Friday'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, we're looking at three headline-driven ratings moves, as SunEdison's (NYSE: SUNE  ) wins the stock an upgrade, while poor earnings reports earn downgrades for Aeropostale (NYSE: ARO  ) and Pandora Media (NYSE: P  ) . Taking these in order, we begin with...

SunEdison is shiny
Silicon-wafer maker SunEdison announced plans yesterday to spin off its SunEdison Semiconductor business in an IPO slated to take place in early 2014. Hopes that the spinoff will unlock value at the company sent SunEdison shares soaring 15% in Thursday trading. This morning, similar hopes have inspired analysts at Needham & Co. to upgrade the shares to "buy," while establishing an $11 price target on SunEdison.

Is the upgrade justified? Is the run-up in share price justified? My Foolish colleague Travis Hoium is not convinced that either are. Together with its subsidiary or apart, SunEdison remains a deeply unprofitable and cash-burning business. GAAP losses last year amounted to $167 million. Free cash flow ran negative to the tune of $626 million.

Maybe spinning off its semiconductor division will help fix SunEdison's problems. Maybe it won't. All that's certain at this point is that the company only intends to sell "a minority ownership interest" in SunEdison Semiconductor -- and if you ask me, that's not a big enough change in the business to justify the soaring share price.

Aeropostale is going out of style (too)
Next up, the trading action in shares of clothier Aeropostale is looking a lot like what we saw at rival Abercrombie & Fitch yesterday. Just hours apart from each other, the two companies reported weak earnings -- $0.14 per share at A&F (half what had been expected); a $0.43-per-share loss at Aeropostale (likewise short of estimates).

Analysts at Imperial Capital are taking the opportunity to remove their buy rating from Aeropostale shares, and cutting their price target to $10 per share. It's not hard to see why. Like Abercrombie, Aeropostale management failed to provide a cash flow statement along with its earnings release, a document which might have shown that the damage is not quite so severe as it initially appeared. Absent this document, investors are left with no reason to believe otherwise than that the damage is indeed fully as bad as it looks.

And how bad does it look? Yesterday's posted loss pushed Aeropostale into the red, leaving the company with $22 million in losses racked up over the past 12 months. With no profits to its name, no dividend to its shareholders, and a projected growth rate even slower than A&F's, at this point, there's very little reason left to want to own Aeropostale shares.

Pandora's profits don't play
Last but not least, we come to Pandora. Yesterday, Pandora reported earnings that, at positive $0.04 per share pro forma but negative $0.02 per share GAAP, either beat analyst estimates handily, or missed them quite badly. Whether the news was a beat or a miss depends entirely on whether you think companies need to hit a GAAP per-share target to qualify for a "beat," or whether it's enough to deliver mere "earnings before bad stuff" that matches analyst objectives.

Today, it appears that investors are leaning toward the former interpretation, and punishing Pandora for a "miss." Shares are currently down 12%, and still falling. This is despite the fact that Pandora reported a whole series of other numbers that didn't look half-bad: Pro forma revenue from services delivered over mobile devices grew 92%, active users increased 30%, total listener hours were up 18%, and market share among radio listeners of all types climbed 106 basis points to 7.08%.

Analyst reactions to Pandora's news are decidedly mixed. According to StreetInsider.com, both Stifel Nicolaus and Raymond James are downgrading the shares to various flavors of "hold" this morning. Goldman Sachs and Canaccord Genuity, in contrast, are maintaining their "buy" ratings and raising their price targets -- to $29 and $25, respectively.

Who's right? Who's wrong? I'm going to side with the investors today (and with Stifel and Raymond), and against analysts Goldman and Canaccord. For while adding users and increasing listener hours is all well and good, the fact remains that Pandora remains an unprofitable business, and one burning increasing amounts of cash. Trailing-12-month results show Pandora losing nearly $49 million, as negative free cash flow approaches the $22 million mark.

Long story short, Pandora's business may be growing, but until it figures out a way to grow profits in tandem, I cannot recommend the shares.

Fool contributor Rich Smith owns shares of Abercrombie & Fitch. The Motley Fool recommends Pandora Media.


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  • Report this Comment On August 23, 2013, at 2:09 PM, EllenBrandtPhD wrote:

    It is somewhat rare that I side with Gokdman, but I side with them here.

    First of all, today's action has nothing to do with "investors."

    It has to do with the humongous Short position making its decisions in light of results which probably frightened them, not the opposite.

    Some are possibly increasing their Short to support a Short - not bright, as far I'm concerned.

    But others are furiously trying to cover, taking advantage of any (supposedly crafty) Short-Long funds which dumped early after the news yesterday and are now attempting to buy back their own shares lower.

    The stock decisively turned about 30 minutes ago as I write this, and I believe it should make back some of its low-point loss by the end of the trading day, because Who Knows? what may be announced this weekend.

    This report was interpreted as Bearish by those already Bearish and Bullish by those already Bullish. Period.

    The unlimited hours announcement is VERY Bullish and already being touted as so by the Bulls, with 30-odd articles coming out the past couple of hours around the world. What it means is that those particular stats are going to SOAR over the next quarter and beyond.

    The financial implications of this move, plus a much larger sales staff and marketing staff added, are the reasons for the supposed "lower guidance," which is actually the equivalent of a Capex announcement in a manufacturing business. You have to think of it that way: Pandora is greatly increasing Capex.

    It still truly looks to me - speaking of it totally as a STOCK - that this one is the next Facebook, with a similar meteoric rise just ahead, after we exit this nasty uncertain general Market.

    All it will take, a la Facebook - and at one point in its history, Google - is for one or more of the Elders of the Market - Lee Cooperman, George Soros, someone else like that - to grandly announce next week that they are taking a "Big, Big" position in Pandora, citing that it is the "next Facebook" (as a stock).

    That's all it will take, and the Shorts who are covering today will seem awfully smart next week.

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