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'll be looking at the latest in downgrades and diminished expectations at Chesapeake Energy (NYSE: CHK) and Emerson Electric (NYSE: EMR), respectively, then we'll perk up with pizza at Papa John's (Nasdaq: PZZA).
Chesapeake de-energized
It should have been good news. After weeks of recriminations, accusations, and (IRS and SEC) investigations, yesterday Chesapeake CEO Aubrey McClendon bowed to public pressure and announced he'll be giving up his chairmanship and ending his participation in the company's Founder Well Participation Program (FWPP). This elimination of multiple grounds for conflict of interest claims had investors enthused up until Chesapeake announced its earnings numbers for last quarter (featuring losses that were less than last year's, but losses nonetheless) and added a new scandal to the mix.
Reuters is now reporting that in addition to the multiple McClendon distractions we knew about, there's one more we did not: At the same time he was heading up Chessie, the CEO was also apparently running a $200 million hedge fund that traded the same gas and oil commodities that Chesapeake sucks out of the ground.
Wall Street is not amused, and this morning two new analysts issued downgrades on the stock: Robert W. Baird and Ladenburg Thalmann. (Remember them?) With Chessie shares looking so cheap right now (7 times earnings), even its critics can't quite bring themselves to recommend selling the stock, exactly. But they no longer think you should buy it, either. And when you consider that Chesapeake just claimed that it's "earning" its highest level of "profits" in at least a decade -- while its cash flow statement clearly shows that the company burned through $10.6 billion in negative free cash flow over the last year -- it's easy to see why they're less than enthusiastic.
Emerson short-circuits
It's less obvious why FBR Capital ratcheted down its price target on Emerson Electric. Sure, Emerson missed earnings yesterday, but only by about $0.06. Does this justify FBR's decision to cut $3 off the stock's price target (which now stands at $51)? Perhaps.
But this news isn't as bad as you might think. At a bit under 16 times earnings, Emerson looks fairly valued for its 3% annual dividend payment and 11.4% long-term growth prospects. Maybe even a little bit overpriced, but really, this is more of a rounding error than a case of clear overvaluation. Recognizing the stock's full valuation, FBR is keeping a lid on its expectations for the stock. But it's also holding firm on its Emerson recommendation of "market perform." At today's price, the stock's neither too hot nor too cold. In fact, it looks just about just right.
Go ahead. Have a slice
And finally, speaking of stocks whose price looks right, we come to Papa John's, which last night reported "better ingredients, better profits." Profits rose 8% in the just-ended quarter, versus the decline in profits that Wall Street was expecting. Seeing this, analyst Feltl & Co. wasted no time in revoking its "sell" recommendation on the stock, and upgrading to "hold."
That looks like the right call. While Papa's P/E still looks pricey, the company's earnings report clearly shows it generated a healthy $87.5 million in cash profits over the past year. This works out to a valuation of about 13 times free cash flow. That's right in line with Wall Street projections for 12% long-term profits growth.
Result: While no longer a bargain, Papa John's looks fairly priced, and can be held with confidence.
Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Papa John's International. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and Emerson Electric.
