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 upgrades for Sierra Wireless (SWIR) and Genuine Parts (GPC -0.97%). But the news isn't all good, so before we get to those, let's find out why one analyst thinks...
Stanley Black & Decker needs a recharge
We begin the day on a down note, as analysts at Imperial Capital cut their rating on Stanley Black & Decker (SWK -0.52%) from "outperform" to "in-line." Last week, Stanley reported per-share profits of $1.37, or $0.09 better than expected. Revenues, too, beat the consensus number. So why is Imperial more pessimistic about the company?
It all comes down to guidance. Wall Street, you see, had Stanley pegged for fiscal 2013 earnings of about $5.69 a share. Problem is, Stanley's now promising only $5.65, best case -- and perhaps as little as $5.40 a share. Given this downbeat news, Imperial says the stock lacks "near-term catalysts" that could lift the share price higher, and needs to see "tangible progress on ... potential opportunities during 2H13 and FY14" before it can endorse the stock again.
I agree. While the stock's not particularly expensive at just a little over 14 times earnings, Stanley's only expected to grow these earnings at about 8% per year going forward. Plus, the company only generated about $0.66 in real free cash flow for every $1 it reported "earning" last year. So we're seeing pretty poor quality of earnings at the company to date. Given all this, even Stanley's generous 2.5% dividend yield probably isn't enough to save the stock. It's overpriced, and likely to fall.
High Sierra
Happier news greeted shareholders of Sierra Wireless this week. Yesterday, as you may have heard, the company managed to offload its AirCard mobile devices business onto Netgear (NTGR 1.10%), collecting $100 million after taxes in the process. Analysts seem to think Sierra got the better of this deal, for while Netgear shares are falling 9% on the news today, Sierra's shares are up nearly 15%.
One banker endorsing the deal is RBC Capital, which says it thinks Sierra (currently trading around $10.50 a share) is now worth about $13 a share, and rates the stock an outperform.
It's easy to see why. Sierra had $60 million cash in the bank before selling AirCard. Now it will have closer to $160 million, meaning more than half its market cap will be backed by cold, hard cash. Granted, the company still isn't technically "profitable," as GAAP defines the concept. But Sierra did generate nearly $31 million in positive free cash flow over the past year. It remains to be seen what the sale of AirCard will do to cash profitability going forward, but for now at least, the company appears to be making out like a bandit.
A genuine bargain?
Last but not least, we come to Genuine Parts, which BB&T just upgraded to buy. With a stock priced under $68, but expected (by BB&T at least) to be destined for $75, Genuine Parts shares appear to offer the prospect of a 10% capital gain, plus another 3% from the company's sizable dividend yield. But is that enough to justify buying the stock?
Maybe... but also maybe not. You see, priced at 17 times earnings, Genuine Parts still looks genuinely expensive to me. It's only expected to grow profits at about 8% a year, after all. And while free cash flow at this firm is very, very strong -- $781 million generated over the past year, versus only $623 million reported as "net profit" -- that still leaves the stock costing 13.5 times annual free cash flow.
Long story short, while Genuine Parts isn't the most outrageously priced equity on the market today, it still doesn't look cheap enough to justify a buy rating. Not at 8% growth. On the other hand, if Genuine Parts can ratchet that growth rate back up into the double digits -- say, 11% or so -- I'd have to take another look.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Netgear.
