This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we'll be looking at new buy ratings for Walgreen (NYSE: WAG) and LeapFrog (NYSE: LF). But first, let's find out why Wall Street is...
Panning Pandora
Getting the bad news out of the way first, we begin with Nomura Securities and its new "reduce" rating (Hint: To "reduce" a position, you need to sell the stock) on Internet radio star Pandora (NYSE: P). According to StreetInsider.com, which reported the rating this morning, Nomura worries that "online radio is a structurally weak industry with low barriers to entry. New competitors continue to emerge [hint: Apple] and deep-pocketed technology companies [Amazon.com, Google] pose significant threats."
As The Wall Street Journal recently opined, it's the ability of these tech companies to provide Internet radio at no profit, or even a loss, that poses the real threat to Pandora. In this afterthought of a business, techs like Apple, Amazon, and Google can easily be imagined providing Internet radio access for free, as a fringe benefit for buying their phones/tablets/e-gizmos. And in that environment, it's hard to imagine how Pandora -- for whom Internet radio is the be-all and end-all -- can both compete for market share and earn a profit for its shareholders. In short: "Even if P 'wins' the battle to capture more users," Nomura warns, "the Street is overestimating its ability to draw local radio ad dollars and to improve monetization."
As it's unprofitable and burning cash today, there may be no reason to think Pandora can do better tomorrow.
Wild for Walgreen
That being the case, investors may be better off investing in a less "sexy" business, but one with more staying power. That's the thinking at Goldman Sachs, at least, which this morning proffered the idea of investing in Walgreen instead.
As Walgreen is one of America's two biggest drugstore chains, Goldman thinks it has a real future in this business. The analyst predicts we will see earnings growth return as the company "recaptures" lost business from its spat with Express Scripts, and pulls in some extra profit from its Alliance Boots business. This potential, though, argues the analyst, is not yet reflected in Walgreen's stock price, which sits "near the low end of the sector's range."
With the stock trading for just 12.4 times earnings but expected to grow these earnings at 11.5% per year over the next five years -- and paying a 3.1% dividend to boot -- Goldman's right. Anyone who says Walgreen's drugstore business isn't sexy may just not love profits enough.
Leaping for LeapFrog
Last but not least, we end with a little something for the kids. This morning, analysts at SunTrust Robinson Humphrey announced a new buy rating for LeapFrog -- and this is an idea investors should jump on.
Selling for just 15 times earnings, LeapFrog is bargain-priced for the 20% long-term growth Wall Street assigns to it. But this story's actually even better than that. LeapFrog also boasts $127 million in the bank, and not a lick of debt on its balance sheet. Plus, with actual free cash flow that far outstrips its reported $38 million in GAAP "net income," the stock's arguably even cheaper than it looks.
In short, even after more than doubling over the past year, LeapFrog's enterprise value-to-free-cash-flow ratio of less than six makes this stock cheap enough that it could hop even higher.
Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Google, Express Scripts Holding, Apple, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Google, Amazon.com, Express Scripts Holding, Apple, and LeapFrog Enterprises. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.
