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 headliners include a new buy rating for Tupperware (NYSE:TUP), balanced out by lower price targets on Pandora Media (NYSE:P) and Toll Brothers (NYSE:TOL). Let's check out the good news first, and find out whether investors should...
Pop the top on Tupperware?
Argus Research starts us off on a bright note this morning, upgrading shares of container-maker Tupperware to "buy," and assigning a $72 price target. Tupperware shares currently cost only $65 and change, suggesting 10% upside on the share price, plus an additional 2.2% dividend yield. Is that enough to justify a buy rating, though?
In a word: no. For one thing, 12% total return really isn't that much more than the 10% or so the S&P 500 has returned for investors historically -- certainly not enough of a premium to justify concentrating your risk in a single stock, as opposed to a diversified basket of 500 different equities.
For another thing, the valuation here just doesn't work. Priced at more than 18 times trailing earnings, Tupperware looks vastly overpriced for the 12% rate at which its profits are expected to grow over the next five years. True, the company generates a smidgen more free cash flow than it reports as net income -- but still not enough to justify the valuation. Long story short, Tupperware's no buy. It might be worth holding if you really like dividends. If not, the stock's potentially the exact opposite of what Argus calls it: a sell.
Tune in to Pandora?
Speaking of stocks to sell: Pandora. The online music service (you can't really call it a "business," since it's usually giving away its product for free) is burning cash and racking up losses. Analysts have it pegged for a P/E ratio of more than 110 based on forward earnings estimates, and Pandora just threw even those modest assumptions into question,when it warned yesterday that its fiscal 2012 loss is widening, to a potential $0.12 per share.
Responding to the bad news, analysts at Stifel Nicolaus cut $3 off their price target for Pandora this morning. Granted, they still like the stock, still recommend buying it, and still think it will rise in price -- to as high as $14, or nearly twice today's share price of $7 and change.
But I say, if Stifel likes Pandora so much, let them buy it. With the company unprofitable today, and not expected to book a profit before 2015, Pandora's prospects are still very much a closed box. The company hasn't yet figured out how to make money off selling a free product, and my bet is that they never will. If you're an investor unhappy with the prospect of selling the stock on a day when it's down 17%, ask yourself: How happy will you be selling a few years from now, when the stock's down 100%?
For whom the bell Tolls
And finally, we come to Toll Brothers, a stock that's done quite well on reports that the U.S. homebuilding industry is not quite dead, and just finished reporting fiscal fourth-quarter profits that exceeded Wall Street's expectations. So... why is it that this morning, analysts at Compass Point reduced their target price for the stock by $5.50, valuing the stock at $30 a share?
After all, counting a big tax benefit recorded in the quarter, Toll just finished earning $2.35 a share. It also sold $632.8 million worth of houses versus expected revenue of just $565.1 million, increased "deliveries" by 44% and backlog by 54%, and reduced its cancellation rate on house orders to 4.6%.
Maybe the reason Compass is pointing down on Toll Brothers is that a lot of this good news was already baked into the stock price. Toll Brothers, you see, currently sells for more than 46 times trailing earnings (if you don't count the tax benefit), and 28 times forward earnings (in which the benefit is unlikely to repeat). Either way you look at it, that's a pretty premium to even the 21% long-term profits growth rate that analysts expect out of the stock, and leaves precious little margin of safety for new buyers. In fact, with it priced at $31 a share today, Compass Point's new $30 price target suggests there's no margin of safety left here at all. In which case, you have to wonder whether any good news at all would be good enough to justify buying this stock.
With Toll Brothers already up 52% over the past year, it may be time to take your profits and go home.