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Thursday's Top Upgrades (and Downgrades)

By Rich Smith – Mar 6, 2014 at 2:53PM

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Analysts shift stance on Navios Maritime, Star Bulk Carriers, and Lowe's.

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 a pair of Greek dry bulk shippers, Star Bulk Carriers (SBLK 2.15%) and Navios Maritime Holdings (NYSE: NM). Meanwhile, though, back here at home...

Lowe's just went lower
We begin the day's news on a down note, as shares of home-improvement superstore Lowe's (LOW 0.94%) are moving lower in response to a downgrade from investment banker Wedbush. Citing continued slowing in the national housing market, Wedbush warns that same-store sales at Lowe's could be at risk. As the analyst sees it, this is how things will play out: "Traffic will likely stall first, followed by ticket in late 2014/early 2015."

Translation: First, we'll see fewer homeowners walking the aisles at Lowe's, but those who are there will still be buying. By this time next year, though, not only will there be fewer customers, but those few will be spending less as well. Obviously, not an attractive proposition for Lowe's -- and that's why Wedbush is downgrading it to neutral.

If Wedbush is right about the growth rate, it would seem to put in question the consensus forecast for 16%-plus long-term-earnings growth that has been supporting Lowe's stock price to date. And here's the really bad news: Even if Lowe's hits its targeted growth rate, combined with its 1.4% dividend yield, I only see enough profit at Lowe's to support about an 18 times P/E ratio on the stock -- but Lowe's shares already sell for more than 23 times earnings.

Add slower growth to the mix, and Lowe's already overvalued shares could easily head lower.

It's all Greek to Stifel -- and they like that
Moving now to the stocks that Wall Street likes, we find analysts at Stifel Nicolaus giving high marks -- and buy ratings -- to Greek dry bulk shippers Star Bulk and Navios Maritime. The analyst sees the former going to $18 within a year, while shares of Navios Maritime are pegged for perhaps a $14 share price. But is Stifel right about that?

Both stocks recently reported earnings, so let's take a look at those. Navios missed estimates by $0.09 last month, which was not good news. Yet the company reported stronger than expected revenues, cut costs, and continued dividend payments. Management says its ships need to make only about $7,308 in cash lease revenue to break even, a number it calls "low," and predicts it will produce "reasonable cash flow in any event."

The crucial point here, though, is that while cash flow is positive at Navios, free cash flow does not appear to be. In an abbreviated cash flow statement filed last month, the company noted that cash from operations amounted to only $57.9 million in 2013 -- while "investing activities" ate up $256.7 million. How much of this sum was actual capital expenditure is not certain, but it certainly appears that the company went free cash-flow negative last year.

If that's the case, then I cannot support Stifel's buy recommendation on this stock -- both unprofitable and apparently burning cash. And until Navios produces the numbers to show us otherwise, prudent investors will have to assume that free cash flow negativity really is the case.

And Star Bulk?
As for Stifel's other dry bulk pick, Star Bulk Carriers also reported earnings -- just yesterday in fact. According to the company's report, Q4 earnings of $0.07 were nearly twice what analysts had expected. In contrast to Navios, however, Star Bulk missed estimates for revenues.

So why might Stifel be saying you should buy it? Well, for one thing, if Navios is hoping to turn a profit next year, Star Bulk already is profitable -- just barely, but it did earn $1.9 million last year, and that was the company's first profitable report in five years. Going forward, most analysts predict Star Bulk will earn as much as $0.44 per share this year, then double that in 2015, then nearly double it again by 2017. If they're right, then within just four years we could be looking at a stock earning nearly $2 a share -- and today you can buy it for just 7.5 times such earnings.

Of course, that's all in the future, highly uncertain, and highly dependent on global pricing for dry bulk shipments -- something over which Star Bulk has little control. Star Bulk has a poor history of earning profits in years past, too. And it's been even worse than Navios at providing shareholders with timely information on its cash flows, with the result being that we have little or no idea of how cash profitable the firm may (or may not) be.

Long story short, I've got too little information on the stock to say you should short it. But I've got way too little information to agree with Stifel that it's safe to go long.

Rich Smith has no position in any stocks mentioned, and neither does The Motley Fool.


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