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 bumps in price target for Pep Boys (NYSE: PBY) and Skyworks Solutions (Nasdaq: SWKS). We'll also find out why G-III Apparel (Nasdaq: GIII) may be going lower. Let's dive right in.
Peppier performance at Pep Boys?
Manny, Moe & Jack are grinning ear-to-ear today, buoyed by news that at least one analyst thinks yesterday's earnings report wasn't quite as bad as it looked. As you've probably heard by now, Pep Boys met expectations on revenues for Q2, but may have "missed" on earnings per share, despite earnings of $0.61 GAAP, and more than doubling its per-share earnings of a year ago.
Analyst Stifel Nicolaus commented that once you back out one-time gains from an aborted acquisition, Pep Boys actually earned adjusted profit of just $0.12 per share, or $0.04 short of consensus. But not everyone's being so picky. Looking at the same numbers that underwhelmed Stifel, analysts at Benchmark argued that the news wasn't as bad as it might have been, and upped its target price on Pep Boys to $10 a share.
Both analysts still agree that Pep Boys is only a "hold" kind of a stock, though, and not a "buy." The reason: price. At 14 times earnings, and with an estimated 14% long-term growth rate, Pep Boys is neither expensive nor cheap. It's worth holding on to, but lacks the kind of pep needed to justify a higher rating.
Skyworks: To the moon?
One stock with greater promise, also on the receiving end of a higher price target today, is mobile communications chip maker Skyworks Solutions. This morning, UBS upped its price target on the stock by $3, and says Skyworks shares should hit $36 within a year. Is it right?
Maybe... but probably not. You see, on its face, Skyworks already looks pricey at a P/E ratio of 28.5. Sure, GAAP profits don't tell the whole tale here. With $279 million in annual free cash generation, Skyworks is more profitable than meets the eye. But even with its copious cash production, the best a Skyworks bull can really say about the stock is that its 21 times price-to-free cash flow ratio is a bit cheaper than the P/E ratio that meets the eye. It's not, however, cheap enough.
In order to deserve the buy rating -- or the higher price target -- that UBS ascribes to it, Skyworks really needs to grow faster than the 15% long-term growth rate that most folks on Wall Street expect it to achieve. Absent faster growth, or a lower stock price, the stock's just not worth buying.
G-III forced down
In contrast, one stock Wall Street is getting all wrong today -- in a good way -- is G-III Apparel. Yesterday, the stock spiked on news that it was upping its earnings forecast for full-year 2012. Analysts at Stifel Nicolaus moved quickly to lock in profits, downgrading the stock to "neutral." But honestly, they appear to have moved too soon.
Priced at 15 times earnings today, G-III looks for all the world like a bargain relative to consensus estimates of 17.5% long-term growth. But it gets even better. According to management's new full-year forecast, G-III could easily end 2012 with about $2.68 per share in net profit -- a number that would drop the stock's price-to-earnings ratio down by more than a point, to just 13.6.
Long story short, even after yesterday's pop in price, G-III Apparel shares are stylin'. They don't cost a lot, and if growth materializes as promised, they actually look like a bargain.
Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool has a disclosure policy.
