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 is doing mostly downgrades, as Netflix (NASDAQ:NFLX) and PriceSmart (NASDAQ:PSMT) take big hits. Papa John's (NASDAQ:PZZA), on the other hand, just scored a target price hike...
Good news first
So let's start with that one. On Wednesday, Papa John's released third-quarter results showing a 25% increase in profit ($0.55 per share) on 6.5% revenue growth ($325.5 million). Earnings met consensus, and guidance for the rest of the year matched expectations as well.
Apparently, that was all Feltl & Co. needed to see to up its price target on the stock to $53 a share -- a 13% boost. Investors, however, are heading the other way -- selling off PJ's to the tune of more than 8% in response to the company's "in-line" numbers.
Why? Possibly because at a valuation of 20 times earnings but a growth rate of only 12%, investors wanted PJ's to do a whole lot more than just meet expectations yesterday, in order to justify its share price. And if that's the case, the stock may not be done selling off. Consensus expectations for this year's earnings still hover around $2.50 a share (giving the stock a 19.5 P/E). If things don't improve in 2013, then guidance suggests a valuation that's still in excess of 17 times forward earnings for that year as well.
Result: We're going to need to see a whole lot more than just 12% growth to justify these kinds of prices.
How pricey is PriceSmart?
Speaking of high prices, and too-slow growth, shares of PriceSmart are getting whacked today in the wake of a schizophrenic downgrade from The Benchmark Company.
Shares of "the Caribbean Costco" shot 6% higher in post-earnings, post-Sandy trading yesterday, after PriceSmart reported an estimates-beating $0.58 per share in fiscal fourth-quarter profit. Problem is, the new and improved share price now has PriceSmart trading for close to 39 times trailing earnings -- quite a pretty penny even if PriceSmart succeeds in hitting the 20% long-term growth rate that Wall Street expects from it.
Benchmark took the opportunity this morning to raise its price target on the shares to something closer to where they trade today ($86 a share). At the same time, it hedged its bets against investors wising up to the high price and cashing out -- lowering its rating on the stock from "buy" to "hold." Forward-thinking investors might want to beat the rush, though, and head for the exits today before that rating drops to "sell."
Is Netflix for sale?
Finally, in what could very well be the week's top story, Netflix shares leapt to new heights yesterday on news that Carl Icahn has taken a 10% stake in the company and is pushing for a sale. That news translated into a one-day 14% profit for Netflix shareholders yesterday, on top of the 13% gain shareholders enjoyed just ahead of Sandy. Nice.
But according to Oppenheimer, this is about as good as things are going to get for Netflix shareholders, and it's time to start taking some chips off the table. The analyst downgraded Netflix to "perform" this morning, and not a moment too soon.
With its business model in transition, and its future uncertain, Netflix shares currently fetch a steep 100 times trailing earnings. Now, maybe Icahn can cajole some easily duped corporate buyer into paying that price tag, and maybe he can even wrangle a premium -- but I wouldn't bet on it. Meanwhile, if a sale does not happen, investors buying today's hype will be stuck owning a double-digit grower trading for a triple-digit P/E -- never a comfortable situation. Best advice for shareholders here: You won big yesterday on the Icahn bounce, but now's not the time to be greedy. Now's the time to declare victory and go home.