This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, it's an all-Internet day on Wall Street, as analysts weigh in on the prospects of Yelp (YELP -0.38%) and Angie's List (ANGI) -- which they like -- and Ancestry.com (ACOM) -- which they don't. Let's find out why.
No hope for Ancestry.com
When Ancestry.com announced last month that it intends to sell itself to European private equity firm Permira for $32 a share, many investors were underwhelmed. After all, as investment banker Cantor Fitzgerald commented this morning, "the proposed valuation seems somewhat low to us, given historical multiples paid for similar transactions." Expecting that a better bidder would soon emerge, therefore, Cantor recommended buying Ancestry, stuck a $37 price target on the stock, and waited to see what would happen.
Well, it's done waiting. This morning, noting that "no competing offers have emerged," Cantor threw in the towel and downgraded Ancestry stock to hold. It's hard to argue with that advice. At $31.57 a share, there's little room for improvement between now and the time this transaction closes at the $32 bid price. Absent an eleventh-hour arrival by some white knight, Ancestry.com shareholders really have little better to look forward to.
Moving on
So what's an investor to do? Cantor recommends moving on to "more compelling opportunities in the Internet space" -- and wouldn't you know it? They just happen to have another idea handy. This morning, Cantor recommended that investors exiting Ancestry take a look at Yelp on their way out. "Following a 20%+ price decline since 3Q:12 results," observes Cantor, the shares may offer a buying opportunity.
As reported on StreetInsider.com, Cantor thinks Yelp's "core Local Ad business" remains intact. With its "brand, scale and strong network effect," Cantor argues Yelp is "a clear beneficiary of the secular migration of local ad dollars online."
All of which is well and good, of course. But the question remains: Can Yelp actually make a profit off of all these ad dollars it's supposedly collecting?
So far, the answer to that question has been "no." The company's unprofitable today, and even analysts optimistic about its future agree that if Yelp earns a profit next year, it'll be such a little profit as to give the stock a forward P/E ratio in the triple digits -- 652, to be precise.
Suffice it to say that, even at a respectable growth rate of 18.5%, that's a pretty steep price to pay for Yelp shares. My advice: If you take Cantor's advice and exit Ancestry today -- quit while you're ahead. Head straight to the bank and deposit your winnings, because if you take Cantor's other advice, and spin the wheel on Yelp, you're likely to lose everything you just worked so hard to win.
Angie's on Northland's list
Oh, and one other thing: On your way to the bank, don't stop to take any advice from Northland Securities, either. This morning -- perhaps with an eye of its own on Ancestry.com shareholders' money -- Northland offered up the idea of buying a few shares of Angie's List, initiating coverage of the stock at outperform.
According to Northland, Angie's currently in a "hyper-growth" stage of adding both members and service providers to its online network of contractor referrals. Northland thinks this network has "proven long-term characteristics" that justify the costs of the expansion. Characteristics such as estimated renewal rates of 70% or better among members and service providers alike, good visibility into future revenues (Northland estimates that 65% of any given year's revenues are pretty much in the bag before the year begins), and strong operating margins on the business.
Northland admits that there's a downside to an investment in Angie's List, namely, that the company "has not achieved profitability," of course. But I don't think the analyst is giving this downside proper weight. More than just failing to "achieve" profitability, Angie is actually getting steadily less profitable by the day. Losses at the Internet firm have increased for three years straight, and the rate of cash-burn is accelerating as well.
Granted, the consensus is that Angie will turn around and earn a profit in 2014 -- but honestly, the trend lines I'm seeing show no such turnaround in progress. Certainly, I see nothing to suggest a turnaround will begin within just a little more than a year. To the contrary, things appear to be getting steadily worse -- and investors are right to be worried.
6% a year, and paying no dividend whatsoever. It's not exactly an expensive stock, but it's not nearly as attractive as it looked Thursday, when the dividend was still intact.
Wish upon a Navistar?
In happier news, Navistar scored a big upgrade to "outperform" this morning. The truck maker has been making big moves toward reducing costs in recent weeks, laying off workers and talking about asset sales. Barron's predicts the efforts will yield a higher share price in the coming year. Now, it seems the analysts at R.W. Baird agree as well.
After all, with a share price of 0.96 (according to Yahoo! Finance, and assuming no one misplaced a decimal), it's hard to see how Navistar's share price could go much lower, barring a visit to bankruptcy court. But the problem with Navistar, as it's always been, isn't the stock price. It's the debt load.
Bearing a $4.5 billion debt burden, against just $837 million in cash, it's hard to see Navistar's billion-dollar-and-change market cap under the pile of IOUs. It's also hard to see, though, how Navistar is going to be able to plow its way out from under this debt. So far this year, the company's generated a whopping $96 million in free cash flow. Annualized, that works out to maybe $130 million a year, for an enterprise value-to-free cash flow ratio of 44.
That's an awfully high price to pay for a company expected to grow earnings at just 5.2% per year over the next five years, no matter what R.W. Baird says. Caveat investor.
Is Hibbett a winner?
Sad to report, it appears our third and final analyst recommendation will be a similar strike-out for investors. This morning, Needham announced it's upgrading shares of sporting goods chain Hibbett Sports to "buy." The question is "why?"
Priced at nearly 22 times earnings, Hibbett looks a bit expensive even assuming the company hits Wall Street's expected 15.5% long-term growth rate. The stock's no great bargain from a free cash flow perspective, either, actually generating a bit less cash profit than what it claims as "net income" under GAAP. And of course, the company pays not dividend whatsoever.
True, Hibbett's got one thing in its favor that the other stocks discussed so far do not. It's debt free, or near-enough so as to make no difference. As such, it's probably the best stock idea Wall Street's thrown out for us today -- but still not good enough to be worth your money.
Fool contributor Rich Smith owns shares of Ancestry.com. The Motley Fool owns shares of Ancestry.com. Motley Fool newsletter services recommend Ancestry.com.
