Thursday'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 both TiVo (NASDAQ: TIVO  ) and Green Mountain Coffee Roasters (NASDAQ: GMCR  ) . But the news isn't all good, so before we get to those two, let's take a quick look at why today is a...

Scary day for Monster Beverage
Missed earnings estimates and renewed reports of health concerns about its energy drinks translated into a downgrade for shares of Monster Beverage (NASDAQ: MNST  ) Thursday. Analysts at Gabelli & Co. cited slowing U.S. energy drink sales, losses on business abroad, and negative publicity as all being factors contributing to their decision to cut Monster's rating from "buy" to "hold."

But if all those reasons aren't enough for you, here's one more: Monster costs too much.

Priced at 29 times earnings, even the 19% projected earnings growth rate isn't fast enough to make Monster shares worth buying. Add in the fact that the company's not living up to analyst expectations already, and the case for downgrading the stock only gets stronger.

Now, factor in the fact that the profits Monster does earn aren't all that high in quality -- free cash flow last year fell about $95 million short of the $340 million in "net income" the company claimed to have earned -- and there's really no reason to risk buying these shares. The value just isn't there.

Green Mountain looking greener
Preferring the tried and true over the canned and new, investors are bidding up shares of coffee maker Green Mountain today -- up an astounding 26% as of this writing. Why?

A big second-quarter earnings beat yesterday evening probably had something to do with it. Green Mountain reported $0.93 earnings per share Wednesday, or $0.20 more than analysts had it pegged for. Management also promised to deliver as much as $3.15 per share in profit for this year, or $0.31 better than estimates -- so the company seems to think the second quarter won't be the only one in which it "beats earnings" this year.

And yet... I still can't agree with analyst Dougherty & Company's decision to resume coverage of the stock with a buy rating, or with Lazard's decision to lift its price target to $95. Even if Green Mountain succeeds in growing its profits at 19% per year over the next five years, as analysts project it will, the stock's 32-times-earnings valuation more than prices in this prospect. Plus, while not performing as poorly as it once was, Green Mountain still isn't generating as much free cash flow as it claims to be "earning" under GAAP.

Trailing-12-month FCF at the company comes to $367 million, which is only 91% of reported earnings. So if Green Mountain looks pricey when valued on GAAP earnings, it's even more expensive when valued on its real cash profits. Long story short, the stock looks overvalued to me. I wouldn't buy it -- and certainly not after today's run-up.

Can TiVo be saved? 
Finally, we come to one of the (very few, apparently) companies that did not report earnings today but got a new buy rating from Wall Street anyway: TiVo. This morning, MKM Partners initiated coverage of TiVo with a buy rating and an $18 price target. And here's the astounding part: They might be right.

Unprofitable today -- and really, unprofitable most years -- TiVo doesn't look like much of a business at first glance. But the company generated $41 million in positive free cash flow last year, and $234 million the year before that. Profits are kind of hit-or-miss for this company, which relies on lawyers extracting license fees for much of its business, but MKM thinks the company will see more success on this front, and could be due as much as $8 to $15 per share in litigation settlements in relatively short order.

For a company that's already sitting on $455 million net cash, this raises the potential for TiVo to soon have more cash in the bank than Mr. Market currently charges to buy the whole business on the Nasdaq. And while success in court is never guaranteed, TiVo's continued positive free cash flow, and fairly low valuation relative to that FCF, makes the stock look like it could be worth a (small) gamble.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Monster Beverage. The Motley Fool owns shares of Monster Beverage.

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