This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, Wall Street gets back to business, and in a big way, as analysts lift their heads above water to issue new upgrades on Intuitive Surgical (ISRG 0.95%) and Red Robin Gourmet Burgers (RRGB +0.00%), while downgrading Overstock.com (OSTK 1.99%).
Overstock, over and done
Let's get the bad news out of the way, and begin with Standpoint Research's downgrade of Overstock. Last week, the Internet retailer and Amazon-wannabe reported a return to profit from last year's dismal third quarter: $0.11 per share versus $0.33 lost in Q3 2011. Revenue also topped estimates.
Investors reacted with a round of applause, sending Overstock shares over the moon in a 41.5% bidding-up war, and are bidding the shares even higher this morning. But according to Standpoint, this is really your cue to take the money and run. "A powerful short squeeze ... may be winding down at this time. OSTK should be able to generate $1.00 in EPS on $1.5 bln in revenues [if we look out to 2014-2015 and that would justify a price target in the high teens] versus negligible profit in 2011-2012," reports StreetInsider.com. And while this analysis suggests additional upside to Overstock's $15-and-change share price, a 41.5% gain in the hand is worth a couple of extra bucks in the bush. Hence, Standpoint counsels selling, and locking in the gain.
I agree. Viewed in the most favorable light, the $15.6 million in free cash flow Overstock has produced over the past year probably justifies a 20-times multiple based on the company's projected 20% growth rate. Instead, though, Overstock shares now cost more than 23x FCF -- and nearly 150 times earnings. The stock's reached fair value. It's time to declare victory and go home.
Intuiting an upswing
In contrast, analysts at Barrington Research seem to think that robotic surgery still has quite a bit of room left to run. This morning, Barrington upgraded the ever-popular Intuitive to "outperform," noting that "ISRG is likely developing several new systems one of which is more of a catheter-based technology that will be used for non-vascular applications."
The analyst cites an extension to the company's "co-exclusive licensing agreement" with Hansen Medical (HNSN +0.00%) -- that's driving the latter stock up quite a bit today -- as evidence of the new product's development. And the analyst argues that this development supports its belief that Intuitive "will continue to execute on its significant market opportunities over the short and long term and will drive strong procedure growth/pricing power with new technologies in new procedures."
It had better. Right now, the consensus on Wall Street is that Intuitive will produce profits growth rates of 18% per year over the next five years. That's fast growth, but perhaps not fast enough to support the stock's super-high P/E ratio of 35. If Intuitive's to keep its stock price up, it needs to maintain something closer to the 33% pace of growth shown over the past five years. Deals like the one just inked with Hansen could help with that.
Red Robin Takes Wing
One company that's showing it knows how to grow all on its own today is Red Robin Gourmet Burgers. There's not a lot high-tech about burgers. You make 'em. You sell 'em. You pocket some profit along the way.
Last quarter, Red Robin proved it's got this system down pat when it reported third-quarter earnings of $0.24 per share -- 50% better than the $0.16 analysts had expected. The news prompted an upgrade to "buy" at Miller Tabak today -- an upgrade that's probably justified, by the way.
Sure, at 20 times earnings, the stock looks a bit rich for projected 14% long-term growth. But the thing is, Red Robin has been generating a lot of cash these past few years -- much more than its "GAAP" income statement would suggest. The company hasn't updated us on its latest cash flow information just yet, but if it's anything like what the company produced last year, when free cash flow exceeded reported income by 150%, or the year before that, when FCF was five times reported income, chances are the firm's still raking in enough cash to justify its share price.
Is it making enough money to justify every single dollar in Miller Tabak's new $36 price target? For now, it's hard to say -- but I wouldn't bet against it.
