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 headlines include sweet news for lululemon athletica (LULU 1.59%), but downgrades for Bankrate (RATE +0.00%) and DreamWorks Animation (DWA +0.00%).
Good news first
Let's start off the week on a bright note -- say, neon yellow -- and begin with Lululemon, recipient of a new buy rating from the analysts at Canaccord Genuity this morning.
According to Canaccord, Lululemon's biggest problem historically has been that its products are so popular, it can't make them fast enough to sell all the yoga-wear that its customers want to buy. Admittedly, that's a nice problem to have, and according to Canaccord, it won't even be a "problem" much longer. The analyst thinks Lulu's expanding "supply capacity" will have the result that "traffic and conversion should improve" in 2013. Add in Lulu's increasing ability to deliver products into new markets abroad, and Canaccord predicts we'll see "a reacceleration of comp growth" in the new year, and as many as $0.18 per share in incremental profits growth.
Add this to the $1.82 a share that analysts are already expecting, and Lulu could theoretically earn a nice, round $2 a share next year. But the problem is, that still works out to a P/E ratio of more than 36 (and a price-to-free cash flow ratio even higher) on the stock. Given that Lulu is expected to post long-term earnings growth rates only in the mid-to-upper 20s, a P/E in the mid-to-upper 30s seems a bit aggressive. Especially seeing as it's based on 2013 profits that Lulu hasn't actually earned yet...
Run from Bankrate?
Rosy as Canaccord's view of Lulu's future might be, the analyst comes back to reality with its new rating on Bankrate. The company behind the Bankrate.com brand got downgraded to hold at Canaccord this morning on concerns that "tough H1 comps, high execution risk, and the likelihood that any recovery may not occur until mid-2013 warrant a more cautious stance for the next quarter or two."
Crunching numbers under this more conservative scenario, Canaccord estimates that Bankrate might bring in only $488 million in revenues and $0.68 per share in profit in fiscal 2013 -- numbers 10% and 17% lower than previously posited, respectively. And yet, according to Canaccord, Bankrate shares deserve a price-to-forward earnings multiple of 20 -- the same number it used in its previous estimate.
But if Canaccord now sees earnings growing slower than it previously thought, doesn't this logically imply that the multiple, tied to the earnings growth rate, should fall as well? Maybe not by 10%, or 17%, but certainly, by some amount? It really doesn't make a whole lot of sense.
DreamWorks a buy? Dream on!
And finally, we come to DreamWorks Animation. Over at Stifel Nicolaus, they've stuck by the Shrek studio through thick and thin, as DreamWorks shares lagged the rest of the market by more than 16 percentage points over the past year. Today, though, Stifel finally threw in the towel and downgraded to sell.
It's about time. According to StreetInsider.com, analysts are calling the studio's new Rise of the Guardians movie a flop. And if that doesn't turn around soon, it means there's really very little reason to want to own a stock trading for 20 times earnings, growing at less than 13% a year -- and now, with no hope of improving on that growth rate in the near term.
Factor in the fact that DreamWorks is already arguably an "unprofitable" firm, given that the firm's burning cash at the rate of more than $40 million annually (despite reporting GAAP profits), and the critics have this one right. DreamWorks is a dud.
Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of lululemon athletica. Motley Fool newsletter services recommend DreamWorks Animation, lululemon athletica, and Bankrate.
