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 upgrades for both Cracker Barrel (CBRL 0.14%) and Procter & Gamble (PG 2.04%). But the news isn't all good. Before we get to those two, let's dig a little into the numbers at...
Yamana Gold (AUY 1.03%)
As gold prices tumbled, investors pulled $38.6 billion out of gold-focused mutual funds in 2013. As 2014 gets under way, this is having an effect on at least one gold-mining stock, too, as investment banker Raymond James pulls up stakes on its "outperform" rating for Yamana Gold and downgrades to "market perform."
According to Raymond James, Yamana shares, currently at $9 and change, could easily climb to $11 by year-end. That translates into a potential 18% profit -- which you would ordinarily think would be a reason to buy the stock. Yet Raymond James is saying not to. Why?
Well, one obvious catalyst for caution is that Yamana is due to report earnings in two weeks. Raymond James may just be stepping back and waiting for the dust to settle before deciding on a clearer direction -- up or down -- for the stock to head. Another reason for worry, though, came out last week when banker HSBC warned investors to expect gold prices in 2014 to average 10% lower than it previously expected, at $1,292 an ounce, and to sell for not much more than that in 2015.
This could be bad news for a gold miner like Yamana, which while technically "profitable" (as GAAP accounts for such things), is in fact burning through its cash. Over the past 12 months, Yamana has racked up $292 million in negative free cash flow from its business -- its second straight year of burning cash. Absent significant cost-cutting, or a significant rise in the price of the gold it sells, 2014 and even 2015 could see similar cash losses at the company -- which is already nearly $900 million in debt, net of cash.
With a P/E ratio of 23 but negative growth expected over the next five years, and negative free cash flow a fact already today, this is not a stock I'd want to buy. Fact is, even with its new rating of market perform, Raymond James may be giving Yamana Gold too much credit.
Procter & Gamble
Happier news greeted investors in consumer products powerhouse Procter & Gamble this morning, when independent analyst Standpoint Research relented on its sell rating, and upgraded the stock to "hold." But here, too, I fear the analysts are being overly optimistic. While not as clearly overpriced at Yamana Gold, Procter & Gamble is no bargain.
The stock sells for well more than 20 times earnings today, yet the low quality of earnings ($9.4 billion in positive free cash flow backing up only about 87% of Procter's claimed $10.9 billion in "earnings"), combined with a massive debt load of $27.1 billion net of cash, give this stock an enterprise value-to-free cash flow ratio north of 25 -- against a projected earnings growth rate of less than 9%.
Granted, if you're only interested in dividend yield (and don't care about valuation, and don't mind if the stock price sinks), P&G's 3% dividend payout may justify holding on to the stock, as Standpoint advises. But for anyone looking to buy a great company at a good -- or even a reasonable -- price, I fear Procter & Gamble is not it.
Finally, we come to an honest-to-goodness buy rating, in the form of Miller Tabak's endorsement of Cracker Barrel Old Country Store this morning. Miller is assigning a $114 price target to the $99 stock, suggesting 15% upside. Combined with Cracker Barrel's generous 2.7% dividend yield, that's enough of a profit potential (18%) to get any investor's attention. It's just as good a profit as Raymond James was promising with Yamana Gold -- and with the bonus of being available on a stock that's making money instead of burning cash.
But is it good enough?
Sadly, I fear not. While no more expensive than Procter & Gamble when valued on its 20 P/E ratio, and despite generating copious free cash flow where Yamana generates none at all, Cracker Barrel turns into our third analytical swing-and-a-miss today -- struck out by a too-low growth rate.
Quite simply, if you value the stock by P/E (20) or price-to-free cash flow (17.5), either way the stock's sub-11% projected growth rate is too low to justify the high price. Long story short, while Cracker Barrel is probably the least overvalued of the three stocks we've looked at today, it's still not cheap enough to buy.
Rich Smith has no position in any stocks mentioned, and doesn't always agree with his fellow Fools. The Motley Fool recommends Procter & Gamble.