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 big upgrade for Quiksilver (NYSE: ZQK  ) , an even bigger downgrade for Pfizer (NYSE: PFE  ) , and for Polaris Industries (NYSE: PII  ) , a new "buy" rating. Let's start with that one.

Polaris lights up the night
Somebody must have wished upon a star last night, for investors in Polaris Industries awoke this morning to find their stock "initiated at buy" by Swiss megabanker UBS. Shares are already up 1.2% in response -- nearly three times the gain on the Dow. But are these gains deserved?

Maybe. Sure, priced at 21 times earnings, Polaris doesn't look particularly cheap. But this stock has several things in its favor, which make it cheaper than it looks. For one, the company's got no net debt -- to the contrary, its bank account is brimming with nearly $275 million more cash than debt.

Free cash flow at Polaris is a stellar (pun intended) $342 million, or 4% more than the "net income" that the company claims under GAAP. Finally, the stock is projected to grow its profits at nearly 16.7% and pays a modest 1.8% dividend yield -- for a total estimated return of 18.5% annually.

Priced today at an enterprise value-to-free cash flow ratio of 18.3, I see the stock as modestly underpriced and one of the better values available in today's generally overpriced stock market.

Haste makes waste at Quiksilver
Now if only I could say the same thing about today's other buy recommendation. Tuesday also saw Quiksilver upgraded to "buy" at analyst B. Riley, with a new price target of $9.25. But here, the picture's nowhere near as pretty as Polaris.

Unprofitable today, and burning cash even faster than it can report GAAP losses, Quiksilver experienced $75 million in negative free cash flow over the past year -- and with a balance sheet showing it burdened with $766 million more debt than cash, that's not a trend Quiksilver can long endure.

Even the stock's fans on Wall Street see Quiksilver earning only enough to bring its forward P/E ratio down from "infinity" to 28 times earnings based on next year's earnings prognostications. But with these same optimistic analysts saying earnings over the next five years will only grow at a 15% annual clip, that multiple to earnings -- should Quiksilver even earn anything -- still seems to high to justify a "buy."

Pfizer and the winner's curse
Last and least, we come to Pfizer. This morning, ace independent analyst Standpoint Research cut its recommendation on the big pharma giant to "sell," warning that Pfizer is exaggerating its earnings by characterizing some of its ongoing costs of doing business as "one-time charges" -- when they're really not. Standpoint also takes Pfizer to task for reporting a 15% revenue drop since 2010 (mainly due to Lipitor going off patent), for earning less today than it did five years ago, and for... well, basically just for costing too darn much.

Priced at 13.3 times earnings, Pfizer shares get far too much credit from investors for the sub-3% average earnings growth the company's expected to produce over the next five years. Worse, free cash flow at the company -- historically a strong point in Pfizer's favor -- now lags reported net income by nearly 2%. This suggests there's some truth to Standpoint's accusation that Pfizer is not as profitable as it portrays itself to be.

Finally, Standpoint argues that Pfizer appears tempted to get into a bidding war with Amgen (NASDAQ: AMGN  ) over Onyx Pharmaceuticals (UNKNOWN: ONXX.DL  ) . On the one hand, the analyst thinks this is a war Pfizer can win. On the other hand, a win at, say, a $10 billion price, to acquire Onyx's potential $1 billion revenue stream (in 2015), would both add significantly to Pfizer's $5 billion net-debt load, while at the same time failing to move the needle much on Pfizer's $57 billion annual revenue stream.

In short, Standpoint sees many reasons to sell Pfizer stock today, and few reasons to buy. That pretty much sums up my feelings, as well.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Polaris Industries.


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