Thursday's Top Upgrades (and Downgrades)
Jan 31st 2013 12:39PM
Updated Jan 31st 2013 12:55PM
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 include an upgrade for Facebook , but also downgrades for Fresh Del Monte and Chiquita Brands .
Bad news for banana fans, and Chiquita Brands
Might as well get the bad news out of the way first, so let's begin with the pair of downgrades that BB&T Capital Markets just instituted against Chiquita (and we'll get to Fresh Del Monte in a minute).
This morning, BB&T pulled its buy rating on Chiquita and downgraded the stock to hold. No one seems to know why, exactly -- even StreetInsider.com, our usual source for pertinent comments and quips from analysts on their ratings -- seems at a loss as to why this one happened. But it's not too hard to guess.
Chiquita Brands is getting set to report fourth-quarter earnings mid next month, and the prospects don't look good. The company's not currently profitable. It reported a huge loss last quarter, and analysts are predicting another whopper of a loss for Q4. Chiquita's also burning cash at a phenomenal rate, with "free" cash flow ringing in at nearly negative $50 million over the past 12 months.
Unable to generate cash to pay its bills on its own, the company was forced to offer $425 million worth of senior secured notes earlier this week to help refinance its massive, $587 million debt load. Long story short, this banana purveyor looks anything but "green" to me. Red is a whole lot more like it.
Does Fresh Del Monte deserve to get frozen out, too?
In comparison to Chiquita, the other stock BB&T is downgrading today -- Fresh Del Monte -- looks positively healthy. Profitable where Chiquita is unprofitable, Fresh-D sells for a seemingly reasonable 11.7 times earnings. It pays a tidy 1.5% dividend yield, and is projected to grow earnings at about 7% per year over the next five years.
Now, sure, that's not a great valuation. It's also true that Fresh-D generates less real free cash flow (about $97 million) than it reports as GAAP net income ($133 million). On the plus side, though, at least Fresh-D has positive free cash flow. It's also net-debt-free, with $40 million in the bank canceling out its $28 million in debt.
While not a huge bargain just yet, Fresh Del Monte looks a whole lot closer to ripeness than its rival does.
And finally, some "good" news
But is there any stock out there that's already fully ripe for purchase? A stock you can actually buy today? Actually... maybe. At least, Pivotal Research says it's found one: Facebook. (Ever heard of it?)
According to the analyst, investors who started selling the social network this morning after fourth-quarter earnings have got it all wrong, "interpreting reported mobile revenue figures as a negative when, in fact, they are part of a story that we can see as qualitatively more favorable."
The way Pivotal sees it, "growth in mobile occurred primarily as the company ... began to effectively
bundle sales of mobile and desktop advertising. We view this as meaning that the company is selling its inventory very efficiently." Also positive, in the analyst's opinion, is that FBX is now generating revenues at the rate of $50 million per quarter, and accelerating toward what Pivotal predicts will be $460 million for the full fiscal year 2013. Says the analyst: "We see growth at similar rates generally continuing for several quarters in part because of these products."
But here's what no one sees at Facebook: profits. Net earnings at the company came to just $53 million for all of fiscal 2012. Free cash flow was a bit stronger -- $377 million -- but still poor enough to leave the stock trading at 175 times FCF today. (Don't even ask how high the P/E ratio is. You don't want to know).
In short, unless you think Facebook will find a way to produce a triple-digit growth rate -- not just for revenues, but for profits -- and maintain it for several years running, it's hard to justify paying $30 and change for this stock. Right now, the sub-30% growth rate that Wall Street is positing for Facebook just doesn't cut it.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook.
The article Thursday's Top Upgrades (and Downgrades) originally appeared on Fool.com.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.