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, as we skim the headlines, what leap out are a pair of upgrades for Apple (NASDAQ: AAPL  ) and FLIR Systems (NASDAQ: FLIR  ) , and also a downgrade for Walt Disney (NYSE: DIS  ) . Let's start with that one.

House of Mouse -- condemned!
Shares of Walt Disney are leading the Dow lower this morning as analysts at B. Riley cut their rating on the stock from "buy" to "neutral."

Riley, as you may recall, upgraded Disney back in January on the theory that the shares -- then selling for $54 a pop -- would rise to $73 over the course of 12 months' trading. Today, barely 10 months later, the shares are already within spitting distance of that target. Consequently, Riley is declaring victory and going home... and it's right to do so.

Priced at close to 21 times earnings today, and 18.5 times free cash flow, Disney shares look modestly overpriced based on the stock's 1.1% dividend yield and projected 14.6% long-term growth rate. While Disney is certainly a one-of-a-kind operation, and a stock that deserves a premium valuation, it's already grown into that. Further growth from today's prices seems unlikely.

Apple of their eye
Next up: Apple. The iPhone maker has benefited from a series of positive news items these past few days, from consumer growling over the company's failure to offer large discounts on its wares over the Black Friday shopping weekend (indicative of profit margin strength), to reports of market share gains for the newest iPhones in Europe, the U.S., and Japan, to this morning's announcement that China Mobile has begun taking pre-orders for Apple's new iPhone 5 models -- strong evidence that the company's 760 million-strong subscriber base will soon be buying for Apple products.

Responding to the news flow, analysts at UBS raised their rating on Apple stock from "neutral" to "buy," and tacked $110 onto their price target -- which now stands at $650 a share. Additional catalysts that UBS cited include the banker's belief that institutions will begin buying Apple again, helping to increase demand for the shares, and that the company will begin to close the 15% to 20% "P/E discount" that's been a drag on its shares.

Here again, I find myself in agreement with Wall Street. Priced at barely 14 times earnings, Apple shares are already too cheap for the 14.3% long-term growth that Wall Street was expecting out of it before the China Mobile news broke. Factor 760 million-odd new potential customers, and that growth rate could move even higher -- making the stock look even cheaper.

Give Apple "bonus points" for its 2.3% dividend yield, $23.6 billion in net cash, and annual free cash flow that exceeds reported net income by 23%, and there's simply no reason not to own Apple today.

FLIR flying high
Last but not least, we come to infrared eye-in-the-sky specialist FLIR Systems. Not as well known as Apple or Disney, FLIR nonetheless holds some attraction for tech investors due to its powerful position in the "drone" industry, and novel initiatives in using IR technology for things like traffic cameras. The company scored an upgrade from "fairly valued" to "buy" at the hands of CRT Capital this morning, which thinks the $30 stock could be worth $37 -- and CRT is absolutely right about that.

Granted, at a share price north of 19 times earnings, FLIR may not look like much of a bargain. But toggle on your IR lenses for a moment, and take a closer look. I think you'll like what you see.

FLIR generated $307 million in positive free cash flow over the past 12 months. That's a whopping 36% ahead of the company's reported $225 million in "GAAP" earnings -- a disconnect between real and apparent value that's even bigger than what we see at Apple.

Valued on its free cash flow, the stock sells for less than a 14x multiple -- which is lower than its projected earnings growth rate. Throw in a modest 1.2% dividend yield and a cash stash that outweighs debt on the books by a cool $100 million, and I think the stock's a glow-in-the-dark bargain.

No Pitch

Motley Fool contributor Rich Smith owns shares of Apple. The Motley Fool recommends Apple and Walt Disney. The Motley Fool owns shares of Apple, China Mobile, and Walt Disney.


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