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 an upgrade for Skyworks Solutions (NASDAQ: SWKS  )  and a higher price target for Cracker Barrel (NASDAQ: CBRL  ) . But on the downside...

Buy InvenSense? Nonsense! 
Smartphone motion-sensor maker InvenSense (NYSE: INVN  ) is taking a tumble this morning, knocked for a 4% loop by a downgrade from analysts at RW Baird. Although the stock's down 22% over the past 12 months, Baird thinks InvenSense won't bounce back quickly, and no longer backs its previous promise of $16 a share by year-end.

That said, Baird's new price target -- $13 a share -- is at least more than InvenSense shares currently cost. After today's sell-off, it offers the prospect of a not-insubstantial 11% gain. What's more, I think it's entirely possible that InvenSense will hit this new target price.

Why? Well let's look at the numbers: Priced at 23 times earnings today, InvenSense doesn't look unreasonably expensive relative to long-term estimates of 22% annualized profits growth. Free cash flow at the company is strong -- almost as strong as reported income. Best of all, InvenSense boasts a bank account brimming with $159 million cash, and no debt.

Based on these numbers, I calculated an enterprise value-to-free-cash-flow ratio of 22.2 for the stock, which is almost exactly in line with 22% growth estimates, and perfectly deserving of Baird's new neutral rating. Any improvement at all in operations... and InvenSense becomes a buy.

Now for the "good" news 
That was the "bad" news of the day. Now let's look at the good, beginning with Cracker Barrel, which just finished reporting fiscal Q2 earnings that beat estimates by $0.18 a share ($1.43 in all), alongside better-than-expected sales, and a stronger forecast for full-year profits as well.

These numbers convinced analysts at Miller Tabak to add $7 to their price target for the buy-rated shares (now at $81). There are, however, a couple of problems with that promise. First off... $81 a share only works out to about an 8% profit from today's prices, which seems a bit slim to justify Miller's assigning the stock a buy rating.

This problem is compounded by the stock's valuation. At 15.7 times earnings today, and with a 3% dividend yield, the stock looks a bit pricey for the 10% long-term earnings growth it's expected to produce. Free cash flow is strong, but not significantly greater than reported GAAP income. In short, while the company looks great, and the stock's not unreasonably priced, it's really not a bargain at today's prices. If you're looking for a better bet on the Barrel, I'd suggest you check out a stock I own, Biglari Holdings (NYSE: BH  ) , instead. Biglari pays no dividend and appears, on the surface, to have a higher valuation. But with $48 million in trailing free cash flow, and an enterprise value of only $381 million, the stock's EV/FCF ratio is less than 8.0 -- which is pretty cheap for its projected 13% growth rate.

Best of all, Biglari owns 20% of Cracker Barrel, giving you a chance to profit from Cracker Barrel's growth, without paying the stock's higher EV/FCF. Cracker Barrel recently tried to jawbone Biglari into selling back its shares ahead of the earnings news, but Biglari shot that idea down immediately -- and as it turns out, rightly.

"Sky" is the limit
Last but not least, we come to another of my favorite stocks: Mobile chip maker Skyworks Solutions. Over the weekend, I labeled Skyworks a "superball" stock that had finally fallen to reasonable valuation on a (perhaps overblown) threat of new competition from Qualcomm. Perhaps someone was paying attention to that column, because just this morning, and analyst at Charter Equity agreed with me that Skyworks was worth a look -- and upgraded the shares to "buy."

Now here's the best news: Skyworks is actually a bit cheaper today than it was when I endorsed the stock a few days ago. At $4 billion in market cap, the stock costs 19 times earnings and less than 17 times free cash flow. (Back out its nearly $380 million in available cash, and the stock's even cheaper than that.)

Either way, Skyworks looks downright attractive relative to analysts' projected 15.6% long-term growth rate. While I wouldn't mind it if the stock's price fell a bit more, offering an even bigger bargain... if analysts are already starting to notice the valuation, and come around with upgrades and buy ratings, "cheaper" may not be in the cards for Skyworks. The stock may have only one way left to go, and that way is up.

Motley Fool contributor Rich Smith owns shares of Biglari Holdings. The Motley Fool recommends Cracker Barrel Old Country Store. The Motley Fool owns shares of InvenSense and Qualcomm. The Motley Fool is short InvenSense.


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