Friday'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, we'll be looking at three headline-making ratings changes, as Apple (NASDAQ: AAPL  ) and Six Flags (NYSE: SIX  ) score new buy ratings, while on the downside...

Coach catches a downgrade 
Might as well get the bad news out of the way first. This morning, handbag maker Coach (NYSE: COH  ) caught a downgrade to neutral, as analysts at Robert W. Baird pulled their buy rating on the stock, and cut their price target to $59. Baird's main worry: Coach is losing market share to rivals.

Of course, even the new $59 price target suggests a good 14% upside to the current share price. Combine that with Coach's generous dividend yield, and you're looking at a nice 16% profit for owning the shares over the next 12 months... assuming Baird's right about the target price.

But is it?

With a 14 trailing P/E ratio and near-14% long-term growth projected, Coach shares sure don't look expensive. Free cash flow at the firm is a bit weak  -- about $984 million versus more than $1.05 billion in reported net income. But to my Foolish eye, Coach's 2.3% dividend easily makes up the difference here. Long story short, the stock looks at worst fairly priced today, and maybe even a bit cheaper than it should sell for. If Baird truly believes the shares are worth $59, it should be telling investors to keep on buying today, and not downgrading the stock.

Showing the flag for value
Next up, amusement park operator Six Flags Entertainment scored a timely buy rating from Credit Suisse this morning, which initiated the stock with an outperform rating and a $87 price target. Is this one worth a look as well?

Well, Six Flags' 11 P/E certainly looks cheap enough, and its 5% dividend yield is not to be ignored. Profits growth is projected to average 10% per year over the next five years, which, when combined with the dividend, appears to offer significant potential for profit. Six Flags is also likely to benefit from heightened investor interest in the lead-up to Blackstone's IPO of SeaWorld later this year.

My main worry about Six Flags is that its cash profits don't match up well with its reported net income. In a situation analogous to Coach's -- but significantly worse -- Six Flags generated only $272 million in free cash flow last year, or about 77% of what it claimed to have earned under GAAP accounting for profits.

That said, even viewed in the most negative light possible, I see Six Flags' $4.4 enterprise value -- 16 times free cash flow -- as not unreasonable given the dividend yield and growth prospects. In the very worst case, the company looks very slightly overvalued. On balance, though, there's a good argument to be made for the stock having room to run, and Credit Suisse's endorsement looks sound.

Apple of their eye
And finally, in a development that used to be common, but that has become less so of late, Apple scored an upgrade this morning, when ace analyst Standpoint Research initiated coverage of the stock with a buy rating and a $480 price target.

Not meaning to overstate the case, but this seems the most obviously right call of the day.

With a P/E ratio of only nine, but a profits growth rate expected to hit nearly 19% annually over the next five years, Apple shares look incredibly undervalued today -- and that's not even counting the 2.5% dividend yield... or the nearly $40 billion in cash in the bank... or the fact that Apple generates about $1.14 in real cash profits for every $1 it gets to report as "net income" -- and so is actually quite a bit more profitable than it appears.

Long story short, Standpoint thinks this stock could gain 22% in value over the next year. I think Apple is worth even more than that.

Fool contributor Rich Smith owns shares of Apple. The Motley Fool recommends Apple and Coach. The Motley Fool owns shares of Apple and Coach.

link


Read/Post Comments (3) | Recommend This Article (7)

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.

  • Report this Comment On April 19, 2013, at 1:39 PM, OracleofOmahaha wrote:

    No BBRYTOOL we are not going to buy your Crapberry stock with no future no matter how much you kick and scream. Good luck with that troll.

  • Report this Comment On April 19, 2013, at 1:45 PM, dwilh51183 wrote:

    AAPL WILL EXPLODE TO THE UPSIDE ONCE THEY RAISE THEIR DIVIDEND AND ANNOUNCE ANOTHER 25 BILLION SHARE BUYBACK. AAPL ALSO WILL RELEASE A LOWER COST IPHONE SO THEY CAN SIGH UP CHINA MOBILE AND JAPAN'S DECOMO AND THAT'S 120 MILLION MORE POTENTIAL CUSTOMERS. SO ANYONE WHO SAYS AAPL WILL BE AT 100 A SHARE IS JUST A YOUNG STUPID KID WHO RIDES THE SHORT BUS TO SCHOOL. AAPL IS A STEAL AT THIS PRICE

  • Report this Comment On May 02, 2013, at 10:20 PM, BlackberryIsKing wrote:

    Apple is a great short at this price. It won't stay there, as it is a $300 stock, at most. The best stock to buy is Blackberry. As you can see from the last week, OracleOfLoserville was wrong. BBRY way up. It's down a bit now, but that's just a great buying opportunity. Way more upside for BBRY, while AAPL has way more downside. Apple is yesterday's news, BBRY is the future. Smart investor's are buying BBRY (that means Oracle is not, and the reason is obvious). lol.

    Long BBRY.

Add your comment.

DocumentId: 2373857, ~/Articles/ArticleHandler.aspx, 4/18/2014 9:38:26 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...


Advertisement