Friday'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 new buy ratings for YRC Worldwide (NASDAQ: YRCW  ) and Keurig Green Mountain (NASDAQ: GMCR  ) . But the news isn't all good. Before we get to those two, let's take a quick look at why Goldman Sachs is...

Knocking the pipes at Flowserve
On a down day for Dow stocks in general, shares of Flowserve (NYSE: FLS  ) are suffering worse than most -- down nearly 2% as of this writing. For this, you can thank the unfriendly analysts at Goldman Sachs.

This morning, Goldman announced it was picking up coverage of the industrial flow management equipment maker with a sell rating. Strangely, though, the $78 price target that Goldman assigns the shares is actually $4 more than what Flowserve shares cost today. So what's up with that?

Quoted on StreetInsider.com this morning, Goldman argues that Flowserve has "a solid franchise that generates strong returns." What worries the analyst, though, isn't Flowserve's bottom line, but how investors might react to trends on its topline. Goldman says these top-line growth expectations "could disappoint," and warns that Flowserve's earnings, too, will probably come in 1%-2% below what other analysts are predicting this year and next.

That could be a problem. After all, at 21 times earnings, Flowserve is hardly a cheap stock today. Most analysts expect to see the company produce 14% annualized earnings growth over the next five years, and knocking even a point or two off of that growth thesis would make an already pricey stock look even more expensive.

On top of all this, Flowserve already isn't generating as much free cash flow as its income statement suggests. FCF for the past 12 months was only $375 million, according to S&P Capital IQ data -- a good $120 million behind reported earnings, and enough to shift the valuation proposition even farther toward the "overvalued" end of the scale.

Long story short, I'm in agreement with Goldman Sachs on calling the stock a sell. The only thing I don't get is the $78 price target on a stock that's clearly overpriced at $74. That one's the real head-scratcher.

Green Mountain gets greener
Turning now to the day's good news, we find analysts at Argus Research upgrading shares of Keurig Green Mountain to buy -- and sending the stock climbing the mountain, up 3.6% already.

Argus is looking for "solid" revenue and improved earnings at the single-serve coffeemaker-maker through at least next year. The question is whether such short-term performance is enough to justify a long-term buy rating on the stock.

Call me a pessimist, but I don't think it is. Here's why not:

Priced at 35 times earnings, Keurig shares look too expensive for the stock's consensus 17% long-term growth rate to justify. Granted, Keurig has factors in its favor that make the overvaluation less extreme than first appears -- $836 million in cash net of debt, strong free cash flow that exceeds reported net income by 14%, and a tidy 0.8% dividend yield to name just a few. But the long and the short of this story is that even after crunching all the numbers in the light most favorable to Keurig, I still see the stock as significantly overvalued relative to its growth rate.

Argus must think it a decent bargain regardless. I disagree.

Yellow flags at YRC Worldwide
And speaking of perpetually overvalued stocks -- YRC Worldwide. This one, too, earned an upgrade to buy on Wall Street today, this time with BB&T Capital doing the honors.

According to StreetInsider.com, BB&T thinks YRC Wolrdwide is in at least the "early stages" of a turnaround that the analyst believes will end up with YRC becoming once again a profitable operation. BB&T's bullish thesis relies largely on the fact that YRC has successfully extracted labor concessions from its union, and forbearance from its bankers, in deals that should last through at least 2019. Speaking as a banker, BB&T notes that "average interest expense [at YRC could drop] from ~8% to ~5% by 2016," freeing up more cash to pay down debt further, and accelerating YRC's march toward profitability.

And BB&T may be right. But even if it is, it's going to be an awfully long march for YRC.

Right now, the stock's still lugging around more than $1 billion in net debt on its balance sheet, and paying out upwards of $180 million annually in interest on this debt. Operating profits, and operating cash flow, which both briefly peeked over the breakeven level last year, are once again looking negative on a trailing-12-month basis -- so even a reduction in interest payments won't be enough to turn the company profitable until that gets fixed.

In short, while most analysts are still looking forward to seeing YRC turn a profit in 2015, I have my doubts. While there's a chance BB&T will be proven right about this, YRC remains a "trust but verify" stock. We'll want to see more positive numbers from the stock, before turning truly positive on the stock.

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 Keurig Green Mountain.


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