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 divergent views of the trucking sector, as one analyst upgrades PACCAR (NASDAQ: PCAR) and another downgrades Navistar International (NAV +0.00%). But before we get to those two ratings, let's check in real quick on...
What's up in solar this morning?
Shares of Chinese solar module maker ReneSola (SOL +0.00%) are up -- that's what.
SOL shares are making a nice move upwards in early trading Tuesday after analysts at Roth Capital heaped praise upon the company, and recommended "buying" the shares. As explained on StreetInsider.com this morning, Roth likes how ReneSola is working to integrate its polysilicon production operations into its own business of manufacturing solar modules. According to the analyst, "the integration into poly differentiates SOL by allowing the company to preserve (and potentially even expand) GMs in an environment where spot poly pricing increases to $25/kg, which we now view as a realistic scenario." What's more, Roth believes the company will have lower capex needs than its peers going forward and that could potentially boost free cash flow.
This is all true. Vertical integration could help shield ReneSola from the kind of margin compression that a producer that does not produce its own polysilicon might face. Also, while ReneSola has not been immune to the kind of cash burn that has afflicted many of its peers in solar power in years past, it's turned modestly free cash flow positive this year.
Granted, from a GAAP perspective the company remains deeply unprofitable. It's also deeply in debt, with about $850 million in debt net of cash. But if ReneSola can maintain and extend its current burst of free cash flow generation, and begin climbing out of that debt hole, it's just faintly possible that Roth will be proven right in time. While certainly not a company without "issues," in time ReneSola really could turn out to be a stock worth buying.
Time to go trucking?
Turning now to the companies we mentioned at the beginning, semi-truck makers PACCAR (which owns the Kenworth and Peterbilt brands for example) and Navistar (International) are moving in opposite directions this morning, as megabankers Goldman Sachs upgrades the one and UBS downgrades the other.
Starting with PACCAR, Goldman announced an upgrade of the stock this morning, and assigned an $80 price target on a belief that "freight fundamentals are overwhelmingly positive entering the sixth quarter of recovery, providing visibility on a sustained truck capex recovery." Goldman sees U.S. trucking companies spending heavily to update their fleets through "at least 2015," and naturally believes this will be good news for PACCAR, which gets 57% of its profits from selling trucks in the U.S.
This aligns with the feelings of most analysts, by the way, who on average are calling for about 13.5% long-term profits growth at PACCAR. Still, it's debatable whether this only modest rate of growth can justify paying the stock's current P/E ratio of more than 20 -- the more so when you notice that PACCAR's free cash flow (about $500 million) significantly lags its reported net income ($1.2 billion).
If you look at the company from the conservative position of taking enterprise value (market cap plus net debt) and comparing it to free cash flow, the situation is even worse. PACCAR currently trades for close to a 60 times multiple of enterprise value-to-free cash flow -- which is about four times what I'd ordinarily want to pay for a 13.5% growth rate. In short, PACCAR looks to me like a case of "great company, lousy stock" -- and I suspect Goldman Sachs will rue the day it told investors to buy it.
Nowhere to run for Navistar
Bad as things look for PACCAR investors, though, the situation's even worse for Navistar. Unprofitable under GAAP, deeply in debt, and burning cash like a bat out of hell (cash burn was $624 million last year, up from $499 million in 2012), Navistar's a company in very dire straits indeed.
This morning, UBS announced it was downgrading the stock to neutral and cutting its price target to $36 per share. Personally, though, I think the stock could do much, much worse than that.
I don't, as a rule, short stocks or recommend that other investors do so. The risks are too great, and the possibilities to rack up losses literally infinite. But if I did short stocks, then I have to say -- Navistar International is the kind of stock I'd be taking a very hard look at right now.
