Friday's Top Upgrades (and Downgrades)
Apr 12th 2013 12:59PM
Updated Apr 12th 2013 2:00PM
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 upgrades for both AMC Networks and Bankrate , but a downgrade for LabCorp Holdings . Let's dive right in.
AMC no longer among the "walking dead"
First up, barely a week has passed since AMC Networks confirmed that the season finale of The Walking Dead scored a record-high viewership for the series. Now, analysts at B. Riley & Co. think they see signs of life in AMC shares. On Friday, B. Riley removed its sell rating from AMC stock, upgrading the shares to "neutral" and assigning a $61 price target.
Forgive investors if they're not exactly jumping out of their coffins with enthusiasm for the upgrade, though. After all, AMC already costs more than $65 a share, so a prediction that the shares might be worth $61 a year from now is hardly cause for rejoicing.
But here's the thing: AMC investors might have more to get excited about, if they focus less on what analysts are saying and more on the numbers. Last year, AMC generated $550 million in real free cash flow from its business -- four times the amount of "GAAP" profit it is permitted to report. This gives the stock a price-to-free cash flow ratio of just 8.6. It suggests that if AMC succeeds in hitting projected targets for profits growth -- 21% -- the shares could be worth far more than the $65 they currently cost... and deserve a far better rating than just "neutral."
Bank on Bankrate?
A more enthusiastic upgrade appeared this morning from analysts at Stifel Nicolaus, who had kind words for mortgage and credit card info provider Bankrate. Stifel thinks the stock -- currently at $12 and change -- should be worth $17 in a year.
But while Stifel's on the right track here, $17 might be a bit of a stretch. You see, Bankrate may look expensive at 44 times earnings. But with free cash flow that exceeds reported net income by a factor of two, it's probably more accurate to think of the stock as selling for "20 times cash profits" than as costing "44 times earnings."
Fact is, with a 22.5% projected long-term growth rate, Bankrate probably is a bit undervalued at today's prices. It probably is worth buying. Just don't go banking on the 35% profit that Stifel is promising you. Absent another burst of irrational exuberance in an already overheated market, it's not going to happen. Bankrate's worth more than it costs today... but not that much more.
LabCorp could blow up
Finally, we turn to the one stock on today's list that's getting black marks on Wall Street: Medical testing giant Laboratory Corporation of America -- or "LabCorp." The stock just hit a 52-week high, but according to analysts at WallachBeth, that's really just your cue to start heading for the exits. Wallach sees potential for LabCorp to inch up maybe a few dollars more over the coming months -- say, to $97 or so. But with the stock already within spitting distance of that price today, Wallach sees little reason to go sinking more money into LabCorp.
I agree... but with reservations. LabCorp is an excellent business, you see. Like Bankrate, it generates far more real cash profit than GAAP rules allow it to claim as "net income" -- $667 million last year alone, or about $1.14 in cash profit for every $1 of accounting profit that shows up on its income statement.
Problem is, even with all this free cash flow, the stock's $8.7 billion market cap looks overenthusiastic. I calculate about a 16 P/E ratio on this stock, and a P/FCF ratio of 13. Both valuations suggest the stock is too richly priced for its 10% projected growth rate. That being the case, I'm forced to agree with WallachBeth. At best, this stock is a hold at today's prices. More cautious investors should even consider selling, perhaps with an eye to getting back in at better prices, after the inevitable stock market sell-off.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Laboratory of America.
The article Friday's Top Upgrades (and Downgrades) originally appeared on Fool.com.