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 a downgrade for Sonoco Products (SON +0.52%), an upgrade for Ball Corp (BLL 1.07%), and for Electronic Arts (EA +0.27%) -- a higher price target. Let's dive right in.
Opening up the box
First up: Sonoco Products. Not to be confused with Sunoco, the oil refiner owned by Energy Transfer Partners, Sonoco Products is actually a maker of cardboard boxes -- and paperboard, fiber trays, and all sorts of other paper-based containers and forms. The company just got hit by a downgrade to neutral at analyst house RW Baird. Curiously, however, at the same time as it was downgrading the stock, Baird was upping its price target on the stock, to $37 a share.
Why?
Basically, the answer is that Sonoco shares have bounced up higher than expected, faster than expected. Over the past six months, Sonoco shares have climbed 18% to pass Baird's old $35 price target linked to an outperform rating. So having met its goal already, Baird is declaring mission accomplished, and pulling its buy rating. That said, modestly bullish news out of FedEx this morning -- a big transporter of boxes -- suggests there could be some upside left to Sonoco stock, and this explains why Baird might have decided to tweak its new price target upwards a skosh.
But only a skosh. Remember that at 18 times earnings, and with only a 6% annualized growth rate in profits over the next five years, analysts still aren't expecting to see huge improvement in Sonoco's earnings in the near term. (Indeed, even 6% would be a big improvement. The best Sonoco has managed to achieve over the past five years is an average of 2.3% growth.)
Numbers like these suggest to me that Baird is right to be cautious, and pull its buy rating. At the same time, Sonoco's 3.5% dividend is better than the market average, and might make the stock worth holding onto despite the overvaluation.
Get on the Ball
On the other hand, one stock Baird thinks might not be overvalued is aerospace star Ball Corp. Baird noted in an upgrade (to outperform) this morning that Ball has basically been left out of the aerospace rally of late. Over the past year, Ball's shares are up only 2%, against a rise of 22% in the S&P 500. In contrast, shares of Boeing have doubled the S&P's rise.
And yet, Ball's had some good news of late. It's helping the U.S. build a satellite-based system for tracking orbital debris and spacecraft (with help from Boeing).
As regards valuation, however, at nearly 18 times earnings, the stock's certainly not cheap. (Its P/E ratio is actually quite close to Sonoco's). Analysts see Ball's earnings growing at least 50% faster than Sonoco's -- nearly 10% per year over the next five years. Free cash flow, at $429 million for the trailing 12 months, exceeds reported net income by 11%. On the other hand, Ball also carries a heaping helping of debt on its books -- about $3.6 billion net of cash -- which may help to explain the stock's laggard status.
Long story short, while I like the stock a bit more than I like Sonoco, I disagree with Baird's decision to recommend buying it.
Game on!
Finally, we come to Electronic Arts. With a stock up 82% over the past year, this one's clearly riding a wave of investor enthusiasm over the new generation of gaming consoles coming down the pike. Analysts at Stifel Nicolaus think EA has more room to grow, and this morning upped their price target on the stock to $27, suggesting about 17% upside.
That said, the stock's already selling for 75 times trailing earnings. (Yes, you read that right.) And the 15% long-term earnings growth, that analysts think the turnover in gaming consoles will help EA to generate, doesn't look fast enough to justify the stock price.
True, free cash flow at the firm is strong, running more than double reported earnings at last report, but that's still only enough to get the stock's price to free cash flow ratio down to 32 -- and if the 15% growth estimate turns out to be accurate, that's still too high a price to pay.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends FedEx.
