Monday's Top Upgrades (and Downgrades)

Analysts shift stance on UnitedHealth, Alcoa, and Century Aluminum.

Jan 21, 2014 at 4:14PM

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 upgrades for a couple of the globe's biggest aluminum producers -- Century Aluminum (NASDAQ:CENX) and Alcoa (NYSE:AA). On the downside, though, UnitedHealth Group (NYSE:UNH) just got hit by a downgrade. In fact, let's jump right in and start with that one.

No good deed...Insurer UnitedHealth Group gave analysts what they were looking for last week, reporting "in-line" fourth-quarter earnings of $1.41 per share on $31.1 billion in revenue (slightly ahead of estimates). Management furthermore confirmed that it still expects to earn between $5.40 and $5.60 per share this year. But this news was not what analysts had hoped to hear.

At least not one analyst. Responding to UnitedHealth's warning that Medicare reductions required by the Affordable Care Act will keep a lid on growth in the current year, analysts at Monness, Crespi, Hardt today downgraded their rating on the nation's biggest provider of Medicare plans to sell. That hardly seems fair, given that this is a problem not of the company's making. But it might be the right decision nonetheless.

Priced north of 13 times earnings today, UnitedHealth already sells for a small premium to the 8% growth that analysts expect it to produce over the next five years. But with the company promising essentially no earnings growth at all in the current year, even that 8% growth projection may come into question.

Long story short, even with a modest dividend yield and decent free cash flow, I don't see a strong case for buying into UnitedHealth with its significant debt load and iffy growth prospects. To me, an insurer such as WellPoint (NYSE:ANTM), with a better balance sheet, better dividend yield, and lower P/E, makes more sense as an investment.

Will the 21st be Aluminum's Century?
Moving on to happier news, analysts at JPMorgan Chase are becoming markedly more bullish about the prospects for Century Aluminum. Citing "tightening aluminum markets and rising Midwest premiums" today, JP said it sees "a significant amount of earnings support to the company's primary aluminum smelting operations."

The potential for earnings improvement is so great, in fact, that it convinced JPMorgan to swing 180 degrees from an underweight rating (i.e., sell) all the way over to overweight (buy) -- and to more than double its price target to $13 per share. But should you follow JP's lead?

I don't think so, and here's why.

First off -- that $13 price target. If you haven't noticed yet, JPMorgan's yawp of support for Century has already moved the stock's price to within pennies of the analyst's new price target for the year. This suggests there's very little prospect for profits left in the stock, even if JPMorgan turns out to be right. Yet it may not be right about Century.

After all, while greater demand for aluminum might help Century in the future, as of today this company remains deeply unprofitable and is working toward completing its fourth unprofitable year out of the past six. True, free cash flow is positive. But with less than $7 million in cash profits generated over the past year, it's hard to justify the stock's current $1.1 billion market capitalization -- much less the richer market cap that JP is promising -- on free cash flow alone.

Can't wait for Alcoa
Heedless of the illogic of recommending the unprofitable Century, however, JPMorgan rushed right out this morning and recommended a second aluminum maker to boot: Alcoa. Here, the analyst took a global view, citing "recent producer capacity curtailments and ... China's likely production profile." In a nutshell, JP noted that while it is true China produces more than enough excess aluminum (1.5 million tons annually) to supply the metal's deficit in the rest of the world (1.1 million tons), little of this extra supply is likely to leak onto world markets due to China imposing a 15% export tax on aluminum shipments abroad.

As a result, JPMorgan noted that pricing premiums on aluminum have been rising in certain U.S. markets. If this continues, it has the potential to expand Alcoa's profit margin, as well as Century's.

Be that as it may, Alcoa is going to have to get a whole lot more profitable if it's to deserve even its current valuation, much less a higher one. Priced at 44 times earnings, and 58 times earnings if you factor the company's net debt into the valuation, Alcoa shares are being valued as if the 32% annualized earnings growth that analysts like JPMorgan expect had already happened -- and was certain to continue happening.

On the one hand, this suggests there's little potential for the shares to rise in value if JP's proven right about the aluminum market -- because the good news is already baked into the stock price. On the other hand, there's every chance that Alcoa will fall if JPMorgan is proven wrong.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint.

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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