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 new buy ratings for Facebook (NASDAQ: FB  ) and Flextronics (NASDAQ: FLEX  ) . The news isn't all good, however, so before we get to those two, let's take a quick look at why one analyst thinks...

SodaStream has lost its fizz
Last week, make-it-at-home soda company SodaStream International (NASDAQ: SODA  ) reported first-quarter earnings of $0.08 per share, beating the Street's expectation by a whopping $0.07 per share. Regardless, investors punished the company for an eroding gross margin and for failing to grow U.S. sales. Expect more of the same today.

Adding insult to the stock price injury shareholders have already endured (shares are down 35% over the past 12 months), Barclays Capital announced today that it is throwing in the towel on SodaStream once and for all -- downgrading the stock to underweight and predicting the company will sell for as little as $35 a share within a year.

SodaStream's "earnings beat" notwithstanding, it's hard to argue with Barclays' decision. Priced at 27 times earnings today, the company's shares may look attractive in light of the 28% long-term growth rate that other analysts assign to the stock. But as revealed in data from S&P Capital IQ, the "earnings" SodaStream is expected to "grow" are pretty illusory.

Even as SodaStream reported earning $31.7 million in generally accepted accounting principles profit over the past 12 months, its cash burn (negative free cash flow) for the period exceeded $30 million. So while the company's income statement reflects the company in a "profitable" light, its cash flow statement clearly shows it to be anything but a cash-making business. Barclays is right to counsel investors to sell.

More profitable than on its Face(book)
Our first upgrade of the day is a high-profile stock that needs no introduction: Facebook. This morning, Evercore Partners upgraded shares of the premier social networking site to overweight, predicting Facebook stock will hit $75 within a year. Praising the company for "an exceptionally strong quarterly result" (sales were up more than 70%, while earnings nearly tripled), Evercore noted that "FB now monetizes mobile time spent to the tune of 9:1 the industry," arguing that the company can therefore increase earnings even without taking market share from smaller rivals.

Crunching a slew of numbers on "mobile per-user monetization ($6/user)," market share, and "mobile time-spent monetization," Evercore upped its estimate of the gross profit Facebook can earn in 2014 by a whopping $600 million. Based on S&P Capital IQ data, it appears that historically, about 75% of such gross profit at Facebook survives all the way to the bottom line. This would imply that Facebook could earn as much as $450 million additional net profit this year (more than $0.17 per share), than investors expect.

If Evercore is right, this would amount to a sizable earnings beat for 2014 -- $1.60 a share in profit, where most analysts expect only $1.43. But even if Evercore is right, does this make the stock a buy?

Valued on trailing earnings of $0.77 per share, Facebook currently sells for a P/E ratio of 79. Valued on the consensus estimate for 2014 earnings, that P/E drops to 42.5 -- and perhaps as low as 38 times earnings if Evercore's predictions bear fruit. Make no mistake: these are all still pretty expensive multiples to earnings. But if analysts are right about Facebook's ability to keep earnings growing at about a 35% pace over the next five years, it's entirely possible the stock is actually cheap enough to buy right now, and that Evercore is right to recommend it.

Flex-ing its earnings muscle
Speaking of stocks that Wall Street might be right about, there is Flextronics International. The company's just-released 10-K filing with the SEC shows that in 2013, Flextronics earned a healthy full-year profit of $365.6 million ($0.59 per diluted share). The 10-K further shows that Flextronics then topped that amount by 66% on its cash flow statement, generating positive free cash flow of $606.9 million.

This morning, Needham praised the contract electronics manufacturer and upgraded its shares to buy. Quoted on StreetInsider.com, Needham stated, "we see the model improving on multiple fronts as another stage kicks in that should yield improved visibility, better margins and ultimately earnings growth," and opined that the stock has a "relatively attractive valuation."

I'd go even farther than that: Flextronics' shares look downright cheap.

Granted, at a share price of 16.4 times earnings, a projected growth rate of less than 13%, and no dividend payout whatsoever, the stock is not the most obvious buy. But if you value Flextronics on its free cash flow, it turns out this stock sells for less than 10 times the amount of cash it's churning out annually. That's not a bad price at all to pay for 13%-ish growth. If Flextronics can live up to the growth pace that Wall Street expects, I might even go so far as to call the stock a buy myself.


 

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