Wednesday's Top Upgrades (and Downgrades)

Analysts shift stance on CVS Caremark, BE Aerospace, and LogMeIn.

Jan 22, 2014 at 12:58PM

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 CVS Caremark (NYSE:CVS) and B/E Aerospace (NASDAQ:BEAV). But it's not all good news. Before we get to those two, let's take a quick look at why one analyst is...

Logging out of LogMeIn
Remote computer access software maker LogMeIn (NASDAQ:LOGM) isn't due to report quarterly earnings till February 13, but one analyst isn't waiting around to get hit with any bad news. With the shares up some 50% over the past 12 months alone, banker Cowen & Co. is taking the money and running -- and downgrading LogMeIn stock to market perform.

Why? Well, there are a couple of reasons why Cowen might be worried about LogMeIn's future. The stock's not currently profitable -- that's a big one. It's also in the middle of a pretty big change in business model. LogMeIn recently warned users that it is discontinuing the freemium model of offering its "Ignition" remote access software to users free of charge, in hopes they'll like it so much that they will upgrade to more robust paid versions of the software. Henceforth, the company is offering only week-long trials of the software, after which they must either pay up or log out.

This is a move calculated to convert more free moochers to paying users of the software -- but it also has the potential to slow adoption of LogMeIn's products, and perhaps pinch revenue growth as well.

Speaking of which, that's another reason to worry about the stock: growth. Unprofitable today, LogMeIn is generating positive free cash flow of about $13.2 million annually. If you think the stock looks expensive at 65 times free cash flow, and a 21% projected growth rate, you may not want to stick around and see what happens to the stock's price if LogMeIn's business model switcheroo has the effect of slowing that growth rate down even further.

Does CVS spell B-U-Y?
Turning now to happier news, shareholders of mega pharmacy chain CVS Caremark are enjoying a nice boost to stock price today in the wake of an upgrade to strong buy at ISI Group. Here, too, growth is the story, with ISI predicting it will be "strong" going forward -- perhaps even stronger than the 15% growth rate projected by the majority of analysts.

It had better be a lot stronger than 15%, however, to justify the price tag the market is hanging on CVS stock today, though. Priced north of 19 times earnings today, CVS shares may not look all that expensive for a growth rate around 15%. But looks can be deceiving.

The problem at CVS, in a nutshell, is that the company's not generating quite as much cash as its GAAP "earnings" number suggests. Free cash flow for the past 12 months amounted to only about $3.9 billion, or just 88% of reported earnings. Factor CVS's $8.6 billion net debt load into the picture, and this company is selling for an enterprise value of roughly 23.5 times free cash flow.

Even if you argue that a small premium is justified on the stock of an oligopolist like CVS, which controls about 23% of the U.S. prescription pharmacy market, it's hard to see how paying an even greater premium would be justified. ISI may be optimistic about the stock's chances. I am not.

Time for B/E to fly?
And finally in today's story of "growth" stocks, we come to airplane interiors-maker B/E Aerospace, recipient of an upgrade to buy from analysts at Topeka Capital this morning. As describes the ratings change, Topeka is upgrading B/E on the theory that "as a leading manufacturer of aircraft passenger cabin interior products and a global distributor of aerospace fasteners and consumables, the Company is well positioned to benefit from cyclical and secular drivers in the commercial aerospace market."

To that extent, we agree. A supplier to both of the world's major airplane builders, Boeing and Airbus, B/E has benefited from a surge in airplane buying of late. As Topeka rightly points out, compound annual revenue growth at B/E has averaged about 20% over the past seven years, with operating profits growing even faster at 30%. And yet, at a P/E ratio flying north of 25, the company's success appears to be fully baked into B/E's stock price already.

Going forward, analysts are extrapolating B/E's past success far into the future, pegging the stock for 19% annualized earnings growth over the next five years. On its face, paying 25 times earnings for a dividend-less stock growing at 19% seems a bit optimistic (especially given that key customers like Boeing, on which B/E's growth depends, are only expected to grow at 11.5%). But the situation may be even worse than that. Over the past year, B/E generated only about $0.67 in real cash profits for every $1 it reported "earning" under GAAP. At today's prices, the shares now sell for 38 times annual free cash flow -- pricey even if we take 19% future growth as a given.

To me, this looks like a case of "great company, overpriced stock," plain and simple. Topeka may be right about the stock continuing to surge in 2014, as it did in 2013 -- but I wouldn't bet on it.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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.

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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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