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Monday’s Top Upgrades (and Downgrades): Crocs, Inc. (CROX) and More

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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 downgrades for both Children’s Place Retail Stores, Inc. (NASDAQ:PLCE) and Boingo Wireless Inc (NASDAQ:WIFI), but a higher price target for Crocs, Inc. (NASDAQ:CROX). Don’t mind the gators, though. Let’s wade right in, beginning with a look at why…

Crocs, Inc. (NASDAQ:CROX)Crocs are stylin’
An earnings beat by plastic shoemaker Crocs last week is translating into a higher price target on Wall Street this morning. On Thursday, Crocs announced 10% fourth-quarter sales growth on the back of a big jump in European and Asian sales. Analysts at Imperial Capital say the stock “is well positioned to generate double-digit sales and EBITDA growth over the coming years given continued efforts to broaden its product assortment, aggressively grow its specialty retail store footprint, further develop its Internet business, and move into new geographies globally.”

Imperial points out that Crocs sells for a “significant” discount to the P/Es found at other shoemakers. (NIKE, Inc. (NYSE:NKE), for example, costs more than twice Crocs’ 10.2 P/E, while the average company in this industry costs about 12 times earnings.)

Personally, I wasn’t thrilled with Crocs’ report, which showed weakened free cash flow — not a trend I like in stocks that I own. Also, at a 10.2 P/E valuation, and a 10% projected growth rate, it’s hard to see much value here. But with Crocs’ balance sheet showing $304 million more cash than debt, and Imperial projecting 12% earnings growth both this year and next, Crocs could still surprise us. The cash balance means Crocs’ ex-cash P/E ratio is about 24% less than its unadjusted P/E. And the growth rate — assuming Imperial is right about it — suggests Crocs could be growing about 20% faster than most investors are counting on.

Result: The potential for significant outperformance in the stock, and a higher price target from Imperial.

Children’s Place is lowered
Less optimistic is the new rating on Children’s Place this morning, as it gets downgraded to neutral by Janney Montgomery Scott. Janney warns that “lower-end consumers” are getting pinched by higher taxes and stagnant earnings. Combine this with “aggressive sectorwide discounting” and “deeper” promotions by rivals and Children’s Place alike, and Janney sees the company ending this year with only $3.48 per share in profit — down 5% from what the analyst was previously projecting.

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