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 Sprint Nextel (NYSE:S) scored an upgrade yesterday morning, while UPS (NYSE:UPS) is going down, and Sirius XM Radio (NASDAQ:SIRI) may rocket higher.
Saved by the bell
News that Japan's Softbank intends to lay out $20 billion in a bid to save Sprint Nextel won applause on Wall Street on Tuesday -- and won Sprint a reprieve from at least one sell rating. Responding to Softbank's overture, analysts at RW Baird announced yesterday morning that they are pulling their "underperform" rating on the stock and upgrading to "neutral." In the process, Baird upped its price target on Sprint stock by 50% -- to $6. But is this logical?
Consider: According to the companies, about $12 billion of Softbank's money will go toward buying out Sprint's existing shareholders. Only $8 billion of the deal will be directed toward providing the telco new financing. That's not exactly small change, but it will still barely make a dent in Sprint's $21 billion debt load, and the company may continue to struggle even with Softbank's support.
Meanwhile, we're still looking at company here that hasn't been able to earn a GAAP profit in six years. A company that, while free-cash-flow-positive, generates so little free cash that its P/FCF ratio still tops around 41. For a telco that's only expected to grow profits at 5% per year over the next five years (about half the industry average), that's an awfully high price. Investors may be best off cashing out now, and letting Softbank take over the risk on this one.
UPS and downs
In other news, UPS is set to report Q3 earnings next Tuesday. But while Baird may be less bearish on Sprint, it's not interested in waiting around to see how bad the news at UPS might be. Baird has pulled its outperform rating on UPS -- and on UTI Worldwide (UNKNOWN:UTIW.DL) and Expeditors International (NASDAQ:EXPD) as well -- downgrading all three to neutral.
According to the analyst, international airfreight patterns trended down in September. Absent "catalysts" that would spark a turnaround, Baird is stepping to the sidelines on UPS -- and it may be right to do so.
After all, while UPS pays an attractive dividend of 3.2%, its shares aren't exactly cheap (18.4 times earnings). Analysts' projected growth rate of less than 11% probably wasn't high enough to justify the P/E ratio before the downgrade. And now that Baird is saying growth is slowing, the shares are only going to look more expensive as the growth rate drops.
Sirius Satellite: To the moon?
Last but not least, investors in satellite radio star Sirius got a double dose of good news yesterday morning, as both Wunderlich and Morgan Stanley announced they were raising their target prices on the stock -- to $2.70 a share, and $2.85, respectively.
Don't get too excited, though. Sirius shares already cost $2.80 a share -- which is more than Wunderlich says they're worth, and leaves only about a nickel of potential profit even in Morgan Stanley's estimation. This being the case, neither analyst wants to clamber out on a limb and actually recommend buying Sirius. The most either analyst is willing to say is that the shares might be worth holding onto.
If you want to hear a more optimistic case for Sirius, however, you're in luck. Turns out, Bank of America recently recommended the stock -- and thinks it's worth a whole lot more than Wunderlich or Morgan Stanley say it is -- as much as $3.75 per share, in fact. Want to know the details of B of A's analysis? Get 'em right here.
Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Expeditors International of Washington. Motley Fool newsletter services recommend United Parcel Service.