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 find out why IntercontinentalExchange (ICE 0.35%) scored an upgrade, but Travelzoo (TZOO -1.68%) and Children's Place (PLCE 2.73%) got schooled.
Exchanging a mediocre rating for a better one
First up, IntercontinentalExchange -- "ICE" to its friends -- won an upgrade to "buy" from the friendly analysts at BGB Securities this morning. Not that you could tell from how the stock is reacting...
Setting a $150 price target on the stock, BGB encouraged investors to warm up to ICE as it begins trading North American swaps contracts on natural gas, electric power, carbon credits, and natural gas liquids as "futures," beginning early next year. According to the analyst, ICE is taking market share from rival exchange CME Group (CME 0.54%), and also reducing regulatory risk by reclassifying these contracts as futures.
Be that as it may, ICE shares already look pretty fully valued at 17 times earning, and about 13.5 times annual free cash flow. Long-term growth rates for the company average less than 13% per year. The faster growth that BGB is predicting could be enough to create some value in the shares. But for now, they just don't look like much of a bargain.
Children's Place takes a step back
Speaking of stocks that are no bargain, last week I criticized FBR Capital's decision to raise its target price on kids retailer The Children's Place, arguing that the stock was already overvalued and that raising the target price was more of a reaction to the stock going up than an evaluation that the stock deserved to go up more.
Seems I'm not alone in that opinion, because analysts at Caris & Co. are also starting to cool on the stock. This morning, Caris cut Children's Place's rating to "above average," down from "buy." But honestly, I think the analyst could have gone even further.
Priced at 24 times earnings, Children's Place costs about three times as much as what you'd ordinarily want to pay for a stock with its 8% long-term projected growth rate. The stock pays no dividend. And while free cash flow at the firm is good, it's still not good enough to justify the stock's price today -- much less the $67 per share that Caris thinks it will fetch a year from now. While it's a fine business, the high price here means that Children's Place simply isn't a very good place for you to invest your money.
Last but not least, we come to Travelzoo, recipient of a downgrade of its own this morning from the folks at Ascendiant Capital. The news follows Travelzoo issuing an earnings "preannouncement" Friday -- predicting earnings will fall from last year's $0.36 per share to about $0.21 in this year's Q3.
That's pretty much the opposite of what investors were hoping to see from a stock that, at last report, was thought to be on a path to 20% annualized growth in earnings over the next five years. (It's also why the stock lost 15% of its market cap Friday). But now that the bad news is out there, is it too late to sell... or maybe even time to buy?
After all, if Travelzoo does manage to get back on its growth track, then the stock's 13.4 P/E ratio looks mighty attractive in light of the anticipated growth rate. It's all the more so when you remember that Travelzoo has historically generated much fatter "cash" profits (free cash flow) than what it reports as "net income" under GAAP. With free cash flowing into the company's coffers at the rate of $30 million a year, and the stock costing only about 10 times that on market cap (and even cheaper once you net out Travelzoo's $54 million cash hoard), there seems to be a pretty big margin of safety here.
Long story short, the selling looks overdone. Any good news at all in Travelzoo's upcoming earnings report, and these shares could roar right out of the cage.