Thursday's Top Upgrades (and Downgrades)

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 pair of upgrades as Wall Street analysts line up to buy discount flyer JetBlue Airways (NASDAQ: JBLU  ) and discount flooring specialist Lumber Liquidators (NYSE: LL  ) . But the news isn't all good, because as it turns out...

Citigroup's not the only banker that's upending Coach
Yesterday, we told you how Coach (NYSE: COH  ) was rudely handled by investment banker Citigroup. Despite reporting third-quarter earnings that exceeded Wall Street expectations, Coach had its buy rating pulled by Citigroup, and was downgraded to neutral on worries that deteriorating fundamentals mean the stock's no longer an attractive investment.

Well, this morning, rival investment banker Morgan Stanley seconded that motion -- with a vengeance. Citing the same "worsening trends" that worried Citigroup, Morgan Stanley says Coach shares are worth no more than $36, suggesting the stock could lose as much as 18% of its value over the course of the next year.

And they may be right... or they may not.

Updated financial data from S&P Capital IQ has Coach earning only $927 million in GAAP profits over the past 12 months -- about $60 million less than I estimated in yesterday's column. Based on these latest numbers, the stock now sells for more than 13 times earnings.

The good news here is that, according to S&P Capital IQ's poll of industry analysts, Coach may actually turn its business around faster than we think. Whereas Yahoo! Finance data still has analysts projecting sub-8% growth rates for Coach over the next five years, S&P's estimates are for a more optimistic 12% annualized pace of growth. If this latter number turns out to be the correct one, then even a 13 times multiple to earnings may not be too much to pay for Coach, given that Coach supplements shareholder earnings growth with a tidy 2.7% dividend payout.

Long story short, while I agree with Citigroup that the stock looks less attractive today and is no longer an obvious buy, I'm not quite ready yet to join Morgan Stanley in the sell camp.

Will JetBlue fly higher?
Turning now from the bad news to the good, we begin with JetBlue Airways, the subject of a new upgrade to overweight this morning from analysts at JPMorgan. According to JP, earnings for the airline industry as a whole are approaching new all-time highs -- and could go higher still over the next few years. This prospect, plus the fact that JetBlue is currently the only airline whose shares are down year to date, makes the company an obvious place to look for value, according to the analyst.

JP estimates JetBlue earnings at $0.90 for next year, and argues the stock should sell for about 11 times that amount -- positing a $10 share price. And given that most analysts assume JetBlue will grow its earnings at better than 21% annually over the next five years, an 11 times multiple to forward earnings doesn't seem too unreasonable.

Fact is, even valuing the company on the $0.48 per share it earned over the past 12 months, JetBlue shares today cost less than 17 times trailing earnings. If Wall Street is right and 21% growth is in the cards for JetBlue, that's quite a bargain price for this bargain-ticket airliner.

Long story short, the analyst's new recommendation to buy the shares looks right on the money.

Is Lumber Liquidators a rock-solid investment? 
Last but not least, we turn to Lumber Liquidators, which this morning earned a buy rating from ISI Group despite reporting numbers last night that missed the earnings consensus by a good $0.13.

Earning $0.49 per share on $246 million in sales, Lumber Liquidators whiffed on both earnings and revenues. And yet, management is still promising to deliver between $3.25 and $3.60 per share in full-year profits -- not too far off the mark from analysts' hoped-for $3.51 per share.

But is that enough profit to justify buying the stock?

To find out, let's give Lumber Liquidators the benefit of the doubt and assume it maxes out its earnings estimate of $3.60 for this year. This would give the stock a P/E ratio of 25.5 -- considerably cheaper than the 33 P/E at which it's still pegged on Yahoo! Finance based on trailing results.

Problem is, with free cash flow at Lumber Liquidators approximating only $24 million for the past 12 months (less than one-third of claimed GAAP earnings of $75 million), it's apparent that Lumber Liquidators' GAAP earnings are of pretty low quality. When you consider further that growth rates for the company are still stuck at 18%, ISI's case for buying this stock starts to look pretty weak.

Absent a stronger growth rate or free cash flow numbers more in line with reported income, I just don't see a good reason to risk buying Lumber Liquidators at today's prices.

Rich Smith has no position in any stocks mentioned, and doesn't (always) agree with his fellow Fools. Case(s) in point: The Motley Fool recommends both Coach and Lumber Liquidators, and owns them both as well.

 


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