Thursday's Top Upgrades (and Downgrades)

Analysts shift stance on Xerox, Brinker, and Cheesecake Factory.

Apr 24, 2014 at 4:32PM

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 a positive rating for Xerox (NYSE:XRX) and an upgrade for Brinker (NYSE:EAT). Meanwhile, on the bad news front...

Cheesecake Factory curdles
We might as well get the bad news out of the way first, and today, the bad news concerns Cheesecake Factory (NASDAQ:CAKE), which is the subject of a negative movement in price target from the Telsey Advisory Group.

This morning, Telsey sliced $3 off its price target for Cheesecake Factory, positing a $52 valuation on the stock. Optimists, however, will be quick to point out that even this lower price target implies about 12% upside to Cheesecake Factory shares, which currently sell for about $46 and change. But are the shares really worth even that much?

Only yesterday Cheesecake Factory reported its Q1 2014 earnings, and they came in at just $0.43 per share -- down year over year, and $0.06 short of analyst estimates. Revenues topped expectations, but were still up only 4% in comparison to last year's Q1 -- a far cry from the 14% long-term earnings growth rate that analysts are expecting the stock to produce. And indeed, even if Cheesecake Factory were producing its hoped-for 14% growth rate, it would be hard to argue that this would be fast enough growth to justify the 21-times-earnings multiple that Cheesecake Factory shares currently sell for.

Accordingly, Telsey's argument that the shares should fetch 12% more than today's share price is even harder to swallow.

EAT out?
Continuing today's eat-out theme, we turn next to Brinker International, which owns the Chili's and Maggiano's Little Italy restaurant chains. In contrast to Cheesecake, whose stock is sinking in Thursday trading, Brinker shares are enjoying a boost from yesterday's fiscal Q3 earnings report, which featured $0.84 in per-share profit -- a penny ahead of estimates, despite revenues that fell a bit short of the mark.

This strong performance prompted an upgrade to "buy" at the hands of analysts at Miller Tabak today, which says the stock should hit $58 within a year. Happily, this argument has a bit more to it.

Priced at 19.5 times trailing earnings, Brinker shares may look expensive for their projected 13% growth rate and 1.9% dividend yield. But Brinker generates strong free cash flow from its business -- $198 million in cash profits over the past year, or about 15% more than the company is allowed to claim as "net income" under GAAP accounting rules. As a result, Brinker's price-to-free cash flow ratio is a more appetizing 16.9 -- almost cheap enough to consider buying based on the company's projected growth rate and dividend yield.

Would I go so far as to call the stock a buy, as Miller Tabak does? No. But I will say the stock looks a whole lot cheaper than that of Cheesecake Factory.

Double down on Xerox?
Last but not least, we switch gears to consider a positive rating that just came out on old-tech stalwart Xerox Corporation. Following Xerox's earnings beat Tuesday ($0.27 per share, versus $0.24 expected), broker Susquehanna International initiated coverage of the stock with a "positive" rating this morning, and a $14 price target.

Which is actually kind of curious. Sure, Xerox "beat earnings" for Q1. But ordinarily (if perversely), the stock market tends to discount a company's accomplishments in favor of the promises it makes about future performance -- and Xerox's promises this week weren't particularly good. Management guided investors to expect at most $0.27 per share in profit for the current second fiscal quarter of the year, versus analysts' expected $0.28. And even looking farther out to year-end, Xerox declined to promise that it would hit analysts' hoped-for $1.13 in per-share profit, saying only that it expected profits to range between $1.07 and $1.13 per share.

On one hand, that's not horrible news. $1.13 per share would give Xerox about a 10.6 P/E ratio at today's prices, while $1.07 would only push that P/E up to 11.2 -- both numbers cheaper than the 12.4-times earnings valuation that the shares currently carry. On the other hand, though, none of these valuations look particularly attractive in light of Xerox's projected 4% long-term earnings growth rate.

What may finally tip the scales in Xerox's favor, though, is the fact that Xerox is generating a whole lot more cash profit than its income statement lets on -- $2.4 billion in positive free cash flow, or more than twice reported net income. Weighed against the company's $14.2 billion market cap, that works out to a price-to-free cash flow ratio of less than 6. And that seems to me cheap enough a price to pay, even for a company growing at only 4%, so long as Xerox maintains its 2.2% dividend yield.

Long story short, Susquehanna sees the valuation on this one as a "positive" -- and I do, too.

Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned, either.


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