Thursday's Top Upgrades (and Downgrades)

Analysts shift stance on ExxonMobil, New York Times, and BlackBerry.

Mar 27, 2014 at 2:08PM

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 blue-chip stocks ExxonMobil (NYSE:XOM) and The New York Times (NYSE:NYT). We'll get to both of those in a moment, but, first, a few words about...

BlackBerry (NASDAQ:BBRY)
Over the past week, we've seen shares of former Canadian tech star BlackBerry twice endorsed by Wall Street as first CLSA, and then Cormark upgraded the stock. Today, we get the counterpart to that sentiment, as French investment banker slaps a sell on the stock.

According to, which reported on the ratings move this morning, SocGen is warning investors that "[s]ervices revenues will also be down almost 13% sequentially as subscriber accounts continue to fall" in BlackBerry's next earnings report. The analyst sees no chance of a turnaround in the immediate future, and thinks that the entire company is worth perhaps $6 a share -- cash, patents, and services business included.

That's significantly less than BlackBerry shares sell for today (close to $9). But the really bad news is that the longer you wait, the less these shares may be worth.

Currently unprofitable from a GAAP perspective, the company is still generating free cash flow at the rate of $286 million a year. On a market cap of $4.6 billion, that works out to a seemingly not expensive 16 times price-to-FCF ratio. But cash production at BlackBerry has been in decline for some years now, and few analysts see any hope of this trend reversing. The longer the company remains in business, the less cash it's likely to retain -- and the lower its sum-of-the-parts valuation will fall. Given this risk, SocGen's advice to sell the stock and look for a better business to invest in seems to me the right advice.

Is Exxon a better business?
Speaking of cash, free cash flow plays the largest role in my decision not to follow Merrill Lynch's advice to buy ExxonMobil today. This morning, Merrill announced an upgrade on Exxon's stock, arguing that its current $95 and change valuation is too low, and that the stock could hit $110 within a year.

That's certainly possible, but I wouldn't bet on it, and here's why: Exxon shares currently sell for about 13 times earnings. Long-term earnings growth, however, is expected to average just 3% per year over the next five years. So even with a 2.7% dividend yield, 13 times earnings looks expensive.

Now consider further that while Exxon reported earnings of $32.6 billion last year, its actual free cash flow was only $11.2 billion. It's apparent, therefore, that the quality of the earnings Exxon is reporting is exceedingly low. For every $1 in profits the company reports, it collects only about $0.34 in actual cash profit -- and that makes the its price-to-free cash flow ratio a very pricey 37 times. That's significantly more than a 3% growth rate can justify, and it's why Merrill is wrong to rate the stock a buy.

None of the news that's fit to invest in
Last and least, we come to Evercore's endorsement of The New York Times Company -- and if you can believe it, this one's an even worse investment idea than Merrill's Exxon pick. This morning, Evercore Partners argued that at $16.65 per share today, the stock's a good bet to hit $18.50 within a year.

But take a look at the numbers here. With $65 million in trailing earnings, "The Grey Lady" is selling for 40 times earnings today, a high price to pay for a growing company with high-quality profits. And yet, The New York Times is neither of those things.

It's not growing. Analysts expect GAAP profits to decline by about 6% annually over the next five years.

And its earnings are not of high quality. Rather, free cash flow at The New York Times totaled a bare $18 million over the past 12 months, or about $0.18 for every $1 of reported earnings.

Result: Valued on earnings and especially valued on real cash profits, the company's simply not worth owning at all. Evercore's recommendation to overweight the shares is dead wrong.

Rich Smith has no position in any stocks mentioned, and neither does The Motley Fool.

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.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information