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 an upgrade for Buffalo Wild Wings (NASDAQ:BWLD), but downgrades for both Quiksilver (NYSE:ZQK) and Harris Teeter Supermarkets (UNKNOWN:HTSI.DL). Let's dive right in.
Buffalo is fly
We begin the end of the week on a bright note, as KeyBanc Capital Markets upgrades wings purveyor Buffalo Wild Wings to buy, assigning an $85 price target in the process. As the analyst explains (quoting from StreetInsider.com here):
Trading at 6.8x EV/EBITDA NTM (vs. peer average of 7.8x), we believe several risks are priced into the stock ... Since reporting disappointing 2Q results (July 24), shares have underperformed (down 7%) the KBCM Restaurant Index (up 16% during same period) and the S&P 500 (up 12%). We believe there is relatively limited downside to the current Street mean of $0.95 for 4Q12E and $3.60 for 2013E.
Translated from Street-speak, what KeyBanc is saying is basically three things. First, Buffalo Wild Wings is trading for a lower price than its peers, relative to what it's expected to earn over the next 12 months. Second, its shares have underperformed relative to these same peers (resulting in the lower valuation). Third and finally, the analyst thinks the worst B-Dub will do is earn $3.60 a share this year -- and it might do better. But does all this add up to a strong buy thesis?
I don't think so, and I'll tell you why: At 26 times trailing earnings, and 21 times this year's projected profit, yes, the stock looks close to fairly valued based on projected long-term earnings growth of 20%. Yes, too, if the company exceeds that growth target, it could be cheap. Still, success isn't guaranteed, and B-Dub still suffers from weak free cash flow, with real cash profits coming in at less than half the level of the company's reported $54 million "profit" over the past 12 months. Long story short, I see the stock as perhaps fairly valued, perhaps a bit overpriced. But a buy?
In a buffalo's eye.
Quiksilver is poisonous
Speaking of overpriced stocks with weak free cash flow: action-sports appareler Quiksilver. This morning, analysts at R.W. Baird downgraded the stock to neutral, and while shareholders of the stock won't want to hear this, they got off easy.
Unprofitable today, and priced at 20 times what it might earn this year, Quiksilver shares look overvalued relative to the 12.5% long-term growth it's expected to produce. Plus, it's burning cash (nearly $80 million over the past 12 months), and struggling under a debt load that exceeds cash on hand by more than $700 million.
I won't mince words on this one: Quiksilver is quite simply not worth owning. Baird shouldn't have stopped at downgrading this one to neutral. It should have surfed the extra mile, and warned investors to sell.
Oh, there you are, Harris Teeter!
And finally, we come to one of my personal favorite companies, if not stocks: upscale grocer Harris Teeter. Once upon a time, HT was a gem buried within the ambiguously named mini-conglomerate Ruddick Corp. That all changed last year, though, when Ruddick shed its other operations and decided to focus purely on retailing. It changed its name to Harris Teeter Supermarkets, took on a new ticker symbol (HTSI), and got down to business. Now, finally, loyal HT customers can find the supermarket they know and love on the NYSE, and even buy shares in it if they want to.
That's the good news. The bad news is that they probably shouldn't want to. HT, you see, just finished reporting its first-quarter earnings results yesterday, and the news wasn't great. Sales rose only 4% in comparison to last year's fiscal first quarter. Profits, at $0.46 per share, fell more than a dime short of the $0.59 analysts were expecting.
These kinds of numbers simply aren't good enough to support the 22 times earnings valuation HT shares enjoyed. Fact is, analysts' projections of 12% long-term profits growth probably wouldn't be enough to support the valuation either, not with HT (like everyone else in today's column, it seems) producing such weak cash profits (just $7.4 million on a $1.9 billion market cap) as it does.
Long story short, there's more than just an earnings miss, or multiple analyst downgrades (UBS, BB&T, and BMO have all downgraded so far) behind HT's 9% plunge in share price today. The stock was overvalued to begin with, and doomed to fall.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings. The Motley Fool owns shares of Buffalo Wild Wings.