Thursday's Top Upgrades (and Downgrades)

Analysts shift stance on Williams-Sonoma, Deckers Outdoor, and NVIDIA.

Jan 9, 2014 at 12:31PM

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 new buy rating for Williams-Sonoma (NYSE:WSM)and a price target improvement for Deckers Outdoor (NYSE:DECK). On the other hand...

No one's envying NVIDIA
Thursday's dawning gray and cloudy for shareholders of graphic chip specialist NVIDIA (NASDAQ:NVDA), as the shares get walloped by a 3% decline after being downgraded by Canaccord Genuity. Earlier this week, NVIDIA unveiled its new Tegra K1 mobile gaming chip at the Consumer Electronics Show in Vegas, trying to prove that its Tegra business has staying power -- but Canaccord isn't convinced.

Arguing that there's little chance of earnings exceeding estimates, and therefore little upside to the shares, Canaccord cut its rating on NVIDIA stock to "hold," while maintaining a $16 price target. But if you ask me, Canaccord is missing the point.

Sure, I have to agree with Canaccord that NVIDIA doesn't look attractive on the surface. Its current P/E ratio of 20.6 would be too high for the 11% long-term growth that analysts expect out of the stock... if that were the end of the story. But it isn't.

Dig a little deeper into NVIDIA, and you'll discover that this stock generates so much more cash than it reports as net income and boasts a balance sheet flush with so much more cash as to make the stock a real bargain. Trailing free cash flow at NVIDIA for the past 12 months approached $650 million, which, on the stock's current $9 billion market cap, works out to a price-to-free cash flow ratio of less than 14. So already, that looks like a fair price to pay for a stock with 11% growth prospects and a 2.2% dividend yield.

What's more, if you factor NVIDIA's $3 billion in cash (and next-to-zero debt) into the picture, NVIDIA's enterprise value-to-free cash flow ratio works out to an even cheaper 9.1 ratio -- an absolute steal if the company achieves 11% growth and maintains that 2.2% divvy. Long story short, I liked NVIDIA as a value stock before Canaccord's downgrade -- and I like it even more at the cheaper price the shares sell for after the downgrade.

How shiny is Sonoma? 
So much for the "bad" news of the day. Now let's turn to the "good," beginning with home furnishings store Williams-Sonoma. This morning, analysts at Argus Research upgraded shares of Williams-Sonoma from hold to buy, and assigned a $68 price target to the stock. I think they're wrong about that, and I'll tell you why.

Curiously, considering their divergent areas of business, Williams-Sonoma seems to bear a lot of resemblance to NVIDIA from a valuation perspective. Its 20.8 P/E ratio and 2.1% dividend yield are both remarkably similar to the valuations we find at NVIDIA. Meanwhile, Williams-Sonoma's 13.7% projected earnings growth rate actually outpaces the 11% expected of NVIDIA.

So far so good. But here's where the story takes a turn for the worse. With only $216 million in trailing free cash flow, Williams-Sonoma's cash profits lag its reported GAAP income of $279 million rather badly. For every $1 of "profit" that Williams-Sonoma says it's earning, the company's actually generating only about $0.77 in cash.

Viewed from this perspective, Williams-Sonoma actually appears to cost more than its P/E ratio implies, rather than less -- a whopping 25.8 times free cash flow. Even on a near-14% growth rate, that's too much to pay for Williams-Sonoma stock, and Argus is wrong to recommend that investors buy it.

Decking the halls
Finally, we come to Deckers Outdoor, maker of the popular UGG brand fleece-lined boots -- and by now, much more than boots. Few investors today would still argue that UGGs are a fad, and the company behind them doomed to fail. But that doesn't necessarily mean that today's ratings move, a $20 increase in price target from Canaccord Genuity (yes, them again) is right.

Let's take a quick look at the valuation here, and see if this pair of UGGs is really as good of a deal as Canaccord seems to think.

At nearly 30 times earnings, Deckers shares look overpriced based on analyst expectations that the company will only be able to grow earnings in the high single digits over the next five years. The good news is that Deckers isn't quite as overvalued as it looks, given that free cash flow at the firm ($116 million) exceeds reported net income ($103 million) by a good margin. The bad news, however, is that the shares are still overvalued enough to throw Canaccord's improved price target into question.

Even $116 million in positive free cash flow isn't enough to make these shares look attractive, you see -- $116 million in free cash flow only gets Deckers shares down to about a 26 times P/FCF valuation, and at 9.4% projected growth, that's too much to pay for the stock. Meanwhile, in its last earnings quarter, Deckers reported that its earnings actually declined 23% -- so the numbers here are getting worse, not better.

Long story short, with Deckers shares having more than doubled in 2013, I think now's a great time to start thinking about taking profits -- not hoping against hope that these overvalued shares will somehow become even more overpriced in the future. 

Fool contributor Rich Smith owns shares of NVIDIA. The Motley Fool recommends NVIDIA and Williams-Sonoma.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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