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 a big endorsement for a growing force in Carolina banking, SCBT Financial (NASDAQ:SSB). Also, we get two new "neutral" ratings -- one bad, one good.
Bad news first
Let's get the bad news out of the way and discuss Stifel Nicolaus's downgrade of IMAX (NYSE:IMAX). The big screen, 3-D moviemaker announced strong earnings yesterday, beating consensus estimates with $0.23 per share in profit and topping estimates for revenues as well.
Free cash flow at the company remains strong -- stronger even than reported net income. The balance sheet looks clean, with nearly as much cash on hand as debt. And, of course, IMAX is growing strongly, with multiple recent expansions announced in Russia and a consensus long-term growth rate of 21%.
All that being said, at a P/E ratio of more than 50, IMAX shares do look just a wee bit overvalued. The fact that Stifel is downgrading the shares after a strong earnings report may rub some shareholders the wrong way. In my Foolish opinion, though, they should to be grateful Stifel didn't go all the way to "sell" because, at these prices, that's exactly the rating IMAX shares deserve.
Better news next
Today's other big move to "hold," in contrast, should be welcomed by investors of Hewlett-Packard (NYSE:HPQ). Following a less-awful-than-expected Q4 report last night, Hewlett shares are getting an extra bit of bounce today as international stock star UBS removes its "sell" rating from the stock and upgrades it to "neutral."
While objectively bad, HP's 6% revenue decline and 12% slide in profits per share (to $0.82) still managed to beat consensus estimates handily. And ,yes, unprofitable Hewlett may be and is still pegged for 0% -- as in no -- earnings growth whatsoever over the next five years. But with $8.5 billion in trailing free cash flow, the stock's trading at an awfully tempting 4.3 times annual cash profit, suggesting that even without growth, an investor can expect to get paid back on an investment here within fewer than five years. Factor in a still generous 3.2% dividend yield, and the rewards look even richer.
Long story short, while I'm not thrilled with how HP has handled itself in past years, under new CEO Meg Whitman's leadership the stock does appear to have a chance of surviving. I wouldn't count the company out just yet.
And now, the "good" news
Last but not least, we come to the honest-to-goodness upgrade of the day: SCBT Financial. As you may have heard, SCBT announced a merger with fellow South Carolina banker First Financial Holdings (UNKNOWN:FFCH.DL) yesterday. The new entity, to be known by the acquired company's name going forward, says it will control $8.3 billion worth of total assets, including $6.9 billion in deposits and a network of 148 branches spread across the Carolinas.
SCBT's brother bankers like the deal a lot, with both BB&T Capital and Raymond James recommending that investors buy the stock today and with both positing a $52 target price within the next year. If they're right, that will work out to a tidy 11.6% capital gain on the stock, which when combined with SCBT's 1.7% dividend yield is not too shabby a profit.
Will it happen? It's hard to say. Personally, though, when I look at the stock -- now trading at $715 million in market cap -- the price doesn't look all that attractive relative to the trailing profits booked by the two firms together (about $55 million over the past year). Assuming the deal goes through, SCBT will have to issue new shares worth about $302 million to acquire First Financial, resulting in a market cap of a bit more than $1 billion and implying about a 20 P/E on the combined company once the merger is complete. (It's scheduled for Q3 2013.)
To justify that price, the combined bankers will have to grow faster than the 12% rate SCBT's currently pegged for and a whole lot faster than First Financial's projected 5% growth rate.