Thursday'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 new-and-improved price targets for Visa (NYSE: V  ) and Boston Beer (NYSE: SAM  ) . Meanwhile, on the bad-news side...

Cree gets creamed
Shares of LED lighting specialist Cree (NASDAQ: CREE  )  are reeling this morning, down more than 2% on what's actually a pretty mild downgrade from Street analyst B. Riley.

Cutting Cree from a buy to a neutral rating, Riley suggested investors should expect to see a $33.75 share price on Cree at the end of next year. Considering that Cree shares cost $33 and change, that's not particularly bad news -- but neither is it great. It suggests a stagnant share price over the next 12 months. But is Riley right?

Not necessarily. While on the surface, Cree certainly appears expensive at a P/E ratio of 81, the company's actually quite a bit cheaper than it looks. True free cash flow at Cree exceeds the net income it reports under GAAP by a factor of more than four, you see. And valued on its $212 million in free cash flow, and taking into account net cash on the balance sheet, Cree actually sells for a very modest enterprise value of only 15 times FCF. Seems to me, that's a perfectly fair price to pay for the 14% long-term earnings growth Cree's expected to produce. But still -- if Cree is fairly priced today, that does suggest that Riley is correct: There's little reason to expect it to rise in value tomorrow.

What about Visa?
Who might go up, then? Oppenheimer thinks it knows, and Oppy's urging investors to double down on their Visa bets, buying the credit card operator in expectations of a rise to $170 per share over the next 12 months. That's $20 more than the analyst thought Visa would be worth previously, by the way. But here, I think the analyst's calling things wrong.

Why? Like Cree, Visa looks expensive on the surface. Its P/E ratio is a lofty 47. Also like Cree, Visa is a cash-generating machine, churning out $4.6 billion in FCF over the past year, enough to give it a 21 times price-to-free cash flow ratio.

Problem is... like Cree, Visa's valuation appears right in line with its projected growth rate of about 20%. Once again, that's an argument for the stock being fairly priced today -- not an argument for why Visa should rise 15% in value "tomorrow," and become a $170 stock over the next 12 months. Like Cree, Visa's a fair value at best, and unworthy of Oppenheimer's latest endorsement.

Don't cry in your beer
Finally, we come to Boston Beer, known simply as "SAM" to its friends.

As you've probably heard by now, shares of the Samuel Adams beer-brewer popped 14% this morning after the company issued a bullish sales and earnings prediction for 2012, and promised even more growth to come in 2013. This happy news convinced Swiss banker UBS to lift its target price on the shares to $111. There's just one problem: Boston Beer shares currently cost $132!

That's why, even as it tweaks its target price, UBS still insists that Boston Beer is a sell -- and I agree. While today's news was wonderful, no doubt, the fact remains that even if the company manages to hit the tippety-top of its revised earnings guidance ($4.60 a share), this would only be enough to pull its P/E ratio down from 29.4 to 28.7.

Personally, I don't give much credence to analyst predictions that Boston Beer will only grow earnings at 9% going forward. Sales growth alone is averaging 12% at the company, and if you add a few cents' worth of price hikes to each bottle of beer sold, it seems the company can't help but grow earnings in the mid-teens at least. Still, that's not enough to justify a P/E ratio that's pushing 30 -- or to explain away the fact that Boston Beer generates far, far less free cash flow than it reports as net income.

My bet is that the rally behind Boston Beer shares will soon fall flat.

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

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