While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Expedia (NASDAQ:EXPE) sank about 7% today after Deutsche Bank downgraded the online travel company from buy to hold.
So what: Along with the downgrade, analyst Ross Sandler lowered his price target to $51 (from $66) -- pretty much where the stock closed on Friday -- suggesting that he sees limited upside at the current levels. The stock was crushed 27% after posting highly disappointing second-quarter results in July. Sandler expects the stock to remain pressured given the competitive headwinds, as well as cost issues that Expedia continues to face.
Now what: Deutsche believes that two of the three likely scenarios with Expedia this quarter don't exactly bode well for shareholders. These, according to the Deutsche Bank report, are:
- "The "Quick Fix," whereby Expedia fixes the short-term problems from the second quarter (TripAdvisor, Qunar, etc.) and is able to hit its full-year guidance,
- The "Almost Gets There," where Expedia fixes the second-quarter problems, but has additional cost for onboarding the Travelocity deal and other items and has to take guidance down slightly, or
- The "Breakdown," where Expedia sees further execution and competitive issues, and management reduces guidance again.
When you couple those unfavorable outcomes with Expedia 's still-lofty P/E of 40, it's tough to disagree with Deutsche's downgrade decision.
Fool contributor Brian Pacampara has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.