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 top trio of newsmakers includes newly downgraded AngioDynamics
Don't have a heart attack, but...
There's bad news for investors in cutting-edge cancer treater AngioDynamics this morning, as Canaccord Genuity -- previously a fan -- warns investors that it's still not convinced management "can deliver stated synergies from the Navilyst acquisition (recently closed)." For one thing, Angio's new subsidiary gets 60% of its revenues from fluid management, which generates low 40% gross margins -- as compared to the near-60% margins Angio was earning itself. For this reason, among others, Canaccord downgraded the shares to "hold" this morning.
Canaccord's taking a wait-and-see approach to the developing merger, and considering how Angio has executed in the past (it's closing on two straight years of declining profits), that seems prudent. While free cash flow at the firm remains relatively strong, Angio is bringing in less and less cash with each passing year. Even at today's depressed share price (down 12% over the past year), it's going to be hard to call the stock a buy until management can demonstrate an ability to get its numbers going up again instead of down.
Down to earth
Speaking of stocks with declining prospects, satellite imaging specialist GeoEye caught a downdraft from Raymond James' downgrade this morning -- and what a downgrade it was. In one fell swoop, RJ took GeoEye all the way from "strong buy" to "underperform." More important than the downgrade, though, is the news that sparked it.
On Friday, the National Geospatial-Intelligence Agency -- a key GeoEye customer -- informed the company that "due to funding shortfalls" it was scaling back its full-year contract to purchase satellite imagery to a three-month contract with a nine-month option that may (or may not) be exercised afterward. Additionally, NGIA advised GeoEye that it will be scaling back cost-sharing on production and launch of the company's GeoEye-2 satellite, shifting more of the burden to GeoEye. Given that GeoEye already carries some $330 million in net debt, and hasn't generated a dime's worth of free cash flow since at least 2009, this is a burden GeoEye is ill-prepared to meet.
The shares are falling to earth with meteoric speed. And rightly so. Down $3 and change already, this stock looks like it could keep dropping.
All aboard Carnival?
Rather than end this column on a down note, though, let's wrap up with some more relaxing news for Carnival cruisers. While everyone else (it seems) was busy issuing downgrades, the friendly analysts at Nomura Securities decided to throw Carnival a bone -- and a "buy" rating -- this morning.
Arguing that the Costa Concordia shipwreck earlier this year is distorting 2012 numbers, and urging investors to focus on 2013 instead, Nomura notes that bookings at Carnival are back on an upswing, and the company should return to "pre-Concordia levels" next year. The analyst believes Carnival could earn as much as $2.67 per share in 2013, then grow this number nearly 20% to hit $3.19 per share a year later.
Good news? It sure sounds like it. Nomura is basically saying that Carnival's stock price today is barely 10 times what the company will be earning soon. For a stock with a 12% growth rate and a 3% dividend yield, that sounds cheap. Just remember, though: Nomura is talking about profits Carnival has not yet earned, and won't earn for two more years (if then). Remember, too, that Carnival never generates free cash flow anywhere near what it claims for its net income.
In short, Carnival's Costa Concordia catastrophe was only the tip of the iceberg. If you look for it, there's much more bad news floating just below the surface.
Fool contributor Rich Smith holds no position in any company mentioned. Motley Fool newsletter services have recommended buying shares of GeoEye. Motley Fool newsletter services have recommended buying shares of GeoEye. 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.
