Wednesday'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 news is all "tech" all the time -- as we examine ratings changes and price target tweaks affecting Riverbed Technology (NASDAQ: RVBD  ) , Rentech Nitrogen Partners (NYSE: RNF  ) , and... Symantec (NASDAQ: SYMC  ) .

Good news first
Let's start off on a bright note, and begin with Symantec, which this morning received an upgrade to outperform, and a price target hike to $30, from analysts at R.W. Baird.

Symantec reported earnings yesterday -- $0.44 per share, or $0.08 better than analysts were expecting. Revenue, too, came in ahead of estimates at $1.71 billion. These numbers convinced Baird that the stock is a buy, but should they convince you, too?

After all, at 24.5 times earnings, Symantec appears at first glance to be vastly overpriced for the sub-10% earnings growth Wall Street expects to see it produce over the next five years. Indeed, even Symantec's superior rate of free cash flow production -- about $1.25 billion over the past year -- leaves the stock trading for close to 15 times FCF. That's arguably overpriced, even considering Symantec's 2.5% dividend yield, if the stock only grows at the 9.5% rate it's predicted to grow at.

And Symantec may not even manage that pace. Issuing guidance to investors on the current quarter's likely earnings, Symantec warned that earnings will probably top out at $0.44 per share, and may only reach $0.42. In either case, that would be short of consensus estimates of $0.45 per share -- and if analysts have overestimated Symantec's growth rate in the current third quarter, you have to figure there's a risk they have also been too optimistic in preparing their estimates for growth rates farther out.

My hunch: Between the dividend, the company's flush bank account, and its current expectations for growth, Symantec stock looks fairly valued after today's run-up. While there's a possibility it will go higher, as Baird says it will, I wouldn't bet on this one to outperform the market.

Riverbed still a dry hole
Turning now to the bad news, networking equipment maker Riverbed Technology reported growing its Q2 sales 26% versus the year-ago quarter, yet still missed analyst estimates, and managed to lose $0.10 a share in the process. Investors are punishing the stock severely today, cutting 11% off of its market cap, and analysts are being no kinder. At last count, Northland Capital, Needham, and UBS had all cut their price targets on the stock to anywhere from $15 to $20.

On the surface, at least, that appears to be the right call. Factoring in yesterday's results, Riverbed now has trailing GAAP earnings of less than $5 million, giving the stock a P/E of -- better sit down for this -- 508 times earnings.

And yet, despite the bad GAAP news, free cash flow at the firm -- real, cash profits -- continues to climb at Riverbed. At $251 million, the company's trailing FCF number is now 50 times what its GAAP earnings suggest, and the company's price-to-free-cash-flow ratio stands at just 10.1. That seems awfully low relative to analysts' expectations that Riverbed will keep growing its profits at upwards of 21% annually over the next five years. And that's slower than the company grew sales this quarter past.

Long story short, I think investors are selling this stock short. Riverbed was cheap before earnings. And now it's even cheaper.

Last of the "techs"
And finally, we come to our final "tech" of the day -- which isn't really a tech stock at all: fertilizer maker Rentech Nitrogen. Rentech reports earnings next Thursday, on August 8, but over at Cowen, the analysts aren't waiting around to hear any shoes drop.

Hearing that a breakup of the global potash duopoly threatens to crater the prices of potash fertilizer (which facilitates chemical reactions in food crop plants), and fearing the knock-on effect this may have on sellers of other kinds of fertilizers -- such as Rentech's nitrogen, a structural component in plant proteins and DNA -- Cowen has decided to knock $6 off its price target for Rentech, and now posits a $28 price target 12 months out.

This, however, may be a mistake. Personally, I don't put a lot of stock in the fact that Rentech sports a 12 times P/E ratio right now (because its free cash flow is week, and its price-to-free-cash-flow ratio is currently 20 times). That alone doesn't make the stock cheap in my book. But even 20 times free cash flow isn't too high a price to pay, I think, given that analysts are still calling for 12% profit growth at Rentech over the next five years, given that the stock is currently yielding 10.5%, and given the entirely obvious point that Rentech's specialty is nitrogen fertilizer, rather than the more vulnerable-to-price-cuts potash.

All in all, I think the stock remains a fine value today, and more likely to go up some more, than fall to the $28 price target that Cowen now assigns it.

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


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  • Report this Comment On July 31, 2013, at 9:39 PM, KGaider wrote:

    Re : RNF

    Rich you are correct. Yes RNF may go back to 27/28 but this makes it a strong buy. RNF also does DEF for Yara of Norway and recently when Yara reported they surprised plus raised their outlook.

    Also RNF and UAN are local suppliers of N fertilizer that must be applied every year - unlike potash which farmers can skip applying up to 4 years in some cases and 2 years in most cases.

    Being local - customers are within 200 miles - gives the advantage that most customers come and pick up - ie no shipping costs - AND ZERO dependance on India and China.

    Also I put little faith in all the analysts that kept pushing MOS and Cantopex companies when #1 first warning sign was when they only got 6 month contracts rather than full year and #2 they all failed to keep track of the steadily falling potash spot price which is published monthly by the USDA for free which Cantopex was subject to when contracts expired in June.

    Also previously If you recall I was the one that commented before months ago that the potash players were in trouble for a variety of reasons. The Ukralia thing just put the nail in the coffin.

    Now here's a prediction - the Russians will work things out with the Swiss - none of them want less than $400/ton - and then watch all those incompetant analysts upgrade after the fact.

  • Report this Comment On August 01, 2013, at 12:01 AM, TMFDitty wrote:

    My theory exactly.

    I'm still not thrilled with the valuations at Mosaic and Potash, even after the sell-off. But I would be shocked if the Russians permitted prices to fall for no particular good reason -- so anyone who *does* like the valuations today may look forward to a rebound when this news turns out to be less dire than it's been portrayed by the press.

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