Wednesday's Top Upgrades (and Downgrades)

Analysts shift stance on Ericsson, Pandora, and Staples.

Mar 5, 2014 at 2:44PM

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 each of telecom equipment maker Ericsson (NASDAQ:ERIC) and online radio station Pandora (NYSE:P), but for Staples (NASDAQ:SPLS), it's...

Time for a downgrade
We begin the day's news on a down note, as shares of Staples wobble between slight gains and slight losses in the wake of a downgrade to neutral from analysts at B. Riley.

Staples isn't expected to report earnings until tomorrow, but Riley isn't waiting around for the bad news to hit. The analyst warns that the retail market is "weak" right now, enticing retailers to discount their wares and imperiling profit margins in the process. Accordingly, Riley is both lowering its rating on Staples shares and cutting its price target to $15 per share.

I think that's a bad call for long-term investors, though, and here's why: Priced north of 18 times earnings but expected to grow these earnings at less than 4% per year over the next five years, Staples shares do not look cheap. But the stock has a couple of big factors in its favor. Free cash flow, for example, is nearly twice reported GAAP income at $849 million. The stock also pays a hefty 3.5% dividend yield, which, when combined with the low growth rate, helps to move its valuation back toward fair value.

A third wild-card factor in Staples' favor is the low growth rate itself. Never underestimate the value of low expectations. With investors expecting Staples to produce almost no growth over the next five years, it's going to be easier for Staples to exceed expectations with only moderately good results. If and when it does so, the high short interest in the stock could result in a "short squeeze" that drives share prices higher.

Long story short, this is not a stock I'd short. In fact, at today's prices I'm almost tempted to go long.

Ericsson the green?
A second stock worth taking a look at is Ericsson -- at least according to one analyst. RBC Capital Markets upgraded Ericsson shares to outperform this morning, assigning the stock a $16 price target on hopes for improvement in profit margins and greater sales of LTE equipment. But is RBC right?

Here, I'm afraid I must differ with the analyst. On one hand, I find a lot to like in Ericsson's business. The company churns out cash at the rate of $2 billion a year (a number bigger than its reported GAAP income). It pays a respectable dividend yield of 2.3%. And Ericsson boasts a strong balance sheet, plump with $11.6 billion in cash, against only $4.4 billion in debt.

However, with a P/E ratio of 23.4, but a growth rate of only 8.4%, Ericsson shares still look overpriced to me. Viewed in the most favorable light, the stock's $34.6 billion enterprise value is only about 17 times annual free cash flow. But the modest growth rate doesn't seem sufficiently speedy to justify even this lower-seeming valuation. While it's a fine company in many respects, I just don't see as much value in the shares as RBC apparently does.

Don't get tricked by Pandora
Last and least (attractive) of our three stocks on parade today, though, is Pandora. This morning, analysts at MKM Partners finally threw in the towel on their sell thesis against the stock, upgrading Pandora shares to neutral and assigning a $39 price target.

They couldn't have picked a worse time to change their minds.

Unprofitable from the day it was born, and still so today, Pandora is burning increasing amounts of cash as it attempts to keep revenue growth climbing. The attempt succeeded -- revenues grew 54% in 2013. But operating cash flow turned negative again, after briefly getting above water in 2012. Meanwhile, capital expenditures surged 79% to an all-time high of $23.1 million.

Result: Free cash flow at the company has descended to negative $26.4 million, even as shareholders rushed in to buy the stock, more than tripling its stock price over the past year.

To me, this looks like a great argument in favor of cashing out before the stock crashes. Instead, MKM is cashing out its short thesis at a sizable loss. 

Rich Smith has no position in any stocks mentioned. He sometimes, but not always, agrees with his fellow Fools  For example, The Motley Fool owns shares of Staples, but it also recommends and owns shares of Pandora Media. 

 

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers