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 headlines offer three intriguing ideas, as Hudson City Bancorp (Nasdaq: HCBK) scores an upgrade, but Las Vegas Sands (NYSE: LVS) is holding a losing hand, and Suntech Power (NYSE: STP) could be just about bust.
Hudson's hot hand ...
Starting at the top, Hudson City Bancorp scored an upgrade to "buy" from Guggenheim this morning, and the shares are responding nicely -- up almost 5% on the day and moving toward the analyst's new $7 price target. Whether Hudson deserves the rating, however, is another question entirely.
On one hand, the stock's 5.3% dividend yield is certainly enticing. On the other hand, you have to wonder how long Hudson can afford to keep paying its shareholders $0.32 a year. Unprofitable today, Hudson's expected to end this year at a profit ... but then immediately see that profit drop next year as it embarks upon a five-year journey averaging 3% annual declines in profit (according to Wall Street estimates).
Meanwhile, the firm's 12-times-earnings forward P/E ratio is pricier than what investors can buy bigger banks such as Wells Fargo (NYSE: WFC) or JPMorgan Chase (NYSE: JPM) for -- and these banks are expected to be growing their earnings over the next five years (Wells at an impressive 10% annualized, and JP not far behind at 7%). Hmm -- a pricey stock whose earnings are slowing, or cheaper stocks with faster growth? Decisions, decisions.
... and Las Vegas' losing streak
While Hudson gained today, there was is a near-3% loss at Las Vegas Sands, hurt by a downgrade to "neutral" from the analysts at Argus. But is this downgrade any more logical than the upgrade at Hudson?
Sure, at 21 times earnings, Sands looks a little overpriced relative to its 20% annual growth estimate. On the other hand, you'd think the fact that Sands pays shareholders a 2.7% dividend would even the odds a bit -- the more so when you consider that Sands currently distributes less than 30% of profits in the form of dividends, and so has ample room to increase its payout. With free cash flow on the upswing, odds are good that this stock will bounce back from today's sell-down and resume rising soon.
Sunset for Suntech?
Not so with Chinese solar-power superstar Suntech, however. In a decision that's bound to cause some controversy, this morning analysts at Maxim Group pulled the rug out from under investors who had hoped that Suntech also rises (eventually).
Maxim, which already had a sell rating on the stock, points out that Suntech has $541 million in debt coming due over the next several months. Unfortunately, what the company doesn't have is any way to pay it. Cash in the bank won't suffice. Free cash flow is negative, so don't expect that to change anytime soon. Plus, Suntech just revealed that it's apparently been defrauded by a company whose debt it had insured. Turns out the $682 million in bonds put up as collateral for the loan guarantee may never have existed. That's a big hole in the balance sheet that may need to be filled.
The only solution, says Maxim, is for the company to "re-cap" -- declare bankruptcy, wipe out the owners of existing shares, and start all over again with a new batch of shares, and new money to work with. Long story short, Suntech may survive as a business, but according to Maxim, anyone owning its shares today is facing the prospect of a total loss.
The "good" news? Today, they're "only" down a little more than 15%.
Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Wells Fargo. Motley Fool newsletter services formerly recommended JPMorgan Chase. The Motley Fool has a disclosure policy.
