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, headlines feature new buy ratings for Autodesk (NASDAQ: ADSK  ) and Starwood Hotels (NYSE: HOT  ) . But before we get to those two, let's take a minute to check in on one of the hottest IPOs of the year...

GoPro going down?
I'm referring, of course, to GoPro (NASDAQ: GPRO  ) , the "action-sports" wearable camera maker that rocketed to prominence in its IPO last month. Priced first at $24 per share, in its first minutes as a public company GoPro stock ran off to the races -- and hasn't really looked back since. But at today's share price of $42 and change, one analyst is saying the stock has gotten too far ahead of itself -- and needs to be sold.

Vertical Group is the analyst raining on GoPro's parade today, and it's fretting over declining rates of revenue growth and "a range" of competitors to the business, and warning, too, that GoPro's "Content Monetization initiative" is "fraught with risks." Calling these threats "tangible and mounting," Vertical Group is quoted on StreetInsider.com today saying that GoPro's true fair value is closer to $28.50 per share than to the $42 the shares fetch today. Accordingly, the analyst recommends selling the stock.

I do, too. Here's why:

With $49 million in trailing earnings and $72 million in trailing free cash flow, GoPro's accounting and cash profits are both starting to slip -- not grow -- from last year's levels. Don't get me wrong: $49 million and $72 million are both fantastic numbers, especially for a new IPO (where profits can sometimes be few and far between). But neither one justifies the stock's market capitalization, which currently tops $5.2 billion. That works out to a price-to-free cash flow ratio of 72 on the stock -- and a P/E ratio in the triple digits.

GoPro will need to grow earnings at a barn-burning pace to justify these kinds of valuations. But as Vertical Group points out -- and as the company's financials show -- GoPro's growth may already be beginning to sputter. The time to head for the hills may already be upon us.

Starwood is no star, either
And speaking of overvalued stocks... Starwood Hotels. In contrast to sell-rated GoPro, this one's getting an endorsement on Wall Street today, as MLV & Co. announces an upgrade to buy, with an ambitious $96 price target on the stock, which currently costs $84 and change.

MLV sees this target price as justified by the hope  that "an improving economic landscape in the Eurozone will translate into increased asset sales and share repurchases, exceeding current muted expectations."

Which may be true. But viewed from the perspective of earnings and free cash flow, Starwood shares still look pricey. The stock sports a P/E ratio that, while not as high as GoPro's, is certainly high enough -- 29 times earnings. That's higher than the average in the hotel industry, even though Starwood earns gross profit margins lower than the average. Free cash flow at the company is strong, with Starwood generating about $1.29 in cash profits ($723 million in free cash flow generated over the past 12 months) for every dollar it reports as net income ($559 million total).

But even so, it's hard to see why MLV would recommend buying a stock that sells for more than 22 times free cash flow, when long-term growth rates are still estimated at only 8%. Maybe other analysts' "current expectations" are indeed "muted" -- but probably not by that much.

Long story short... I'd be leery of going long Starwood on MLV's say-so.

Is Autodesk an automatic buy?
Lastly, we come to Autodesk, the computer-aided design software maker that last month promised investors to turn in 4% to 6% revenue growth in fiscal 2015 (ending in January), and 3% to 5% operating profit margins thereon. Those sound like small numbers, but they're apparently good enough for British banker Barclays, which today announced an upgrade to "overweight" on the stock, and a new price target of $65 per share.

I hate to sound like a broken record, saying, "This stocks' too expensive... and this one is, too... and so's this one." But the cold, hard truth of the matter is that, yes, this stock is expensive too.

Priced at a staggering 64 times earnings (large-cap Autodesk is hardly the kind of fast-growing upstart that GoPro is billed to be), Autodesk is only expected to post earnings growth in the 8% range annually over the next five years.

Sure, the company sports a more attractive price-to-free cash flow ratio than that. With $505 million in cash profits generated over the past year, Autodesk is about 150% more profitable than its $201 million in reported GAAP income makes it look. That's commendable. But the resulting P/FCF ratio on the stock is still a heady 25 times, which seems quite a lot to be paying for a dividendless, 8% grower.

Once again, Wall Street says it's a buy. I say it isn't.

Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned either.


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