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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, our headlines feature a switch in sentiment between oil majors ConocoPhillips (NYSE: COP  ) and Statoil (NYSE: STO  ) . But before we get to those two, let's take a quick look at why one analyst is...

Giving 3D Systems an A+
Our first analyst news of the day concerns three-dimensional "printing" company 3D Systems (NYSE: DDD  ) , recipient of a hike in price target from Canaccord Genuity this morning. Canaccord says it's responding to new data from 3D's "analyst day", at which the company reiterated its earnings guidance for this year, and noted that the company's recent acquisition of Phenix Systems "could contribute modestly to 2013 results and become a substantial driver of printer revenue in 2014."

These catalysts were enough to convince Canaccord to raise its price target on the shares to $55, but should they be enough to convince you to buy?

I'm not so sure. As I noted in my write-up of the Phenix purchase last week, 3D is paying $15 million for an 80% stake in a company that is "currently unprofitable, cash flow-negative, and generated revenues of only $6.1 million over the past year." In the short term at least, that doesn't sound like a very compelling buy.

On the other hand, though, at this stage in its lifetime, tiny Phenix should be growing much faster than its new parent company, which according to Yahoo! Finance estimates is pegged for only 16.5% annualized profit growth over the next five years. Boosting that growth rate -- a lot -- will be key to helping 3D maintain its heady earnings multiple which already stretches into triple digits.

Personally, though, I still think the stock's more hype than value at a P/E ratio of 107, and a price to free cash flow ratio not much lower than that. Canaccord says you should buy it, but I would not.

COP goes pop!
Moving now to the switcheroo, analyst Howard Weil cut its rating on ConocoPhillips to "sector perform" Tuesday. Simultaneously, it moved its Norwegian rival up a notch to take Conoco's former position as a recommended "sector outperform." Why?

Well, right off the bat we can see that Conoco shares, up 11% over the past year, have held up better than Statoil -- down 6%. Conoco now costs about 10.1 times trailing earnings, versus just a 6.8 times P/E ratio for Statoil. From a dividend perspective, Statoil also seems the better bet. According to S&P Capital IQ data, the Norwegian oil concern pays its shareholders a 5.3% annual dividend, versus 4.3% at Conoco.

Turning to free cash flow, Statoil extends its advantage over Conoco. Despite sporting a smaller market cap, Statoil generated more than twice the cash profits of its U.S. rival over the past 12 months -- $1.5 billion versus Conoco's $725 million.

Really, the only metric where Conoco seems to come out a winner in the value race is on earnings growth. Analysts see Conoco growing modestly over the next five years, about 4% per annum. Statoil, in contrast, is expected to see its earnings decline at close to 4% annually over the next half decade.

So is Statoil superior?
When you consider that growth estimates are always basically just guesses about the future, I'm not sure that Conoco's projected growth-rate advantage is reason enough to reject Weil's advice and buy Conoco rather than Statoil. Seems to me, given that the Norwegian firm is cheaper in most respects than its rival, it offers a bit more value for the buck. Indeed, seeing as all Statoil has to do is just "tread water" for a few years, and prevent its earnings from going down, to exceed expectations, it should be easier for the stock to outperform expectations, than it will be for Conoco to produce strong growth in a weak economic environment.

When all's said and done, I still find the weak free cash flow trends at both Statoil and Conoco a turnoff. If Statoil's a better bargain than Conoco, it's only by a matter of degrees. And until I see stronger cash profits being produced, I wouldn't buy either one.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends 3D Systems and Statoil (ADR). The Motley Fool owns shares of 3D Systems and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems.


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  • Report this Comment On June 18, 2013, at 1:26 PM, EllenBrandtPhD wrote:


    Those who follow and trade STO realize that its one humongous dividend payment per year - in early May - skews its calendar, as it were, against the rest of the Brents - but then it plays catch-up with a vengeance.

    In a typical year, the stock starts to climb towards an annual high in July and does very well all the way into late September.

    But many think this is an Atypical year and that the climb of the Brent stocks is starting a month early - i.e. just about now.

    In any case, STO has now gotten 4 analyst upgrades in a little over 3 weeks, a very good performance by the typically reticent US and Canadian amalysts in what is still a little known - and under-owned - stock.

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9/23/2016 4:00 PM
COP $39.94 Down -1.08 -2.63%
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STO $15.67 Down -0.16 -1.01%
Statoil CAPS Rating: ****