This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, with earnings season in full swing, we're seeing mainly analyst reactions to earnings news. Specifically, today we'll be looking at a pair of price target hikes for General Electric (NYSE:GE) and Honeywell (NYSE:HON), followed by a downgrade for Nokia (NYSE:NOK). Let's dive right in.
"General-ly" good news
We'll start off with General Electric which, at a $255 billion in market cap, is an economic bellwether that rings quite a bit louder than Honeywell, at $65 billion. This morning, The Wall Street Journal started off the week on a down note, lamenting recent disappointing economy and corporate-earnings reports -- slow retail sales growth of 0.4% in June, declining restaurant sales, and economist forecasts of only 1.5% annualized GDP growth in Q2.
If that's truly where the U.S. economy is heading, though, then somebody didn't get the memo, and that somebody is General Electric.
GE reported pretty anemic profits in Q2, granted, but the CEO also noted that six of his seven business segments were growing sales, with profit margins improving, and orders for new equipment simply flooding through the front door -- up 20% in the U.S. GE's now predicting strong growth in the second half of this year, and this good news inspired analysts at Argus Research to boost their target price on the shares by more than 10%, to $28 apiece.
So... who is right here? GE, or the WSJ? Honestly, it's hard to say, but with GE stock down 0.8% in early trading today, it appears investors are so far siding with the newspaper's view of the economy. And as good a report as GE put out last week, I cannot say that I blame investors for being cautious. GE shares, at 18.4 times earnings today, don't offer much -- or indeed, any -- margin of safety if all the company manages to do is grow at the 11% long-term rate Wall Street predicts for the company.
A 3.2% dividend yield is nice, sure, and helps to close the gap between price and value. But without faster growth, it's hard to see how this company can qualify for a buy rating, and hard to see how it can reach the new $28 price target Argus has set for it.
Second verse, same as the first
I've got similar reservations about Honeywell, and the new $91 price target that RBC Capital Markets just set for that stock.
Robust gains in cash flow, improvement in profit margins, and a small gain in sales were the big news at Honeywell last week. (Also, there was the little matter of a small piece of electrical equipment hidden deep within a very large Boeing airplane, that's attracting some negative press.) Once again, this is a company that's not cooperating with the official view of a weak U.S. economy.
The valuation picture at Honeywell is, if anything, even less attractive than what we see at GE. Honeywell shares cost nearly 21 times earnings, or about 13% more than GE. These shares are expected to grow at closer to 10% per year over the next five years, however -- 6% slower than GE. And the dividend yield at Honeywell, an even 2%, is 38% worse than what GE pays out.
Long story short, if GE's valuation makes you nervous, Honeywell's should worry you even more.
If there's one analyst move today that I do agree with, though (and don't get excited -- this is not good news), it's about Nokia. Analysts at Oppenheimer just knocked the stock down one notch to underperform, warning investors that far from reviving, Nokia's handset business looks more likely to drag down the rest of the company along with it.
Oppy sees a risk to Nokia's strategy of building high-quality smartphones equipped with superb camera optics... and selling them cheaply. Specifically, the analyst warns that Apple and Samsung are working to discount their phone offerings as well, and to shrink the price gap with Nokia's wares. As a result, Nokia's starting to look like it's caught in a price war that it cannot hope to win. Unprofitable already, and with an operating profit margin of just 5.5%, Nokia's phones business is ill-positioned to compete on price with Apple and its 30%-plus operating margin, for example.
Meanwhile, although the company has cut its rate of cash burn, and actually generated positive operating cash flow over the past year, its free cash flow number remains stuck in negative territory.
The upshot: While Oppenheimer likes Nokia's telecom equipment business, Nokia Siemens Networks, it holds out few hopes for the company as a whole. At least, not until the Lumia business starts gaining more traction in the marketplace.
Fool contributor Rich Smith owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and General Electric Company.