Thursday'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, as analysts take the clippers to their ratings on old-economy stalwart Deere (NYSE: DE  )  and virtual-economy star Green Dot (NYSE: GDOT  ) . But the news isn't all bad, so before we get to those two, let's let you in on a little surprise:

Somebody likes Cisco
You wouldn't guess it from the stock's 6.2% drop this morning, but not everyone's down on the tech star today. In fact, one analyst, ISI Group, has just upgraded Cisco Systems  (NASDAQ: CSCO  )  shares from "cautious" to "neutral."

Yesterday, Cisco reported that it generated analysts' expected $12.4 billion worth of revenue, and earned $0.52 in fiscal fourth-quarter 2013, a penny ahead of estimates. The company then promptly undid all the good that this news did it, warning that fiscal first-quarter 2014 earnings may be only $0.50 per share -- and not the $0.51 that analysts have been looking for. And yet, ISI is not worried, upgrading the shares even as others rush to sell.

Good for ISI. Priced at barely 13 times its $10 billion in trailing earnings, and selling for a mere 11.3 times its $11.7 billion in free cash flow, Cisco looks like a terrific bargain today. Growth estimates for the company call for a hardly barn-burning -- but certainly respectable -- 9% annual pace. Cisco pays a 2.6% dividend yield, which when combined with the growth rate, more than justifies this price-to-free cash flow ratio. (And not for nothing, but buyers of Cisco today also receive a claim on the company's $31.2 billion cash hoard.)

Long story short, and despite today's sell-off, Cisco shares still look as attractive as they ever have.

Deere in the headlights
Our next story isn't quite as happy. Deere reported yesterday that it grew its fiscal third-quarter 2013 revenues 4%, while growing profits per diluted share a much more impressive 29%. Management further confided that while it expects sales growth in its agriculture and turf division to slow in the fourth quarter, it also believes that declines in sales at the company's construction and forestry division will begin to moderate.

Overall, that sounds like good news. And yet, this morning saw analysts at Argus Research cut their rating from "buy" to "hold." I think they're right to be cautious. Here's why:

Priced at 10.3 times earnings, and projected to grow these earnings at 9% annually over the next five years, while paying you a 2.5% dividend yield, Deere shares look appropriately priced today. But that's the best-case scenario. Viewed more skeptically, Deere's record of generating only $460 million in free cash flow over the last 12 months -- even as it reported earning $3.4 billion in profits -- suggests that this company's earnings aren't all they're cracked up to be. Valued on its free cash flow, Deere shares now trade for a lofty 70 times multiple. On balance, I think that's reason enough to be cautious about Deere, and I agree with Argus' decision to downgrade.

Green Dot getting poor marks for value
Time to put a punctuation point on this column -- and we'll do that with Green Dot. This morning, analysts at Compass Point announced that they were downgrading Green Dot shares to neutral. Why?

As StreetInsider.com quotes the analyst explaining, "the shares have now appreciated to within 3% of our $26 price target [and] appreciated 61% compared to the S&P 500 return of 6.6%" since Compass Point last recommended buying Green Dot. Furthermore, Compass points out that "lingering competitive pressures" have it worried about Green Dot's ability to complete, while its dependence on Wal-Mart for 65% of its revenue, and the high, 40% churn rate in customers using its payment cards, leave Compass Point seeing more risks than rewards in Green Dot shares at today's price point.

Ordinarily, I'd probably agree with that assessment -- the more so since we've already seen Green Dot shares appreciate by 150% over the past year. However, the more I look at the numbers, the more I think there's still value to be had in Green Dot.

Consider: With $92 million in free cash flow generated over the past year, Green Dot is earning cash profits nearly twice as fast as it's allowed to report GAAP accounting profits. This also means that Green Dot is more appropriately viewed as being a stock that "sells for less than 10 times FCF" than as a stock that "has a 23 P/E." (At least, that's the way I look at it.)

If you ask me, 10 times free cash flow is hardly a high price to pay for an asset-light business like Green Dot, especially with S&P Capital IQ telling us that analysts expect to see 20% long-term earnings growth at the company. Up one-and-a-half times in the last 12 months, I think Green Dot still has the potential to go higher.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems.


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