This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today's trio of newsmakers: newly buy-rated Suncor (NYSE: SU), now-downgraded First Solar (Nasdaq: FSLR), and Honeywell (NYSE: HON), which got a price-target increase. Let's dive right in.
Suncor could surge
Oil sands specialist Suncor doesn't report first-quarter earnings until late next Monday, but local analyst BMO Capital Markets isn't interested in waiting for the good news to become official before upgrading the shares. Perhaps thinking it's got a better picture of how the stock's doing, what with both of them being Canadian shops and all, the Montreal-owned i-banker announced it's upgrading Suncor to "outperform" based on the stock's low valuation.
It's hard to argue with that reasoning. Priced at just 11.5 times earnings, Suncor does look cheap relative to consensus predictions of 13% long-term earnings growth. The stock's P/E looks even lower relative to the prices other oil firms fetch. On average, valuations in the independent oil and gas industry exceed 18 times earnings, so Suncor is trading at a pretty sizable (38%) discount to its peers.
Best of all? After years of spending more cash than its operations brought in, as it worked to exploit Canada's gooey oil sands resources, Suncor's finally emerged into true free cash flow positivity, and generated a whopping $3.1 billion in free cash flow last year. If Suncor can keep up that good work when earnings come out next week, this stock could go far.
First Solar flames out
Not so with First Solar; at least, not according to analysts at Maxim Group, which this morning slapped a sell rating on the stock. Declaring that the plunge in polysilicon prices to $20 a kilogram has stripped First Solar of "competitive advantage," Maxim explained that First Solar has been forced to abandon its "unprofitable" business of building solar modules for third parties. All that's left now is to focus solely on supplying modules for its own solar power plant projects. This, however, can generate at most $1 a share of annual profit for the company -- too little to justify the stock's $20 share price.
Maxim's suggestion: First Solar shares will go to $9, if not lower. And the projected 50%-plus decline in the shares argues in favor of selling First Solar today.
A Honey of a deal
Let's not end today's column on a down note. Good news comes on the tail of Honeywell's strong first-quarter performance. After topping 2011's Q1 profits by 18% and beating its own ambitious earnings projection by a good 7% Friday, Honeywell went on to predict that it will end this year earning perhaps $4.55 per share -- a nickel better than it had previously hoped.
This news persuaded UBS to up its price target on the stock by 7%, to $61, and the price looks right. Sure, Honeywell costs more than 21 times earnings today, which might seem a bit much for a projected 14% grower. But Honeywell is a whole lot more profitable than meets the eye. Trailing-12-month free cash flow at the firm exceeds $2.6 billion, or 21% better than reported earnings under GAAP. At a market cap of $45.8 billion, this translates into a price-to-free cash flow ratio of about 17.5. Add in a dividend yield of about 2.5%, and the stock's price looks more than fair today.
Mind you, UBS isn't advising investors to buy it just yet. The rating is still just "neutral." But if Mr. Market continues sliding, as he appears intent upon doing today, Honeywell doesn't need to fall much more to become an out-and-out "buy."
Motley Fool contributor Rich Smith holds no position in any company mentioned. Motley Fool newsletter services have recommended buying shares of First Solar. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
