Monday's Top Upgrades (and Downgrades)

Analysts shift stance on FedEx, Allegheny Tech, and bebe.

Jun 30, 2014 at 12:22PM

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 raised price targets at both FedEx (NYSE:FDX) and Allegheny Technologies (NYSE:ATI). But before we get to the good news, let's take a quick look at why...

bebe's crying
Struggling fashionista bebe stores (NASDAQ:BEBE) announced last week that it's going to try to shave $9 million-$10 million off its annual cost of doing business, closing tis "2b" mall-based store chain and doubling down on efforts to reinvigorate its core brand. This will entail at least $5 million in charges for restructuring, however, and won't happen fast enough to prevent bebe from reporting "low single digit" negative same store sales for fiscal Q4 2014, rising levels of inventories, and a "mid-teen" per-share loss for the company -- none of which news made analysts at B. Riley happy.

This morning, Riley threw in the towel on bebe stores, reducing its rating to neutral and cutting its price target by more than half, to just $3.40 per share. Riley's right to do so.

Unprofitable ($60 million in losses over the past year) and burning cash (free cash flow of negative $36 million for the same period), bebe is certainly struggling. But despite being a far worse than average retailer (as an industry, retailers remain profitable), bebe's stock sells for only about a 35% discount to the average price-to-sales ratio of 0.84 in this industry.

The stock does have some potential, don't get me wrong. For one thing, bebe is still sitting on more than $127 million in cash at last report, and has no debt. But at the very least, we're going to want to see the company begin generating positive free cash flow before buying into a turnaround story. Because the longer bebe burns cash, the smaller its bank account is going to get. For now, Riley's right to sit on the fence, and see how things play out with the turnaround.

FedEx is flying
Turning now to happier news, shares of FedEx got a nice lift when the company reported Q4 earnings that exceeded expectations by a good $0.01 per share. Shares rose 6% in the aftermath of earnings, have continued drifting upwards since -- and according to analysts at Oppenheimer, could go up even more from here.

Oppenheimer, which rates FedEx an outperform, increased its price target on the stock to $168 per share today. If it turns out to be right, this will equate to an 11% return on the shares for investors who buy FedEx today, with a 0.5% dividend yield tacked on for good measure.

But here's the thing: The sum of anticipated growth in the stock price, plus the dividend, still works out to not much more than the stock market's average long-term growth of 10% and change. And given the evident overvaluation of FedEx stock, I'm not sure it's worth the risk for only a chance at "average" returns.

FedEx's valuation of 28.6 times earnings more than prices in growth prospects of 15% annually over the next five years. What makes the stock look even more expensive, though, is the fact that with only $731 million in trailing free cash flow (according to S&P Capital IQ data), FedEx is actually much less profitable than the $2.1 billion in "GAAP earnings" shown on its income statement make it appear. In fact, I calculate the company's enterprise value-to-free cash flow ratio at more than 63.8 -- far, far too much to pay even for a 15% grower like FedEx.

Long story short, while FedEx is a great company, with a moat around its business that is well nigh on unassailable, it's still possible to overpay to own it. Oppenheimer may think that's a risk worth taking. I disagree.

Allegheny Tech-nically overvalued
Finally, we come to Allegheny Technologies -- which despite the name, has very little to do with the "tech" industry at all, and is in fact a specialist in steel, titanium, and alloys. The stock costs a bit less than $45 today, and has been performing well over the past year (up nearly 70%). That said, the stock's sharp run-up has drawn it close to Stifel Nicolaus's old $45 price target, and with momentum showing little sign of slowing, the analyst decided today to raise the roof a bit.

Suggesting a $50 target price for Allegheny Tech, Stifel is predicting investors can earn about a 12% return on their money if they buy today. Factor in Allegheny's 1.7% dividend yield, and what you wind up with is an anticipated total return of about 13.5% -- more than Oppenheimer is promising from FedEx. So is Allegheny Tech a buy?


In fact, if you ask me, Allegheny Tech stock looks like an even riskier investment than what we saw at FedEx. Consider: Priced north of 38 times earnings, Allegheny carries a higher P/E ratio than does FedEx -- despite being pegged for the slightly slower growth rate of 13.8%. What's more, while FedEx is generating a lot less free cash flow than it reports as net income, Allegheny is currently generating no free cash flow whatsoever. Indeed, S&P Capital IQ data show the company burning cash at the rate of nearly $200 million per annum.

Once again, Wall Street and I don't see eye to eye. Stifel looks at Allegheny, and sees modest growth justifying Allegheny Technology's very high P/E ratio. I see cash burning by the bail-load, and earnings that simply aren't high enough to support the stock price. In short, it's simply not a stock I'd want to own.

Rich Smith has no position in any stocks mentioned, and doesn't always see eye-to-eye with the other Fool analysts, either. Case in point: The Motley Fool recommends FedEx.

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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