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 new buy ratings for MAKO Surgical Corp. (NASDAQ:MAKO) and Lions Gate Entertainment Corp. (USA) (NYSE:LGF). Meanwhile, Lufkin Industries, Inc. (NASDAQ:LUFK) gets a cut.
An improved prognosis for MAKO
Let’s start the news on a bright note, with Mizuho Securities’ just-announced upgrade of MAKO Surgical Corp. (NASDAQ:MAKO). Last week, MAKO Surgical Corp. (NASDAQ:MAKO) won a court-ordered injunction against rival Blue Belt Technologies, forbidding Blue Belt from hiring a former MAKO Surgical Corp. (NASDAQ:MAKO) sales manager, and ordering it to destroy all proprietary MAKO Surgical Corp. (NASDAQ:MAKO) business information in its possession. Today, this news translated into an upgrade to “buy” for MAKO at Mizuho and a new $14 price target on the stock.
With MAKO Surgical Corp. (NASDAQ:MAKO) shares currently costing only $11, this raises the prospect of a 27% profit for investors today. Problem is… it won’t happen.
Winning enforcement of a non-competition agreement against a former employee is all well and good, of course. But it doesn’t change the fact that MAKO remains a deeply unprofitable operation, or that it continues to burn cash at an even faster rate than it reports GAAP losses. Valued at 4.8 times sales (because it has no profits to value it by), MAKO remains a speculative stock only. Until it figures out a way to earn real profits from its business, it’s hard to call the stock an “investment”… or a “buy.”
Analysts upgrade. Lions Gate investors purr
A better buy idea may be found in the stock Argus Research initiated coverage of today: Lions Gate Entertainment Corp. (USA) (NYSE:LGF). Sure, on the surface, the $0.34 a share that Lions Gate Entertainment Corp. (USA) (NYSE:LGF) earned last year doesn’t look like all that much more than the profits MAKO failed to generate. But most analysts agree that Lions Gate Entertainment Corp. (USA) (NYSE:LGF) is in the hunt for bigger profits in years to come.
On average, Wall Street estimates see Lions Gate Entertainment Corp. (USA) (NYSE:LGF) growing its per-share earnings by 22% per year over the next five years. That may not sound like a lot relative to the stock’s 70 “P/E” ratio. But if we assume the company will grow its real cash profits at a similar rate, then the $214 million in free cash flow that Lions Gate Entertainment Corp. (USA) (NYSE:LGF) generated last year gives the stock a price-to-free cash flow ratio of only 15. That’s plenty cheap enough for 22% growth. It’s probably cheap enough to justify Argus’ “buy” rating on the stock as well.