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 a big upgrade on Big 5 Sporting Goods (BGFV +0.00%) a nice bump in price target for DIRECTV (DTV +0.00%), and find out why one analyst is less than convinced you should stick with Glu Mobile (GLUU +0.00%). Let's dive right in.
Good news first
Leading off the day is an upgrade for Big Five Sporting Goods. Responding to yesterday's report of a $0.38-per-share profit (22.5% better than expected), analysts at Needham are upgrading the shares to "strong buy." Big 5's big 5.2% same-store-sales growth number significantly outperformed the analyst's expectations, with higher gross margins to boot.
Best of all, StreetInsider.com has the analyst predicting "continued tailwinds from the company's investment in business analytics," with the potential for a repeat of last quarter's same-store-sales performance in Q4. Needham now says Big 5 will probably earn $0.72 per share this year, and a whole $1 in 2013. Perversely, though, this poses a conundrum for investors.
If you believe Needham's numbers, then Big 5 is clearly growing much faster than anyone else on Wall Street was expecting. At last report, long-term growth estimates for the company were still stuck at 8% per year -- far too slow to justify the stock's P/E ratio of 28. These new projections, however, suggest a growth rate of something more than 30%. And if that turns out to be the right number, then even a 28 P/E may not be too much to pay for Big 5.
Tune in to DIRECTV?
Another stock basking in some Wall Street love this morning is satellite TV provider DIRECTV. This one hasn't reported earnings yet (and won't until Tuesday). But over at Wunderlich, the analysts aren't waiting around to hear the good news confirmed -- they're saying investors should buy the stock now. Wunderlich predicts DIRECTV could go as high as $63 -- a 12.5% boost to the analyst's last price target, and a promise of 23% gains from today's prices.
This sounds like an ambitious price target, if not totally out of reach. Consider: At 13.3 times earnings, DIRECTV appears to sell at a discount to its 17% long-term projected earnings growth rate. On the minus side, free cash flow at the company isn't particularly impressive, lagging reported net income by about 10%. And there's also the debt load to consider. DIRECTV's balance sheet shows the company carrying nearly $14 billion more debt than it has cash in the bank.
On balance, I think the stock is appropriately priced today -- maybe even a bit expensive, in light of the debt load. In short, Wunderlich could be right about the potential for a 23% profit, but I wouldn't bet on it.
Glu comes unglued
In contrast, one stock I am sure about is Glu Mobile -- in a bad way. Last week, I warned investors to stay away from this one, arguing that the company's lack of a GAAP profit, and continued negative free cash flow, made Glu a worse bet than more established, traditional games makers such as Electronic Arts (EA +0.24%)and Activision Blizzard (ATVI +0.00%). Yesterday, you found out why, when Glu "beat" earnings... by reporting a $0.03-per-share loss and weaker-than-expected revenue, and sorry guidance for the fourth quarter.
At last report, Glu is expecting to lose as much as $0.08 per share in Q4 on revenue ($19.5 million) that could come in as much as 27% below consensus expectations. The gloomy report prompted a spate of analyst downgrades this morning, with Piper Jaffray and Craig-Hallum dropping Glu to hold, while Needham cut back the stock's rating to buy from strong buy, and cut its price target from $8 to $5.
Granted, five game titles that should have been published this year have been pushed into next fiscal year. This has Needham still holding out hope that 2013 will prove better for Glu than 2012 did (hence the maintaining of a buy rating). But for now, the stock remains stuck right where it was a week ago -- overpriced, growing too slow, and burning cash. Follow Needham's advice, and buy this stock at your peril.
Fool contributor Rich Smith owns shares of Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard and Electronic Arts.
