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 a pair of earnings-inspired downgrades for first Advanced Micro Devices, Inc. (NYSE:AMD) and Intuitive Surgical, Inc. (NASDAQ:ISRG).
On the plus side, though, one analyst is naming Under Armour Inc (NYSE:UA) a winner. Let’s start the week’s final trading day off on a bright note and begin with that one:
Under Armour could sprint
As next week’s earnings report approaches, analysts are getting in line to line up behind Under Armour Inc (NYSE:UA). Canaccord Genuity led off earlier this week with a reiterated buy rating and a price target raised to $70, arguing that “new product introductions/extensions in both apparel and footwear… the relaunch of bags in accessories… the impact of accelerated shop-in-shop openings at [Dick’s Sporting Goods and] sq. ft. growth… and improved planning” will all help to grow revenues, improve gross margins, and deliver more profit to the bottom line.
Initiating at outperform yesterday, banker Wedbush added that “women’s, youth, footwear and international continuing to represent UA’s most significant wholesale opportunities,” while also looking forward to “continued growth of direct-to-consumer operations.” And this morning, SunTrust Robinson Humphrey leapt aboard the Under Armour Inc (NYSE:UA) train, initiating coverage with a buy rating and a $71 price target.
Are they right? I don’t know. Personally, I’m still leery of the more-than-53-times-earnings valuation at Under Armour Inc (NYSE:UA). But it’s undeniable that, at least in one respect, Under Armour is improving. Free cash flow at the company, which has historically vacillated between weak and negative, is now firmly in the green and even outpacing reported net income. While I don’t think it’s strong enough to support UA’s lofty $6.4 billion valuation yet, the trend’s clearly moving in the right direction. UA could surprise.
Retreating from Advanced Micro
Less happy news greets Advanced Micro Devices, Inc. (NYSE:AMD) shareholders today. Yesterday, AMD beat estimates soundly, but only by losing less money ($0.09 per share) than expected ($0.13 per share). It seems that’s not going to be good enough for Wall Street, however, as we watch both Credit Suisse and Morgan Stanley downgrade to various flavors of sell.
I can’t say I blame them for that. Beat or no, it’s undeniable that Advanced Micro Devices, Inc. (NYSE:AMD) is losing money these days. It may or may not turn profitable next year, but even if it does, consensus estimates have the stock trading for a forward P/E ratio of 65 times earnings, which is quite a lot for a company that’s only expected to grow earnings at about 11.5% per year over the next five years.
Top all this off with the fact that Advanced Micro Devices, Inc. (NYSE:AMD) carries a $1 billion net-debt load and has racked up $818 million in negative free cash flows over the past year, and I just don’t see a whole lot to like about this stock right now.
Intuitive Surgical in the ICU
Intuitive Surgical, Inc. (NASDAQ:ISRG)? My, that one has been a disappointment this month, hasn’t it? First, the company issued an earnings warning a couple of weeks ago. Then it followed that up by missing analyst earnings estimates yesterday. One analyst has already thrown in the towel on this one, with JMP Securities downgrading to market underperform this morning.