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, our headlines include upgrades for Manitowoc (NYSE: MTW  ) and Tempur-Pedic (NYSE: TPX  ) . But the news isn't all good, so before we get to those, let's find out why one banker just sent...

Select Comfort "back" to hold
Good-for-your-back airbed maker Select Comfort (NASDAQ: SCSS  ) got dislocated last week after reporting fourth-quarter earnings of just $0.22 per share, or a full dime below the consensus estimate. Guiding investors to expect weak profits in fiscal 2013 as well -- perhaps as low as $1.65 a share, versus consensus estimates of $1.80 -- guaranteed shareholders sleepless nights for many a quarter to come.

Given all the bad news, and after sleeping on it for a few days, one analyst has decided that enough is enough, and there's no point in buying Select Comfort anymore if this is the best it can do. And really, you can hardly blame KeyBanc Capital Markets for its decision to downgrade the stock to hold.

While on the surface, the stock looks cheap at 16 times earnings and a projected 24% long-term growth rate, under the covers we see that Select Comfort actually only generated about $49 million in positive free cash flow last year, less than two thirds of its reported GAAP income. Valued on this free cash flow, the stock's price-to-FCF ratio comes to just under 25 -- or right in line with the projected growth rate.

To me, that looks like the very definition of a hold-rated stock. What's more, if Select turns in too many more quarters of negative earnings growth, instead of the 24% positive growth we've been promised, the stock will quickly turn into a sell.

Time for Tempur-Pedic
In contrast to Select Comfort's uncomfortable admission last week, Tempur-Pedic's performance last quarter looked "down"-right firm. Fourth-quarter earnings of $0.60 a share beat the Street estimate by a nickel, helping to send Tempur-Pedic's share price up 17% in after-hours trading.

Contrasting the two bed makers' results, KeyBanc commented today that increased competition from Tempur-Pedic was a factor in its decision to downgrade Select Comfort -- and a reason KeyBanc decided to upgrade Tempur-Pedic.

Problem is, KeyBanc's coming late to this particular slumber party. Priced at 24 times earnings itself, Tempur-Pedic not only costs more than Select Comfort, it's also growing slower. Consensus estimates currently call for Tempur-Pedic to post barely more than 11% long-term earnings growth over the next five year ... and that's a big problem.

You see, even with the company's superior free cash flow, Tempur-Pedic still sports a 17.5 times FCF valuation. On an 11% grower, that valuation looks too high. It suggests to me that last week's share price rally was more of a temporary short squeeze than a long-term trend. Long-term, the stock's still overpriced.

Could Manitowoc move? 
Finally, switching gears from the bedroom to the kitchen, we come to Manitowoc -- maker of both industrial cranes  and commercial kitchen appliances. Earlier this week, Manny announced the sale of its commercial warewashing (i.e., dishwashing) business to Japan's Hoshizaki. The company said it plans to use the $26 million it netted from the sale to help pay down its debt.

BB&T Capital seems to like this news, and this morning announced it is upgrading the shares. But here's the thing: Manitowoc is currently more than $2 billion in hock -- so the $26 million generated by this sale will barely scratch the surface. Even more important, while debt is surely a factor in evaluating whether Manitowoc is worth buying, the stock's valuation looks so clearly overpriced as to make debt a mere afterthought.

Trailing-12-month earnings show the stock to be trading at an insupportable 28.5 times earnings -- rich even for the 17.5% long-term grower than Manitowoc's fans believe it to be. Worse, the company's free cash flow has a lot more in common with Select Comfort than it does with Tempur-Pedic. Over the past 12 months, Manitowoc generated only about $44 million in free cash flow -- or barely half the $83 million it reported as GAAP net income.

Long story short, I wouldn't be long the stock at today's prices. And once you factor Manny's $2 billion debt load into the picture... I might even go short.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Tempur-Pedic International.

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