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, our headlines feature new buy ratings for both Pandora Media (NYSE: P  ) and Procter & Gamble (NYSE: PG  ) . But the news isn't all good, so before we get to those two, let's find out why one analyst thinks...

Buckle is looking rusty
Jeans-hawker The Buckle (NYSE: BKE  ) disappointed the Street Thursday with an earnings report that featured $0.78 in per-share earnings on $269.7 million in sales. In both respects, these numbers were worse than the analysts had been projecting. Result: Ascendiant Capital Markets cut its rating on the stock from "neutral" to "sell" -- and it may be right to do so.

On the surface, Buckle's valuation -- 15.7 times trailing earnings -- looks like too much to pay for a stock expected to grow at less than 8% over the next five years. On the other hand, the company does tend to generate more free cash flow than it reports as net earnings. The problem with Buckle, though, is that the discrepancy simply isn't big enough to turn this "sell" of a stock into a "buy."

Valued on free cash flow -- and we don't have up-to-date numbers for that yet, so we'll use last quarter's results as a proxy for how things are probably still going -- I get a price-to-free cash flow ratio of a bit less than 14 times for Buckle. That means the stock is a bit cheaper than it looks, but still not cheap enough for 8% growth.

Long story short, while the stock has done well over the past year, and outperformed the S&P, this outperformance isn't justified by the valuation. The stock's overpriced, and Ascendiant is probably right to recommend selling it.

 How should you play Pandora?
Next up: Internet music streamer Pandora. Thursday's results at Pandora weren't much to write home about. The company reported losing $0.10 per share in the first quarter, just as analysts had predicted. On the other hand, Pandora did beat slightly on revenues, and promised investors it will deliver profits of as much as $0.08 per share over the rest of this year, or $0.05 at the midpoint of its guidance range. Either of those numbers would top the consensus estimate of $0.01 pretty handily, and secure Pandora a place at the finally-profitable-companies table.

This prospect convinced analysts at RBC Capital to upgrade the stock this morning. RBC now rates Pandora an "outperform," and predicts its stock will rise to $24 within a year. Me, I see things going the other way.

According to its own release, Pandora's profits are actually shrinking rather than expanding, with trailing-12-month losses now amounting to $46.5 million. Cash-burn is also accelerating, with Pandora burning through about $13 million over the past year. Call me a pessimist, but these are not the kinds of trends that convince me Pandora has begun turning around its business and will become suddenly profitable in 2013.

They're not the kinds of trends that encourage me to follow RBC's advice and buy the stock.

Procter & Gamble: Lather, rinse, and repeat the last CEO
Finally, you've probably heard by now that Procter & Gamble has decided to let its current CEO go, and bring back the CEO it had before him: Alan Lafley. What you may not have heard yet is whether this is good news or bad news.

Well, according to UBS, it's the former. Responding to Lafley's return, the Swiss megabanker announced today that it's upgrading P&G shares to "buy," saying Lafley gives it "new hope" that the stock will recover and begin outperforming its peers again.

Quoted on StreetInsider.com this morning, UBS notes that outgoing CEO Bob McDonald has already delivered "improving fundamentals and significant cost savings" at P&G. The banker expects to see Lafley build on those improvements. But perhaps more important, UBS notes that because he's technically the new guy, investors may forgive Lafley if he inflicts some short-term pain on earnings to "re-base" them at a lower level -- from which the company can then start growing again at significant speed.

This makes sense. Investors do like growth, and maybe the stock's current sub-8% pace is the reason P&G shares haven't outperformed the S&P 500 by much this past year. I know I don't see much to like in a stock that costs more than 18 times earnings, and growing at 8%...

On the other hand, if earnings take a hit, and that P/E rises in consequence, will a faster growth rate be enough to make the stock look more attractive. Would you buy, for example, a 25 P/E P&G if it could promise 12% growth?

Personally, I wouldn't. And that's why I don't buy UBS' buy thesis -- and won't be buying P&G stock, even with its new-and-improved CEO.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble and The Buckle. The Motley Fool owns shares of The Buckle.

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