Wednesday's Top Upgrades (and Downgrades)

Analysts shift stance on AutoZone, DreamWorks, and Lowe's.

May 28, 2014 at 7:30PM

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 both DreamWorks Animation (NASDAQ:DWA) and AutoZone (NYSE:AZO). But not all stocks are so lucky. Before we get to the good news, let's address why one analyst foresees...

New lows for Lowe's
Shares of home improvement retailer Lowe's (NYSE:LOW) are tumbling this morning in response to a downgrade to sell from investment banker Canaccord Genuity.

Last week, as you may recall, Lowe's reported first-quarter earnings featuring a 2.4% rise in net sales and a 25% leap in earnings per diluted share (to $0.61). Adding to the good news, Lowe's matched its one-penny earnings "beat" by raising its full-year earnings outlook by $0.03 -- to $2.63 -- suggesting that the first-quarter profit was not borrowed from future quarters, and that earnings strength should continue growing throughout the year. So why isn't Canaccord buying that argument?

As it turns out, maybe it is. In the write-up on its downgrade, Canaccord acknowledged that Lowe's has benefited "from the flood of positive housing data" recently. The problem, as Canaccord sees it, is less a worry that the housing market will collapse, but that growth in housing might decelerate, and that this risk is not baked into Lowe's share price, which is up 88% dating to the beginning of 2012.

Admittedly, there is a risk here -- but if you ask me, it's not a big one. Priced just north of 20 times earnings, Lowe's looks slightly overpriced relative to consensus expectations for 17% annualized earnings growth over the next five years. But if you value the stock on its cash profits -- which at $3.2 billion for the past year are fully one-third higher than Lowe's reported net income, according to S&P Capital IQ -- I still see a lot of value in the stock.

Valued on free cash flow, Lowe's still sells for a modest multiple of less than 15, which is easily justified by the stock's projected growth rate. Add in the 1.5% dividend yield for a bonus, and I'd argue Lowe's shares remain cheap today -- and unworthy of the sell rating Canaccord has put forward.

Not so, AutoZone
I wish I could say the same about today's first big upgrade -- AutoZone -- but I cannot. The auto parts retail specialist reported strong earnings yesterday: $8.46 for its fiscal third quarter, $0.02 ahead of the consensus estimate, with same-store sales rising 4% year over year. This earnings beat prompted an upgrade to buy today from Gabelli, which said that AutoZone is doing so well, it deserves a premium multiple to peer retailers. But why?

Based on the company's latest numbers, AutoZone shares sell for nearly 17 times earnings. With only a 14.4% projected growth rate, and no dividend to sweeten the deal for investors, AutoZone shares already look pretty premium-priced. Factor in the fact that, unlike Lowe's, AutoZone actually generates a bit less free cash flow than it reports as net income on its income statement, along with the company's sizable debt load of more than $4.1 billion net of cash, and the stock actually starts looking pretty expensive.

Long story short, even if you think AutoZone deserves a premium multiple -- it's already got one. The chances of this stock going up even more, absent significantly higher growth than analysts are expecting it to produce, seem slight. Gabelli is wrong to recommend buying the stock.

Dream on
AutoZone isn't the only stock analysts are wrong in recommending today, of course. So let's wrap up today's column with a quick look at DreamWorks, which earned some kind words from Topeka Capital this morning.

Formerly a bear on DreamWorks, Topeka relented and upgraded the shares to hold today. According to, the analyst argued that with the damage from DreamWorks' writedown of its investment in Mr. Peabody & Sherman over and done with, the stock's "18.7% decline in the 5 sessions after the earnings call" last month is about as bad as things are likely to get.

I disagree. I think there's more pain ahead for DreamWorks shareholders.

Here's why: The $57 million charge to earnings that DreamWorks took last quarter was sizable, no doubt. But it was no aberration at this movie maker, which has taken more than $230 million in such writedowns over just the past six quarters. Even with these writedowns, DreamWorks says it still managed to earn $6.6 million in trailing earnings over the past year.

DreamWorks' cash flow statement, however, shows zero cash profit generated over this past year. To the contrary, cash burn at the company topped $64 million for the period -- meaning DreamWorks actually burned through nearly 10 times as much cash as it says it earned in profits. And while the company has historically generated some cash over time, its record over the past five years -- averaging about $17 million in annual free cash flow -- is no great shakes.

Simply put, DreamWorks isn't generating enough cash to justify the stock's $2.4 billion market capitalization, which values shares at nearly 140 times average annual cash production. I think the stock's worth far less than what investors are presently valuing it at, and that it's likely to continue to fall.


Rich Smith has no position in any stocks mentioned, and doesn't always agree with his fellow Fools. Case in point: The Motley Fool recommends DreamWorks Animation.

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.

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