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 both Magna International (NYSE: MGA  ) and BorgWarner (NYSE: BWA  ) , but a downgrade for NYSE Euronext (UNKNOWN: NYX.DL  ) . Might as well rip the band-aid off, so let's go right ahead and find out why...

NYSE got downgraded 
Shares of "Big Board" operator NYSE Euronext are slipping this morning, tripped up by a downgrade to neutral by Swiss megabanker UBS. Curiously, UBS coupled its downgrade with an upping of its price target on the stock to $34.

This seems to suggest the banker believes there's a slight chance NYSE will get a better bid than the $33.12 per share that IntercontinentalExchange (NYSE: ICE  ) offered for the company last month. But really, it's a distinction without a difference. Assuming the deal goes through, there's little opportunity for upside from NYSE's current share price of $33 and change. Conversely, if the deal falls through, NYSE's share price would likely decline -- which also argues against keeping a buy rating on the stock today.

Long story short, there's no good reason to be either long or short this stock today.

Magna is hot
In contrast, KeyBanc Capital Markets proffered two other ideas this morning that just might be worth buying. The first, Magna International, is a Canadian auto parts purveyor to such European carmakers as Fiat, BMW, and Mercedes.

This customer list is key to KeyBanc's suggestion that you should buy Magna, because according to the analyst, an "analysis of European light vehicle sales" suggests things are improving in the old economy, making KeyBanc "incrementally more bullish on the outlook for automotive supplier stocks." Magna in particular looks attractive at 9.1 times earnings, a 9.4% long-term growth rate, and a 2.1% dividend yield. The only thing arguing against KeyBanc's rating, really, is the surprisingly weak free cash flow at Magna.

Despite reporting "earnings" of $1.4 billion over the past 12 months, this company has actually only generated about $571 million in real cash profit from its business. Personally, I think this is reason to be suspicious of KeyBanc's endorsement. Good as Magna looks from the outside, I'd suggest you pop the hood and take a good hard look at this company's cash flow statement before deciding to buy.

Should you assimilate BorgWarner instead? 
KeyBanc cites similar arguments in upgrading BorgWarner to buy Monday -- good European light vehicles sales, incrementally more bullish, yadda, yadda, yadda. But with Borg, the argument in favor of buying looks even weaker than at Magna.

Here, too, we see a stock generating less free cash flow than it claims to be "earning" on its income statement -- $375 million versus $502 million. But if BorgWarner has a slightly better projected growth rate (12%) than Magna boasts (9%), it suffers by comparison in two other respects: First, BorgWarner's 18.6 P/E ratio is fully twice the valuation we find at Magna. Second, Borg currently isn't paying any dividend at all. (Not surprising, considering the weak free cash flow).

In short, if I'm dubious of Magna's prospects -- KeyBanc's endorsement notwithstanding -- I'm downright pessimistic about BorgWarner.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends BorgWarner and NYSE Euronext.

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9/27/2016 4:02 PM
BWA $34.49 Down -0.24 -0.69%
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