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 start off the New Year with a buy rating for FLIR Systems (NASDAQ: FLIR  ) and a higher price target for eBay (NASDAQ: EBAY  ) . Not everyone's happy, though -- Google (NASDAQ: GOOGL  ) just got its price target cut.

Bad news first
Google lost $50 off its price target at Oppenheimer this morning, as the analyst -- which only rates Google a "perform" (i.e., "hold"), in any event -- reduced its year-out price target to $715 per share.

That's disappointing news, to be sure, but it probably shouldn't come as a surprise. Google shares cost about $720 right now. Based on trailing-12-month earnings, that works out to a 22.5 P/E ratio. And while that's cheaper than the stock has cost historically, it's arguably still more than the company is worth.

Why? While fabulously profitable, Google is so big today that analysts only think it capable of about 13.5% annual profits growth over the next five years. Even with superior free cash flow and lots of cash in the bank, that's probably not fast enough growth to justify a 20-plus times multiple to earnings. In short, Google has hit the wall. No longer a pure-play software company, and burdened by the cost of building hardware as well, Google's days of go-go growth may be at an end.

Upping the bid on eBay  
Happier news greets eBay shareholders this morning, as Canaccord Genuity ups its price target $6 to $56 a share. On the plus side, that's about 7% higher than the price shareholders are bidding for eBay shares today. On the minus side, though... Canaccord still isn't willing to lift its recommendation on the stock past "hold." Why not?

The answer's simple: eBay already costs quite a pretty penny. Sure, valued at nearly 18 times earnings, and pegged for better than 14% growth over the next half-decade, eBay looks simultaneously cheaper than Google, and faster-growing. But here's the thing: While Google generates far more cash than it reports as "net income" under GAAP accounting standards, eBay generates less cash than it claims to be "earning."

A lot less.

Turns out, at the same time as eBay was reporting $3.8 billion in GAAP profits over the past year, its actual free cash flow only backed up about 57% of those apparent profits -- just $0.57 on the dollar. As a result, a stock that looks perhaps fairly priced under traditional PEG analysis may actually be significantly overvalued when judged on the actual amount of cash it's producing.

My guess: eBay is a whole lot more expensive than it looks. Canaccord may be raising its price target today... but it may not be long before other analysts start going the other way, and urging investors to sell the stock.

Could FLIR fly? 
And finally, we come to the only bona fide buy rating on today's list: FLIR Systems, just upgraded by Needham on news of the Traficon acquisition. Traficon, as you may know, does video analysis of traffic patterns in Europe, and FLIR thinks its business will integrate nicely and even be improved by the addition of FLIR's thermal imaging techniques. According to StreetInsider.com, Needham sees this, along with earlier acquisitions, as opening up "new growth platforms for FLIR's commercial imaging business."

I agree. I also think that at a valuation of less than 15 times annual free cash flow (which outruns reported income by 8% at FLIR), the shares look attractive based on 12.5% growth estimates and FLIR's 1.3% dividend yield. While the stock's not an obvious bargain, and FLIR's defense business remains vulnerable to "sequestration" in Congress, the stock's starting to look attractive. Kudos to Needham for noticing it.

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

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