cablevision stock shares a lot of the same problems Telecom Italia has. Its projected growth rate is slow -- less than 8% annually over the next five years. Its free cash flow, while superior to net income, is still less than $300 million a year, giving it a price-to-free cash flow ratio of roughly 12 (which is higher than the growth rate). And of course, Cablevision also comes with a heaping helping of debt -- about $10.9 billion, or three times the stock's market cap.

Long story short, even if you believe Telecom Italia deserves a neutral rating, it's hard to see why the equally unstable Cablevision would deserve a buy rating from Wunderlich -- no matter the target price.

Intel (NASDAQ: INTC  )
But fear note, dear investor. There is one stock on Wall Street's ratings list today that does offer some potential for a profit: Intel. Granted, Intel's actually getting its price target cut today, with Argus Research reducing it from $30 to $25 -- but the good news here is that I don't think the cut is particularly well-deserved.

Priced at less than nine times earnings, Intel seems an obvious bargain given its growth rate (near 12%), its dividend yield (4.6%), and its debt load (none -- to the contrary, Intel's got about $3.25 billion more cash than debt). In truth, it's not quite as good a bargain as it seems, because free cash flow at the semiconducting giant isn't up to par with reported net income. But even the $8.1 billion that Intel has managed to generate as cash profit over the past 12 months is sufficient to give the stock an enterprise value-to-free-cash-flow ratio of 11.5.

That number is still a smidge below the firm's expected growth rate, suggesting that even in the worst-case scenario, Intel remains fairly priced despite its weak free cash flow number. Add in the 4.6% dividend yield, and I think there's still plenty of reason to call the stock underpriced -- and a buy.

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel.


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