Thursday's Top Upgrades (and Downgrades)

Analysts shift stance on Spirit Airlines, Oceaneering International, and Transocean.

Feb 20, 2014 at 11:28AM

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 lowered price targets for Oceaneering International (NYSE:OII) and Transocean (NYSE:RIG), but a much-improved target for Spirit Airlines (NASDAQ:SAVE). Or put another way...

One (better price target) if by air...
Let's start the day on a high note, with Imperial Capital's bullish prognosis for Spirit Airlines. This morning, Imperial added $10 to its price target for the discount flyer, predicting that within a year, Spirit shares will fetch $58 apiece.

Given that Spirit sells for only $51 today, you'll not be surprised to learn that Imperial also recommends buying the stock. But why? Well, for one thing, Spirit announced Q4 earnings yesterday that greatly exceeded estimates. The company had been expected to report $0.50 per share for its fiscal fourth quarter, but delivered a $0.56 profit instead. Revenues fell just short of estimates -- but given that revenue for available seat mile, or RASM, was up 3% and that Spirit enjoyed success in filling more seats on its planes and wringing more money out of each passenger flying, it seems the company's growth thesis remains intact.

Analysts on average expect to see Spirit grow earnings at about 25% annually over the next five years. That seems more than fast enough to justify the company's P/E ratio of 21. My only real reservation here is that free cash flow at Spirit looks a bit light -- just $105 million in cash profits collected last year, versus $177 million in reported "net income." When you consider that rival discount flyers such as JetBlue Airways (NASDAQ:JBLU) and Southwest Airlines (NYSE:LUV) are both reporting free cash flow numbers superior to their better-publicized GAAP earnings, I'm more inclined to look at an investment in one of those two than at Spirit -- Imperial Capital's recommendation notwithstanding.

...but two (worse price targets) if by sea
So much for the "air" part of this column. Now let's lower our sights to the seas and take a look at two ocean-going stocks that Wall Street's less keen on. We'll start with Oceaneering International.

The submarine robotics and construction company reported strong results Tuesday -- earnings of $0.86 that were $0.02 ahead of estimates and sales of $895 million that blew away the anticipated $830 million. Regardless, Cowen & Co. is cutting its price target on the stock by 12.5%, to $92 per share. Why?

One reason might be Oceaneering's Q1 guidance, which promised investors no more than $0.80 per share -- where analysts had been hoping to see $0.82. That's certainly disappointing. But if Q1 guidance looks a bit light, Oceaneering is still promising to earn between $3.90 and $4.10 over the course of this year, in line with expectations. And priced at less than 21 times earnings, with a projected growth rate in excess of 21%, the stock looks no worse than fairly priced -- and probably even a bit of a bargain.

The key thing to keep in mind here is that Cowen & Co. is still recommending buying the stock. Cowen's just trimming its price target a bit, and promising investors a bit less profit from an investment in Oceaneering. I think that's the right call. While arguably a bargain, the stock doesn't look capable of delivering the near-50% profit that Cowen's old price target implied. If the analyst was wrong to be so enthusiastic before now, at least it's right to be tempering expectations today.

Rig for rough sailing?
And finally, our other nautical stock of the day -- Transocean, the deep-sea driller. For a change of pace, this one has not released earnings yet. Transocean is actually not expected to report until close of trading Wednesday. But that's not keeping Cowen in check. Following its reduction in price target on Oceaneering International, the analyst slashed expectations for Transocean as well -- by more than 13%, to $52 per share.

At first glance, this may seem unfair. After all, why punish the stock before it's done anything wrong?

Well, in a word, the reason to punish Transocean for offenses not yet committed is: valuation. Priced at less than 10 times earnings today, Transocean stock looks cheap, but it really isn't. Trailing free cash flow at the company shows Transocean to be a company barely keeping its head above water. Free cash flow over the past 12 months amounted to a mere $121 million, and a mere fraction of the $1.6 billion in GAAP profit the company claims to have earned.

This is a steep reduction from Transocean's FCF numbers in recent years, and suggests the company's not doing nearly as well as it appears to be on the surface. Indeed, unless Transocean gets its cash production engine back in gear soon, investors might begin to question the company's ability to keep paying out its above-market 5.2% dividend yield.

In short, there's real reason to worry about this stock. For this reason, I don't dispute Cowen's decision to cut its stock price target. What has me wondering is why the analyst continues to rate Transocean an outperform at all -- because that's the last thing I expect to see this stock do: outperform the market.

Rich Smith has no position in any stocks mentioned, and doesn't (always) agree with his fellow Fools. For example, The Motley Fool recommends Oceaneering International, but it also owns shares of Transocean. 

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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