Tuesday'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, in honor of the season, our headlines are all vacation, all the time, as we check out a pair of price-target hikes for travel websites Travelzoo (NASDAQ: TZOO  ) and priceline.com (NASDAQ: PCLN  ) . But first, let's examine why one analyst thinks...

Carnival Cruise Lines is a shipwreck
Carnival Cruise Lines (NYSE: CCL  ) updated investors on its prospects -- or lack thereof -- yesterday, warning that revenues are likely to slip 2% to 3% in fiscal 2013, with earnings ranging from $1.45 to $1.65 per share. That's down from previous promises of only flat revenues, and earnings as high as $2.10.

The news shook Wall Street pretty badly, with William Blair, UBS, and HSBC pulling their buy ratings on the stock, and downgrading to various flavors of "hold." UBS, in particular, while admitting that it's closing the barn door after the earnings warning has already run down the country road, is quoted by StreetInsider.com today as worrying that "the worst is not behind Carnival just yet. We had maintained BUY after previous incidents with belief that perception issues would start to resolve going forward, but lower guidance tonight means bookings have gotten worse, not better, in the last few weeks."

That's bad news for Carnival -- bad news that investors can ill afford to ignore. Priced at 17.5 times earnings today, the stock may not look unfairly priced based on Carnival's 2.9% dividend yield and 14% projected growth rate. However, now that analysts are saying the growth rate is in question -- and Carnival is confirming it -- there's a real risk that this apparently fairly priced stock will begin to look overvalued once earnings growth projections adjust.

Add in the fact that, with just $770 million in trailing free cash flow showing up on its cash flow statement, Carnival apparently produces only one dollar of real cash profit for every $2 it claims to be "earning" under GAAP, and the stock could deserve even worse ratings than the "hold"s that Wall Street analysts are handing out today.

Tune into the morning Travelzoo
Better news greeted investors in travel deals website Travelzoo this morning. While maintaining a hold rating on the stock, analysts at Ascendiant Capital Markets upped their price target by 23%, to $32 per share -- comfortably higher than the $29 and change the stock costs right now. But is Ascendiant right?

Actually, yes. And in fact, I think the analyst might even still be a bit too conservative here. On one hand, sure, Travelzoo at 23 times earnings looks a bit pricey for the 20% annualized earnings growth it's expected to produce over the next five years. On the other hand(s), though, Travelzoo generates about 50% more free cash flow than it gets to report as net earnings on its income statement, resulting in a price-to-free cash flow ratio of just 15. Factor in the $65 million in cash on Travelzoo's books, and the valuation drops even further -- to an enterprise value-to-free cash flow ratio of only 12.5.

On a 20% grower, that's a bargain price. Result: I think Travelzoo will hit Ascendiant's $32 price target... and keep right on running higher.

A new price target for Priceline
Finally, similarly, but from a different analyst this time, we're seeing shares of Priceline get a price-target bump -- this time courtesy of analysts at Cantor Fitzgerald. According to the analyst, this stock is going to $900 within a year, and since Priceline only costs about $837 today, Cantor thinks you should buy it.

But here's where I break with the Street. While I like Priceline a lot, I don't believe the stock offers investors a compelling bargain at today's prices. Here's why:

Priced at 29 times earnings, and with 20% growth projected, the stock looks expensive on its face. Factor in all the caveats and quibbles we used to prove Travelzoo is actually a bargain, though, and... Priceline still looks expensive. Value it on free cash flow, and the P/FCF ratio drops to 25. Give it credit for its cash reserves, and the valuation drops again -- to an EV/FCF of 22.

Both of those numbers, unfortunately, are still higher than the 20% growth estimates for Priceline. Meaning: If the company exceeds estimates for its performance by a significant margin, it could indeed be worth buying -- but only if it exceeds these estimates, and only if the difference between promise and performance is significant. Merely living up to expectations won't cut it, and any failure to grow as expected could bring a world of hurt to Priceline shareholders.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends priceline.com. The Motley Fool owns shares of priceline.com.


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