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Wednesday's Top Upgrades (and Downgrades)

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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 an upgrade for LinkedIn (NYSE: LNKD  ) and an improved price target for Mazor Robotics (NASDAQ: MZOR  ) . But the news isn't all good. Before we get to those two, let's take a quick look at why one analyst is...

Panning DreamWorks Animation
Shares of cartoonish filmmaker DreamWorks Animation (NASDAQ: DWA  ) are getting panned by the critics this morning -- and its stock price is getting its hide tanned. All this is in response to Q4 earnings numbers that barely met analyst expectations for profit ($0.33 per share) while missing badly on revenues.

Revenues in Q4 came in at a lowly $204 million, far below the $237 million that analysts were looking for. In response, analysts at Piper Jaffray are standing up and walking out in the middle of the movie, downgrading DreamWorks all the way to "underweight," Wall Streetspeak for sell. Are they right to give up hope?

I think so, yes. And I'll tell you why: Priced at 46 times earnings today, DreamWorks shares are arguably fairly priced after the sell-off -- but only if you believe the analysts who think the stock will grow its profits at the rate of 47% per year every year for the next five years. That's a tough task to try to accomplish, and it seems all the more unlikely to succeed given that over the past five years, DreamWorks has actually shrunk it profits at the rate of about 17% per annum. (Both figures according to S&P Capital IQ data.)

What's more, given that DreamWorks wrapped up 2013 with more than $12 million in negative free cash flow -- its third straight year of burning cash -- I'd say that a turnaround in the business is far from certain. Long story short, there's little original to the plot of this movie. Piper Jaffray is right to walk away.

Praising LinkedIn
A better play, according to analysts from RBC Capital this time, may be professional social networker LinkedIn.

Pointing out that LinkedIn shares have shed 13% of their value over the past six months, and underperformed the S&P 500 by a good 25 points, RBC is suggesting today that it's time for LinkedIn to begin regaining some lost ground. As the analyst explains on this morning, "overly aggressive Street estimates" are what did LinkedIn in these past few months, combined with "a heavier than expected investment outlook for '14" and other factors. But RBC notes that analysts have come down on their estimates of late (making expectations easier to exceed). And RBC sees LinkedIn's investments as being aimed at growing the business (expansion capex) as opposed to simply staying in business (maintenance capex) -- so a good thing. "Hence," says RBC, "the Upgrade..."

It seems to be working out well for them, too. While LinkedIn's capital spending more than doubled in size last year, and operating cashflow did a bit less than that, this still worked out to a small increase in free cash flow for the company. LinkedIn brought in $158 million in such cash profits last year -- six times reported GAAP earnings.

Of course, this still leaves the stock selling for a hefty 164 times FCF. That's not as bad as the "970 times earnings" valuation you see on Yahoo! Finance -- but it's still quite a pretty penny. Personally, I think it's too high a price to pay, even given analyst estimates of near-38% annual profits growth at the company. I suspect that while RBC's right about the big picture for LinkedIn's business, it's still wrong about the valuation... and wrong to upgrade the stock.

Amazing Mazor?
And finally, we'll end with a stock I've been meaning to take a look at for some time now: Mazor Robotics. This Israeli manufacturer of medical devices for use in orthopedic and neurosurgery reported its Q4 earnings yesterday -- or, rather, its Q4 losses. The good news, though, was that the $0.04 per share that Mazor lost last quarter was $0.07 better than the $0.11 Wall Street expected it to lose.

This victory of sorts won a pair of price target hikes from two of Mazor's fans this morning, with Ladenburg Thalmann increasing its target to $27.50 and WallachBeth going four bits higher -- $28 a share. But I still don't see any compelling reason to buy the stock.

Problem is, if Mazor lost less money than it was expected to lose last quarter, it still lost quite a bit. Free cash flow ran negative to the tune of $5.3 million, which was more than twice the rate of cash burn seen in 2012. GAAP losses exceeded $20 million -- nearly treble Mazor's loss in 2012.

The analysts may see nothing worrisome in this trend. To me, though, when I see a stock losing more and more money the more stuff it sells (sales were up 64%), that's not a particularly good thing. It's not a good reason to raise price targets -- and it's not a good reason for you to buy Mazor Robotics stock, either.

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Rich Smith

As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.

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8/28/2015 4:00 PM
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