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 run the gamut from software to fashion to medical robots, as Workday (NYSE: WDAY  ) gets an upgrade, Coach (NYSE: COH  ) gets a downgrade, and...

Intuitive Surgical gets rated a sell
Yes, you heard that right. The star stock for medical robots investors got hit with a "sell" rating this morning, when analysts at CRT Capital initiated coverage of Intuitive Surgical (NASDAQ: ISRG  ) -- and said that in their opinion, at least, this $376 stock is worth not a penny more than $305.

Now here's the scary part: They may be right.

Consider that after exhibiting heady growth rates (33.5%) over the past five years, Intuitive's earnings growth has slowed dramatically of late. Earnings for the past nine months were up only 5% compared to where Intuitive was at this time last year. Analysts forecast future growth rates of less than 14% annually -- a respectable pace, for sure, but nothing like 33%.

Meanwhile, at a price tag of 22.6 times earnings, or 20.3 times free cash flow, Intuitive shares still appear to be richly valued for only mid-teens growth. Long story short, either Intuitive's growth rate must accelerate to support its share price, or its share price must fall to a level that the growth rate can support. Long story short, I wouldn't want to be long this stock at this price.

Workday wins!
Speaking of richly priced stocks, software-as-a-service provider Workday revealed big earnings news last night, growing revenues 76% (more than expected), and narrowing its quarterly loss. Granted, the company still lost money -- $0.27 per share. But on an "adjusted" basis, the loss appeared to be less bad than had been anticipated, and that was good enough to win the stock an upgrade to "outperform" from R.W. Baird, and a better price target from Jefferies.

As Jefferies pointed out, Workday beat estimates "across-the-board," and also provided "F4Q guidance and ... preliminary outlook for FY15 revenue growth ... above our forecasts." The analyst still expects to see Workday lose money both this year and next, granted. But even so, Jefferies exudes: "We believe WDAY has among the most attractive share gain potential in software."

Jefferies may even be right about that. After all, with Workday shares selling for $82 a pop despite earning no money and having no prospects for earning any money as far out as analysts can forecast, there's really no telling what investors might be willing to pay for this stock.

But if you ask me, an unprofitable company that's burning cash, and growing its capital expenditures even faster than it grows cash flow, is not the kind of company I want to own. Jefferies and Baird may say "Buy," but I say, "No thanks."

Time to bag Coach
Last but not least, we come to Coach. One month ago, ace independent analyst Standpoint Research told investors to buy the handbag maker after it beat earnings by a penny but reported declining U.S. sales and missed analyst estimates for sales to boot -- sparking a tiny sell-off in the stock. Today, the stock's up 15% from that recommendation, and Standpoint is saying that it's time to take a breather, and pause before buying more, in anticipation of the next sell-off.

Standpoint's right -- almost to the penny.

Sure, at just 15.4 times earnings, Coach is hardly the priciest stock on the market today. Yes, it still produces copious free cash flow -- $1.14 billion over the past year. By my calculations, giving Coach credit for its $854 million in cash, that works out to a 12.5 enterprise value-to-free cash flow ratio. With Coach having just reaffirmed its dividend yield of 2.5%, that means you'd ordinarily want to see the stock grow at 10% per year going forward, to justify today's price tag. And what is Coach's projected growth rate, according to the analysts?

9.85%.

Turns out, Coach is almost precisely "fairly priced" today, with an EV/FCF ratio, divided by its total return ratio, of a near-perfect 1.0. It's selling for the right price today, but no longer an obvious bargain. I'd wait for better prices before buying any more.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coach and Intuitive Surgical.


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