Herbalife Ltd. (HLF), Potash Corp./Saskatchewan (USA) (POT), Mosaic Co (MOS): Wednesday’s Top Upgrades (and Downgrades)

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 downgrades for two of the biggest names in fertilizer — Potash Corp./Saskatchewan (USA) (NYSE:POT) and Mosaic Co (NYSE:MOS). But the news isn’t all bad, so before we get to those two, let’s find out why one analyst says…

Take two shares of Herbalife Ltd. (NYSE:HLF), and call us in the morning? George Soros and Carl Icahn have gained a new ally in their battle with Bill Ackman over whether Herbalife Ltd. (NYSE:HLF) is a “pyramid scheme” or not. This morning, analysts at tiny Argus Research joined this battle among hedge fund titans, weighing in with their relative two cents, and assigning the much maligned Herbalife a buy rating and an $80 price target.

According to Argus, you see, Herbalife Ltd. (NYSE:HLF) isn’t just healthy — it’s positively prospering. Earnings growth is said to be strong, and with Herbalife Ltd. (NYSE:HLF) accelerating its program of share buybacks, earnings-per-share growth should be even stronger. Argus is raising its estimate for fiscal 2013 earnings to $5.15 per share, and projecting $6 per share profits in 2014 — a 16.5% increase. What’s more, I think Argus is right about this.

Priced just a shade over 14 times earnings today, and still generating significantly more free cash flow ($524 million) than it reports as GAAP net income ($499 million), quality of earnings at Herbalife Ltd. (NYSE:HLF) looks very strong indeed, which is not what you’d expect to see at a bona fide pyramid scheme. Most analysts see the stock growing earnings faster than 15% per year over the next five years. At that growth rate, today’s valuation of a bit more than 14 times earnings, or less than 13 times free cash flow, looks quite cheap. Add in a modest 1.8% dividend yield, and I think Herbalife Ltd. (NYSE:HLF) shares are priced to move.

In deep… fertilizer
Turning now to the day’s bad news, both of the biggest names in fertilizer got hit with significant negative news this morning, as big banker HSBC announced that it was cutting them to underweight. The cut at Mosaic Co (NYSE:MOS), a single notch from neutral, is bad enough — but the 180-degree turnaround against Potash Corp./Saskatchewan (USA) (NYSE:POT), which got downgraded all the way from overweight to underweight, must really sting.