Please ensure Javascript is enabled for purposes of website accessibility

Griffen Upgrade Gives Big Lots Stock Wings

By Rich Smith - Apr 4, 2013 at 2:47PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Pity the upgrade doesn't hold up to examination.

Shares of closeout retailer Big Lots (BIG 1.07%) are flying 3.5% higher in midday trading. And yet, so far as I can tell, the only reasons for the surge are an analyst upgrade to "buy" and a price target higher than what the shares fetch now.

Actually, make that an ill-considered upgrade to buy from an analyst you've probably never heard of before and a price target far higher than what the shares are worth.

Let's tackle those issues one at a time. If I told you that some guy you'd never heard of before thought you (not he) should buy shares of Big Lots, would you give that recommendation much weight? Then call me a skeptic, but I'm not sure an upgrade to "buy" from an analyst called Griffen Securities (the name cited in an upgrade report on flyonthewall.com today) deserves any particular weight, either.

Now for the price target. Big Lots costs $35 and change today, so a move to $45 suggests the potential for a 27% profit in the stock. I can see how that would grab investors' attention, sure. But that doesn't mean the target is realistic.

Consider: Priced at 12 times earnings, Big Lots' valuation already looks like a bit of a stretch relative to the 10% long-term growth estimates Wall Street analysts have assigned it. When you notice further that based on its cash flow statements, Big Lots is currently only generating about $0.85 in real cash profit for every $1 it claims to be "earning" under GAAP, the magnitude of the overvaluation only grows. And none of this is even factoring Big Lots' $110 million net debt load into the equation. With that number added in, I get an enterprise-value-to-free-cash-flow ratio of 14 -- which is still only growing at 10% a year.

Foolish takeaway
I won't say Big Lots is the most overpriced stock on the market today, but 14 times free cash flow is hardly a cheap price to pay for a mere 10% grower. Therefore, even if you think the stock can hold on to its current valuation, it's hard to make a strong argument for (over)paying even more for the stock in 12 months' time.

Long story short: Griffen Securities' buy rating on Big Lots doesn't look much more realistic than the winged, eagle-headed lion of lore.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Big Lots, Inc. Stock Quote
Big Lots, Inc.
BIG
$29.31 (1.07%) $0.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
327%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.