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 Dean Foods (NYSE: DF  ) and Charles Schwab (NYSE: SCHW  ) , but a downgrade for Micron Technology (NASDAQ: MU  ) .

Bad news first
Might as well get the bad news out of the way first: The trading week got off to a poor start for Micron shareholders this morning, as Lazard Capital announced it's downgrading the stock to neutral. A 30% surge in share price so far this year has Micron finally trading back around where it was a year ago -- but no sooner has Micron evened its keel than Lazard pronounces its run... done.

Is that fair? Maybe not. But "fair" is not the point, or not to Lazard, anyway. According to the analyst, what's key here is that "recent DRAM strength is to taper off as we enter Q2," posing the risk of short-term earnings misses. In the longer term, "Street estimates are too bullish for FY14 and the Elpida merger." With shares now costing somewhere "toward the high end of its historical range," it's time to take any profits you've managed to earn over the past couple of months, and wait for another pullback before buying more Micron.

So says Lazard -- and I agree. GAAP-unprofitable today, selling for more than 16 times free cash flow and nearly 16 times projected 2014 earnings, the stock already costs a bit more than you should want to pay for 14% projected long-term earnings growth. Meanwhile, the stock's 30% return over the past two months has already given shareholders all the profits (and more) that they'd ordinarily expect to earn in a full 12-month year. Now's the time to "declare victory and go home."

Dean looks smart 
Better news greeted shareholders of milk magnate Dean Foods. KeyBanc Capital Markets initiated coverage of the company with a buy rating and a $21 price target this morning. As StreetInsider.com described the rating, KeyBanc thinks "DF is trading at a significant discount to its peers (3.5x EV/EBITDA compared to about 7x for its agribusiness peers)," and that's an "unwarranted" discount "given DF's stable free cash flow (FCF) generation, transformation of balance sheet to a position of strength (2x levered after adjusting for DF's ownership stake in WWAV after adjusting for the sale compared to over 3x before), and relatively stable nature of the milk category."

Dean's balance sheet is only going to look better, by the way, as the company monetizes what's left of its WhiteWave stake, raising perhaps as much as $560 million in extra cash -- enough to pay off about 18% of its debt load. And yet, try as I might, I just can't see the attraction to this stock.

Consider: Free cash flow at Dean is impressive -- $212 million over the past year, versus less than $160 million in reported GAAP earnings. And yet, even if you credit Dean for all the cash it's expected to make from WhiteWave, and adjust the stock's future enterprise value down to about $5.6 billion, that still leaves the company selling for an enterprise value-to-free cash flow ratio north of 26. Even the 16% earnings growth the company is expected to produce over the next five years seems too little to justify the stock price.

Long story short, KeyBanc may like the stock, but I'd rather be short Dean than long.

Talking about Chuck
If there's one stock recommendation today that I do like, it has to be Bernstein's recommendation to buy Charles Schwab. A resurgent stock market has investors finally willing to buy stocks again, and that's a long-ish-term trend that's got to be good for the market's premier discount broker. What's more, Bernstein thinks that if interest rates ever get around to rising again, and return to "normal" levels, then the combination of brokerage commissions and more money from investing customer funds for interest could lift "Chuck" to about $2 a share in annual earnings... eventually.

So much for the future, but what about the present? Personally, when I look at Schwab's numbers today, I see a company with a $21.2 billion market cap, $1.1 billion in annual free cash flow, and about a 19 times price-to-free cash flow ratio. That doesn't look at all unreasonable given Schwab's projected 18% annual earnings growth rate, and its modest 1.5% dividend yield.

As a result, although I'm ambivalent on Bernstein's suggestion that interest rates will soon rise, boosting Schwab's net interest margins and lifting the stock 40% to a $23 target price, I do believe the stock is fairly priced -- or even a bit cheap -- based on the numbers Schwab is producing today. Upside potential aside, I see little downside in the stock, and agree with Bernstein that Charles Schwab is likely to outperform the market.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Dean Foods Company and WhiteWave Foods.

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