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 features newly buy-rated Annie's (Nasdaq: BNNY) and Conn's (Nasdaq: CONN). But for Coach (NYSE: COH), the trading week opens with a cut in target price. Let's get the bad news out of the way first...
Coach gets purse-snatched
High-end pocketbook-maker Coach is feeling a bit light this morning, after an analyst at British banker HSBC removed $9 from its target price. That's disappointing news to be sure, and investors are reacting by sending Coach stock down more than the rest of the market this morning. But it may not be as bad as it sounds.
After all, even HSBC's now-lowered target price of $79 still leaves ample room for profit in this $57 stock. And Coach, at a valuation of just 16 times earnings, with near-14% growth rates and paying a 2.1% dividend yield, hardly looks expensive. Free cash at the firm continues to flow strongly, matching reported "net income" nearly dollar for dollar (an indication of high quality of earnings). And speaking of cash, Coach has more than $917 million in the bank, against barely $23 million in debt. Long story short, Coach is still a stock investors can aspire to own.
This bunny can hop
In contrast, SunTrust's decision to initiate coverage of Annie's (tickered "BNNY" after its cute animal logo) at "buy" this morning makes less sense. For one thing, the stock's already very richly priced at a P/E ratio nearing the triple digits. For another, SunTrust's suggestion that the stock could go to "$50" within a year suggests a much shorter hop (about 14% from today's price) for the company than the gains Coach is expected to make.
Weak free cash flow and a 25% growth rate that, while impressive, doesn't come close to justifying the stock's current P/E ratio also argue against taking SunTrust's advice on Annie's. In short, investors looking for bargains in the stock market should refrain from following SunTrust down this particular rabbit hole.
Long Conn? Or long con?
Speaking of holes you shouldn't flush your money down... there's Conn's. According to StreetInsider.com, KeyBanc just initiated coverage of the electronics and home furnishings merchandiser at "buy." KeyBanc has a "bright outlook" for the stock, arguing that "initiatives to improve merchandising, in-store execution, and the Company's credit portfolio, as well as 10-15% long-term unit growth" all argue in favor of a $26 price target for the stock.
But here's the thing: Conn's already costs nearly $24 a share. So even if KeyBanc is right, there's only about 10% profit potential in Conn's. Worse, KeyBanc is not right about the stock being a bargain.
Our first clue to this is the price -- currently 234 times trailing earnings. Sure, Conn's generates much more free cash flow than it reports as net income, but even the $42.1 million it raked in last year is only enough to give the company an enterprise value-to-free cash flow ratio of about 25 -- too rich for the 20% annual growth rate Wall Street expects Conn's to produce.
When you combine Conn's obvious overvaluation with the troubles rivals like Best Buy (NYSE: BBY) have had recently trying to compete with lower-overhead online retailers like Amazon.com (Nasdaq: AMZN), it's hard to see why KeyBanc thinks this is a stock you should own. Conservative investors are probably better advised to stick with a high-quality name with a wider moat to defend it. Of the three stocks Wall Street offers up for our consideration today, Coach still looks like the best bet of all.
Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Amazon.com, Coach, and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com and Coach.
