This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we're surveying a series of new ratings on some of America's hottest consumer brand names: downgrades for Deckers (Nasdaq: DECK) and True Religion (Nasdaq: TRLG), but a revival of fortunes at JetBlue (Nasdaq: JBLU). Fasten your seat belts, and prepare for liftoff!
Deckers decked
Coming off a warm winter, UGGs footwear maker Deckers Outdoor missed earnings badly Thursday night, reporting a 59% decline in first-quarter profit. Add in a reduction in full-year guidance (perhaps $4.56 per share), and the reaction was predictable: Deckers got smacked down, off 25% as of this writing. (Don't say you weren't warned.)
But also don't get too upset if you missed the warning signs. Some of Wall Street's best and brightest also got fooled. And now that it's too late, Deckers is getting hit by downgrades from all sides, as Northland Securities, Canaccord Genuity, and Auriga all rush for the exits and ratchet back their ratings to "hold." But could this be an overreaction?
Perhaps. Certainly, a worst-case scenario of $4.56 per share doesn't sound too bad on a stock that currently costs only $51 and change. That's only 11 times earnings, after all. Not bad for a stock that most folks on Wall Street still expect to see grow 19% per year over the next half-decade. The only worry here, really, is that Deckers' earnings may not be of particularly high quality. Management didn't bother to provide its shareholders with a cash flow statement in yesterday's earnings release, and as you may recall, last time we checked on the stock, Deckers was still burning cash. If free cash flow at the company matches net income, the stock is probably worth scooping up at today's fire sale.
But if it doesn't, then it isn't.
Don't lose faith in True Religion
Deckers isn't the only stock Wall Street has turned the cold shoulder to, either. Jeans maker True Religion doesn't report earnings till Tuesday, but over at BB&T Capital Markets, the bankers aren't waiting around for bad news. This morning, they downgraded TR to hold ahead of the news. But is BB&T right to go all agnostic on True Religion so early?
After all, unlike Deckers, True Religion generates plenty of cash from its business. Trailing cash profits came to more than $51 million over the past 12 months, more than 10% above levels of reported net income. That means this supposed "15 P/E stock" actually costs only about 13 times profits, when valued on its free cash. For a 20% grower like TR, that sounds like quite a bargain.
Safe landing
And finally, speaking of bargains, the analysts at Dahlman Rose think JetBlue just might be turning into one. The stock is down 18% over the past year, which isn't exactly good news. But here's something that might be: After dropping so far, so fast, JetBlue stock now looks at worst fairly priced at less than 17 times earnings, and a near-17% projected growth rate.
JetBlue reported its own earnings yesterday morning, and with traffic up 14% year over year, the company exceeded expectations handily. Earnings came in at $0.09 a share, versus $0.08 projected and a year-ago profit of just $0.01. So... a nine-fold increase in per-share profits. Not bad!
Dahlman thinks the new numbers at JetBlue justify a ratings increase to "hold," arguing that after the shares' steep sell-off earlier this year, there's now "limited downside risk to the shares." Management has done a good job of using hedges to insulate itself against the risk of rising jetfuel costs, and what the hedges don't cover, new CEO Dave Barger says that record levels of revenue will.
The stock's not quite at bargain levels yet, but if earnings continue to improve, and investors can resist bidding up the shares ahead of time, it soon may be.
Fool contributor Rich Smith holds no position in any company mentioned.
