Thursday's Top Upgrades (and Downgrades)

Analysts shift stance on Nielsen Holdings, TriQuint Semiconductor, and Ford Motor.

Feb 6, 2014 at 2:24PM

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 Nielsen Holdings (NYSE:NLSN) and TriQuint Semiconductor (NASDAQ:TQNT). The news wasn't all good, however. Before we get to those two, let's take a quick look at a downgrade getting a lot of attention today:

Ford freezes up
Yesterday brought news of weak sales for automotive companies in January. Deutsche Bank is reporting that new cars and trucks sold at the rate of 15.16 million annually in the year's first month, significantly below previous estimates of 15.7 million units. This morning, the fallout over this news began, as Argus Research announced it is cutting its rating on Ford Motor Co. (NYSE:F) one notch to hold.

Argus warns, "management's expectations for lower earnings in the North American automotive segment in 2014, together with relatively flat results in South America and Asia Pacific/Africa, and continued (though narrower) losses in Europe, will lead to weaker earnings in 2014." Argus is now predicting Ford will only earn about $1.38 per share this year, or 22% less profit than it collected in 2013. Higher input costs and profit margin compression are added concerns for the analyst.

But is that the right call?

Perhaps not. Priced at barely eight times earnings today, paying a 3.4% dividend and growing at 11% projected over the next five years, Ford's shares don't look particularly expensive. Even Argus admits that "Ford remains the best-positioned company in the industry in terms of vehicle offerings and manufacturing capability," and hints that should the stock fall back toward a $12-per-share price, it would consider returning to a buy recommendation -- regardless of how this year's earnings might look. 

It'll probably take a few quarters to learn, for example, how big of an impact the switch to building aluminum F-150s will have on Ford's costs. But for now, at least, the stock still looks like a buy to me.

Nielsen gets good ratings
Turning now to the stocks that Wall Street likes a bit more, just two days after analysts at the little-known Pivotal Research Group upgraded Nielsen Holdings to buy, citing a "10% fall from its recent peak of value" as a buying opportunity, Nielsen won a much bigger endorsement today -- from Deutsche Bank.

According to Deutsche, more "digital revenue opportunities" are starting to emerge for Nielsen. While the banker warns that "1H14 will be somewhat held back by the wind down of legacy products," Deutsche nonetheless thinks that company behind television's "Nielsen ratings" will enjoy revenue growth in this year's second half "at the high-end of management guidance." Like Pivotal, Deutsche assigns a $48 price target and a buy rating to the stock.

I agree.

Granted, priced at 25 times earnings, Nielsen shares look a little pricey at first glance. But when you consider that the company is generating significantly better free cash flow ($800 million over the past 12 months) than it gets to report as net income ($658 million), the valuation picture here looks a bit better. Currently, Nielsen shares sell for about 20 times free cash flow -- a valuation that Deutsche notes is "a discount to historical trading multiples." Given that most analysts expect the company to grow its profits north of 18% annually over the next five years, and given that the stock also pays a respectable 1.9% dividend yield, I think the shares are already starting to look attractive.

If Deutsche is right about new "digital revenue opportunities" potentially growing profits even faster, the stock could look even cheaper.

TriQuint? No thanks
And finally, we come to smartphone parts supplier TriQuint Semiconductor, a stock I've had my eye on for quite some years now. TriQuint shares have gone on a tear of late, up more than 70% over the past year. Today, they're up a further 8% over Wednesday's prices in response to a big earnings beat yesterday and new buy rating from Needham & Co.

TriQuint reported results yesterday that exceeded its own estimates, its Q4 2012 performance, and analyst predictions alike. The $0.16 per share it earned was $0.03 better than Wall Street had expected. This current quarter, the company looks likely to beat expectations again, as it guides investors to expect about $0.12 per share in profits, versus a Wall Street consensus of $0.04.

Going forward, Needham says that a "shift toward richer margin product lines including premium filters, MMPAs and GaN-based solutions for the Defense and Networks segments" will "accelerate" revenue growth at TriQuint even as the company exits lower margin businesses -- enhancing per-share profits in the process. Meanwhile, the stock looks attractively priced at less than 18 times this year's full-year guidance of $0.49 per share and even cheaper relative to the $0.85 per share that TriQuint hopes to earn in 2015.

With a strong, debt-free balance sheet, these look like attractive valuations on the stock. All we need now, to know whether it's truly a buy or not, is for TriQuint to release its latest cash flow information -- and confirm whether these earnings are as good as they look.

Rich Smith has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Ford, and owns shares of TriQuint Semiconductor.

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