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 pair of downgrades for Ryder System (NYSE: R  ) and Zions Bancorp (NASDAQ: ZION  ) . But the news isn't all bad, so before we address those two, let's start with why one analyst thinks...

SanDisk is no flash in the pan
Tuesday dawned bright for owners of "flash" memory specialist SanDisk (NASDAQ: SNDK  ) . The company just announced it will begin selling the "world's fastest 64GB microSDXC card," the SanDisk Extreme microSDXC, which the company says is ideal for use in the latest smartphones, tablets and cameras. No sooner had it done so than analysts at Needham & Co. upped their price target on SanDisk stock to $75 -- a five-buck bump over the previous target.

Is SanDisk worth it?

Although at first glance, 31 times earnings looks like a lot to pay for a stock in the volatile tech sector, SanDisk is one of the leaders in flash memory products -- and it's growing fast. Analysts on average project 28% annualized earnings growth at the company over the next five years -- nearly fast enough to justify the P/E ratio. Plus, SanDisk is currently generating cash at a 16% faster clip than the rate at which it reports earnings, generating $544 million in free cash flow over the past year.

At a price-to-free cash flow ratio of 27 today, the stock's not quite as cheap as I'd like to buy it -- but regardless, there's little doubt that Needham is right about this one: Even after running up 73% over the past year, it's still not too late to buy. SanDisk shares are still cheap enough to buy.

If only we could say the same about the stocks getting downgraded today.

Zion going downhill? 
First up: Zions Bancorp. It's been a good year for Zions shareholders so far, but with their stock up 66% over the past 12 months, analysts at RBC Capital Markets think it's time to take a step back and consider whether the stock's really worth it.

Priced north of 23 times earnings, Zions carries a P/E ratio nearly twice that of larger, sturdier banks such as US Bancorp and Wells Fargo. Expected to grow its earnings at less than 8% per year going forward, it's arguably a poor bet that the company's weak earnings justify such a valuation -- even if Zions does have a cheaper price-to-book-value ratio.

With a dividend yield that's just a fraction of what its larger banking brethren pay, there's little to recommend this bank, aside from the valuation on its stock. And today, the P/E ratio tells me there's little to recommend the stock on that score, either.

Ryder System: time to dismount?
The middle of the summer moving season might seem like a strange time to be downgrading Ryder, owner of the famed Ryder Truck rental brand. Nonetheless, that's just what banker BB&T Capital did today -- and it's right to do it.

In contrast to SanDisk, which generates a bit more free cash flow than it's allowed to claim as "net income" under GAAP, Ryder actually burns cash on its cashflow statement, even as it claims to be earning income on its income statement.

Cash-burn came to $462 million over the past 12 months. But honestly, even if Ryder's $215 million in claimed GAAP income was all it was cracked up to be, I'd still think the stock expensive: 14.5 times earnings is too much to pay for Ryder's sub-10% earnings growth rate. And that's before you even calculate the effect of Ryder's $3.8 billion net-debt load on the stock's valuation.

Given my druthers, were I asked to recommend a truck rental shop today, I think I'd have to go with U-Haul owner AMERCO (NASDAQ: UHAL  ) instead. It's got the free cash flow that Ryder lacks, plus a cheaper P/E, a slightly faster growth rate, and a smaller debt load. Honestly, I don't "love" AMERCO either -- but it's a heck of a better value than Ryder.

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

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