Wednesday's Top Upgrades (and Downgrades)

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

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 downgrades for tech stalwarts Adobe (NASDAQ: ADBE  ) and Symantec (NASDAQ: SYMC  ) . But it's not all bad news, so why don't we start out with a few words on why one analyst thinks ...

This company is the Cat's meow
Wednesday opened happily for shareholders of mining and construction equipment maker Caterpillar (NYSE: CAT  ) . Predicting that the company is capable of earning $10 a share annually by 2014, analyst Standpoint Research initiated Cat-coverage with a buy rating and a $105 share-price target. And while Standpoint admits there are "concerns regarding China and inventory levels," the analyst notes that with Cat's share price off 24% from its recent high, these worries are "already reflected in the share price."

Be that as it may, here's one worry that isn't reflected: free cash flow.

Even if Caterpillar does manage to "earn" $10 a share next year, you see, there's a big question about the quality of these earnings. Cat reported total net earnings of $5.7 billion last year; however, the amount of actual cash profit it generated -- its free cash flow -- was an anemic $165 million.

On Cat's $56.8 billion market cap, that works out to a simply staggering price-to-free cash flow ratio of 344 -- and that's not even penalizing the company for its nearly $37 billion debt load. Even crediting the company for its strong projected rate of 14% earnings growth, therefore, I'm afraid this stock is simply too overpriced to buy.

 Adobe's not looking so solid today 
So what might you buy instead? Not Adobe, certainly. This morning, Goldman Sachs responded to Adobe's giving of below-consensus earnings guidance yesterday by reiterating its sell rating on the stock, while raising its price target. Meanwhile, ace analyst Stifel Nicolaus went a step further and actually downgraded Adobe shares, to "hold."

On balance, I think I side more with Goldman's sell recommendation than with Stifel's belated hold. On one hand, when valued on GAAP earnings, Adobe looks like a clear "sell" because its shares cost nearly 30 times earnings, despite earnings growth rate projections that fall short of 11%.

On the other hand, Adobe looks like almost as clear a "sell" based on its free cash flow number. Last year, Adobe's cash profits of $1.2 billion dwarfed its reported income of only $713 million. Yet on a $21.2 billion market cap, the company still scores only a 17.3 for its price-to-free cash flow ratio. With no dividend yield to bridge the gap, that's simply too high a price to pay for 10%-and-change profits growth. In short, any way you look at it, the stock's overpriced. Hold it or sell it as you prefer -- but just make sure not to buy Adobe.

Symantec looks buggy 
Similar valuation worries plague antivirus software maker Symantec, the subject of a downgrade to "perform" from Oppenheimer this morning. As Oppenheimer points out, its change of opinion is largely motivated by the fact that "SYMC [is] approaching our prior PT of $25," so "upside becomes relatively limited as catalysts (new CEO + strategy, dividend) have played their course for now." Calling Symantec "a show-me story with a heightened focus on execution," Oppenheimer is stepping to the sidelines to see how things play out.

Problem is, I've already seen what Symantec has to show, and -- spoiler alert -- it doesn't look good.

Dividend-less like Adobe, Symantec is similarly strong on the cash-flow front. But just like Adobe, it's simply not generating enough cash to justify the valuation. Priced at 15.5 times earnings, and 12.6 times its $1.3 billion in free cash flow, Symantec doesn't look all that expensive. But most analysts agree there's limited room for growth at this company -- high single digits at best. As a result, any double-digit multiple at all is probably too high a price to pay.

Long story short, I wouldn't go long this stock at today's prices.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2323909, ~/Articles/ArticleHandler.aspx, 10/1/2016 9:59:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 12 hours ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 4:00 PM
ADBE $108.54 Up +0.74 +0.69%
Adobe Systems CAPS Rating: **
CAT $88.77 Up +1.30 +1.49%
Caterpillar CAPS Rating: ***
SYMC $25.10 Up +0.09 +0.36%
Symantec CAPS Rating: ***