This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. In today's headlines, analysts react to Starbucks' (NASDAQ:SBUX) latest buy by bidding bye-bye to Teavana's (NYSE: TEA) buy rating. Meanwhile, Westport Innovations (NASDAQ:WPRT) is getting a lift from a new buy rating of its own, while Hewlett-Packard (NYSE:HPQ) sags on a reduction in price target.
Tea party's over
Let's start with the easy one. Last night, Starbucks announced that it is buying Teavana for $620 million, cash. KeyBanc Capital Markets promptly downgraded Teavana to "hold" this morning.
Why? Well, let's see here. Starbucks' offer works out to $15.50 a share. Teavana currently costs $15.43 a share. It could go higher if a competing bid comes in, but according to Starbucks, 70% of Teavana's voting shareholders have already signed off on the deal -- so forget about competing bids. A purchase of Teavana today, therefore, guarantees you all of a $0.07 profit -- less than half a percentage point -- if the deal closes by year-end, as planned. Sure, annualized, that's a not-so-shabby 4% guaranteed return on your investment. But chances are, you can do better putting the money to work in a different stock.
Go Westport, young investor?
You could also do worse -- for example, by taking Deutsche Bank's advice and buying shares of Westport Innovations. Sure, investors are all excited this week over the supposed "collaboration" between General Electric and Clean Energy Fuels (NASDAQ:CLNE) -- if you can call a straight $200 million purchase-and-sale agreement a "collaboration" (which Clean Energy just did).
Deutsche says it sees an "inflection point for natural gas vehicles" here, with "diminishing infrastructure bottlenecks and a resulting increase in OEM interest in this technology" that should benefit Westport -- whose business is commercializing "this technology" for use in highway-plying tractor-trailers. And it may be right. But even if it is, is Westport the best way to play the trend?
The company's not profitable, after all. It's lost $56 million over the past 12 months (and burned through $67 million in negative free cash flow), and is expected to lose money next year as well. On the other hand, Westport does have $295 million cash in the bank, against long-term debt of only $53 million. Chances are, it's got the cash to keep it alive till 2015, by which point most analysts expect Westport to be solidly profitable. Personally, I'd like to wait a bit longer, and verify that the profits materialize rather than just trust that they will. But even in the worst-case scenario, I'd say Westport has a few years left before bankruptcy concerns start to emerge. And that's more than I can say about Clean Energy.
Blast from the past (of computing)
And finally, we come to Hewlett-Packard, subject of an undeserved $2 cut to price target at Mizuho today.
Mizuho predicts that within a year, Hewlett-Packard will be selling for just $15 a share, and the shares are down in response to this news today. But should investors be taking their cues from Mizuho?
On one hand, Hewlett shares hardly look expensive. While technically "unprofitable" as GAAP calculates such things, Hewlett generated $4.7 billion in positive free cash flow over the past year, giving it an enterprise value-to-free cash flow ratio of less than 10. Sure, Hewlett has its issues. Its projected growth rate is positively anemic at less than 2%. Its debt burden -- more than $20 billion net of cash -- is absolutely dreadful. But still, if HP turns some of its copious cash flow toward paying down the debt, the company could theoretically get this monkey off its back with just four or five years' diligent work.
Keep that up long enough, bulls might argue, and soon enough you're looking at a stock that could be generating $5 billion-ish in free cash flow, selling for a market cap five times that, and paying a dividend yield of 4%. All you have to do to own it is... buy now, wait patiently for five years, and assume Hewlett-Packard sticks to its plan, makes no mistakes at all for five straight years, and never has to cut its dividend to finance the debt paydown. Simple, right?
Yeah. And that right there tells you why Mizuho is starting to hedge its bets.
Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Clean Energy Fuels, Starbucks, Teavana Holdings, and Westport Innovations and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Clean Energy Fuels, Starbucks, and Westport Innovations.