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 trio of top headlines includes a new buy rating for Elan (NYSE: ELN) and downgrades for Wendy's (NYSE: WEN) and Groupon (Nasdaq: GRPN).
Elan elevated
For the second day in a row, shareholders are cheering Elan's decision to split itself into two separate companies. According to the company, Elan will continue its cooperation with Biogen Idec (Nasdaq: BIIB) on the Tysabri multiple sclerosis drug, while a new firm, Neotope Biosciences, will focus on new drug research.
Shares reacted positively to the news yesterday, rising 4.5%. Today, news that UBS is endorsing the move with an upgrade to "buy" helped to tack on another 1%-plus in early Tuesday trading.
It probably doesn't hurt that Elan currently sells for a P/E ratio of less than 16 despite boasting a growth rate that most analysts believe will approach 30%. Investors, however, should approach this one cautiously. Free cash flow at the company is currently negative. Assuming most of this spending comes from drug research, it could be that a spinoff will make the Elan unit more attractive going forward -- and the Neotope unit less so.
This burger tastes funny
Turning now to the downgrades, Wendy's got sliced and diced by analysts at KeyBanc this morning. Citing an "overall deceleration in same-restaurant sales" and, in particular, Wendy's lack of catalysts for growth, the analyst recommended selling Wendy's -- which has a P/E of 244, according to Yahoo! Finance -- in favor of cheaper Jack in the Box (Nasdaq: JACK), which sports a slimmer P/E of 17.
While the idea of buying Jack seems questionable -- the company's hardly tearing up the track, with long-term growth only expected to average 12.4% going forward -- the advice to sell Wendy's is beyond dispute. Triple-digit P/E ratios and low-double-digit growth rates make for a lousy "combo meal" for investors.
Groupon droops on
Groupon delivered a dog's dinner to investors last night -- and is paying the price for it this morning. The company missed on revenue for Q2, then compounded the error by promising to miss on both revenue and earnings in the current quarter.
In response, analysts at The Benchmark Company downgraded the shares to "hold" this morning, and investors are reacting even more pessimistically, selling off Groupon shares by more than 24%. But could this be an overreaction?
On the one hand, the company is still losing money under GAAP accounting standards, and analysts' dreams of 31% long-term profit growth are looking more like a pie in the sky each day. But on the other hand, Groupon did generate $330 million worth of free cash flow in the quarter. You could argue this means the stock isn't just "profitable," but actually wildly so -- and just as wildly undervalued at a price-to-free-cash-flow ratio of just 11.2.
Long story short, the momentum story for Groupon stock is well and truly over -- but the value story for this stock may be just beginning.
