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, our headlines feature new and improved price targets for two players in the charge card space -- incumbent giant MasterCard (NYSE: MA  ) and rising start Green Dot (NYSE: GDOT  ) . But the news isn't all good, so before we get to those two, let's find out why ...

Craft Brew Alliance just went flat
Pacific Northwest bierbrauer Craft Brew Alliance (NASDAQ: BREW  ) doesn't report third-quarter earnings until next Wednesday, but one analyst isn't waiting around for the bad news. Already this morning, megabanker Citigroup has announced that it's downgrading the shares ahead of earnings, and assigning a neutral rating to the stock. Strangely, though, Citigroup paired its "downgrade" with an increase in price target to $17 per share. What's up with that?

In a word: valuation. As Citi notef in its report, the more-than-doubling of Craft Brew's share price over the past year has left the stock more than richly valued -- 750 times earnings, to be precise. And that's after the stock sold off by more than 7% in response to today's downgrade.

Even with projected strong earnings growth of 20% annually over the next five years, that's a hard valuation to swallow. Even more so once you notice that Craft Brew's $0.6 million in trailing-12-month profits are actually an overstatement of the firm's profitability, since it's currently generating negative free cash flow.

Long story short, Citigroup is only half right today. While the stock certainly deserved to be downgraded, it's just as certainly not worth the $17 a share that Citi says it is worth.

Do-de-do-do-de-do ... charge (it)!
Even as Craft Brew shareholders were crying in their beer over Citi's downgrade, shareholders of two major players in the charge card space --MasterCard and Green Dot -- were rejoicing over higher price targets.

In quick succession, FBR Capital hiked its price target on outperform-rated MasterCard from $690 a share to $820, then Compass Point added $4 to its $26 price target on Green Dot, assigning the stock a $30 target. But are the stocks really worth that much?

According to FBR, MasterCard's $0.33-a-share"beat" on earnings yesterday justifies a big hike in target price because transaction "volume growth was strong (+15% YOY versus 13.6% consensus) and revenue guidance improved." Based on MasterCard's latest report, FBR now thinks the company will earn $26.13 per share this year, and then grow that number 20% to $31.32 in 2014, and a further 20% to $37.56 in 2015. Those numbers are right in line with the consensus Wall Street opinion that MasterCard will grow earnings consistently at a near-19% rate over the next five years.

That's certainly admirable growth -- but I'm still not sure it justifies paying 30 times earnings for MasterCard shares. While the company's clearly got a fine business going, and a wide moat against the competition, there comes a point where an investor just has to admit the stock price has gotten ahead of itself. FBR doesn't think we've reached that point just yet, but I do.

X marks the spot at Green Dot
In contrast, I'm much more optimistic about the $30 price target that Compass Point just assigned to Green Dot. Priced at just 21 times the $43 million in trailing earnings Green Dot reported earlier this week, and barely 13 times its trailing free cash flow, Green Dot looks like a much more attractive value proposition than does MasterCard -- yes, even after the stock shot up 16% in response to earnings.

True, analysts only see the debit card provider growing profits at about 7% annually over the next five years. And if that's the best the company can do, then it's entirely possible that even Green Dot's lower-than-MasterCard multiples to earnings and free cash flow are not the bargains they appear.

On the other hand, if Green Dot should manage to only match the anticipated 12.5% earnings growth rate than analysts expect out of its broader industry, I think the stock looks at least fairly priced today. I view Wal-Mart's recent decision to expand its relationship with Green Dot as evidence that the retailer at least, thinks Green Dot is superior to other businesses in this industry -- and thus that Green Dot's likely to grow earnings faster, rather than slower, than the average. Viewed in this light I think Compass Point is making the right call in hiking its price target on the shares.


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