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 feature downgrades for Texas Roadhouse (NASDAQ:TXRH) and Aurizon Mines (NYSEMKT:AZK). But it's not all bad news, so read on, and find out why one analyst thinks you should...
Fill up on Cracker Barrel
Another day, another higher price target for Cracker Barrel (NASDAQ:CBRL). Last week, we were talking about how the country store-cum-country cookin' restaurant parlayed an $0.18-per-share "earnings beat" into a new $81 price target at analyst Miller Tabak. Today, analysts at Argus Research are going even further than that -- reiterating their buy rating on the stock and predicting that before a year is out, Cracker Barrel shares will be fetching $88 apiece.
Now here's the problem: I was a bit ambivalent when Miller Tabak endorsed Cracker Barrel last week, because at 15.7 times earnings, but only 10% projected long-term earnings growth, the stock looked overvalued to me. Today, Argus is both arguing for a higher price target ($88 versus $81) and saying Cracker Barrel will get there from a higher starting point (16.3 times earnings versus 15.7).
Needless to say, Argus is setting itself a higher hurdle on this one, and one more difficult to clear. (Worth saying, though, is that investors seem to recognize this, and are currently selling off Cracker Barrel shares despite Argus's endorsement -- a pretty clear case of "sell the news" if I ever saw one.)
My hunch: Cracker Barrel is fairly valued today. Maybe even a bit overvalued. That said, if you're dead set on owning it, the workaround I described last week is still there for the taking. Biglari Holdings (NYSE:BH), which owns a 20% stake in Cracker Barrel and sells for a cheaper price-to-free cash flow ratio, with a faster growth rate, offers a compelling way to buy a piece of Cracker Barrel's growth without paying the sticker price on Cracker Barrel stock. I like it so much, I own it myself.
Don't stop at Texas Roadhouse
Continuing today's comfort-food theme, our second analyst recommendation today concerns Texas Roadhouse. Once again, it's Miller Tabak stepping up to lend some advice. This time, however, Miller is feeling more cautious, downgrading TR to hold, and recommending investors be more cautious about the stock.
Make no mistake: Miller still likes Texas Roadhouse quite a lot, praising the company for producing above-peer-group same-store sales while also expanding its profit margin. It's also got a faster growth rate.
On the other hand, though, at 20 times trailing earnings, Texas Roadhouse looks even more expensive than Cracker Barrel. Its dividend is slightly smaller, too -- 2.5% versus 2.6%. And most important of all, Texas Roadhouse is currently generating less free cash flow ($61 million) than it reports as net income under GAAP ($71 million). That's as contrasted with Cracker Barrel, which actually produces slightly more cash profit than it's allowed to claim as net income under GAAP -- and it suggests that Texas Roadhouse isn't quite as good a bargain as it looks.
Long story short, that fact alone is reason enough for caution, and justifies the downgrade to hold.
Aurizon strikes it rich
And finally, we end by switching gears from food to minerals, as Global Hunter Securities removes its "accumulate" rating from shares of Aurizon Mines. Aurizon, you see, announced last night that it's selling itself to Hecla Mining (NYSE:HL), having been offered a better purchase price than the one it received, unsolicited, from Alamos Gold (NYSE:AGI) a week ago.
Depending on how you look at it, Hecla's offer of CA$4.75 a share is either CA$0.10 higher than Alamos' January bid of CA$4.65, or $0.10 worse (at the fluctuating U.S. dollar exchange rate -- Hecla's bid works out to $4.63 versus the $4.73 that Alamos offered six weeks ago).
Whichever way you look at it, though, this deal looks as good as done. Aurizon rejected Alamos' offer, but its board is recommending that shareholders accept Hecla's bid. Hence, no reason to buy this stock anymore. Its run is done.
Fool contributor Rich Smith owns shares of Biglari Holdings. The Motley Fool recommends Cracker Barrel Old Country Store.