This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headliners include AK Steel (AKS +0.00%), recipient of yet another upgrade (albeit again, only to "neutral"). Also, Ralcorp (NYSE: RAH) gets a downgrade, and Green Mountain Coffee Roasters (GMCR +0.00%) brews up a higher price target.
First things first
Let's begin with AK Steel. Analysts at Dahlman Rose upped the Ohio steelmaker to neutral this morning, making the third such upgrade for the stock in the past two weeks. According to StreetInsider.com, the reasons are as previously stated: AK's "recent debt and equity issue have been priced in and near-term liquidity risk has been removed."
That said, the problems with AK are the same as well. High debt. Lack of profits. Continued high rates of cash burn.
While the stock certainly looks cheaper than it did a year or so ago, when the price was twice as high, AK's simply not a good business. Even if it doesn't go bankrupt (and Dahlman's right -- raising nearly $600 million in cash from new bond and stock issuances has bought AK some time), it's hard to see why an investor would want to sink new money into a company that seems intent on burning every dollar it gets hold of.
Ralcorp was the cat's meow
Speaking of cash, ConAgra Foods (CAG 0.82%) just anted up $5 billion worth of the stuff to acquire private-label foodstuffs manufacturer Ralcorp. Problem is, with Ralcorp shares now fetching nearly $89 apiece, and ConAgra bidding only $90, there's precious little room left for upside in Ralcorp shares.
Accordingly, investment bankers Stifel Nicolaus and UBS today decided, in unison, to downgrade Ralcorp shares to "neutral."
No objection here. Assuming ConAgra proceeds with gobbling up Ralcorp, investors have already reaped a tasty return on this stock, which is out of negative territory and up 9% for the past year. On the other hand, if the merger should fall through, there's little to recommend Ralcorp at today's prices. The company's deep in debt, unprofitable, and arguably overpriced at 21 times forward earnings, on a long-term growth rate still stuck in the single digits. If ConAgra wants Ralcorp, I say let them have it.
Green Mountains of cash
Last but not least, we come to Green Mountain Coffee Roasters, recently a pretty poor investment, but one that won big on an earnings beat last night. Over at Canaccord Genuity, they're raising the price target on this buy-rated stock, from $39 to $45 a share -- but should they?
Priced at just under 17 times earnings, Green Mountain shares seem to look attractive at analysts' consensus growth rate of more than 20%. What's more, as of last report, Green Mountain is finally generating some free cash flow -- about $77 million worth over the last 12 months.
Problem is, $77 million is still just a small fraction of the $363 million Green Mountain reports as its "net income" -- the number on which Green Mountain's P/E is based. Value the stock on its free cash flow, however, instead of net income, and you'll see that we're still looking here at a company whose stock costs 73 times the amount of cash it can generate in a year.
Simply put, that number's too high for even a 20% growth rate to justify it. My advice: Take advantage of yesterday's run-up, and Canaccord's mistaken belief that the stock should run even higher, to cash out while you can.
