Monday’s Top Upgrades (and Downgrades): Dean Foods Co (DF), Micron Technology, Inc. (MU), Charles Schwab Corp (SCHW)

Consider: Free cash flow at Dean is impressive — $212 million over the past year, versus less than $160 million in reported GAAP earnings. And yet, even if you credit Dean for all the cash it’s expected to make from WhiteWave, and adjust the stock’s future enterprise value down to about $5.6 billion, that still leaves the company selling for an enterprise value-to-free cash flow ratio north of 26. Even the 16% earnings growth the company is expected to produce over the next five years seems too little to justify the stock price.

Long story short, KeyBanc may like the stock, but I’d rather be short Dean than long.

Talking about Chuck
If there’s one stock recommendation today that I do like, it has to be Bernstein’s recommendation to buy Charles Schwab Corp (NYSE:SCHW). A resurgent stock market has investors finally willing to buy stocks again, and that’s a long-ish-term trend that’s got to be good for the market’s premier discount broker. What’s more, Bernstein thinks that if interest rates ever get around to rising again, and return to “normal” levels, then the combination of brokerage commissions and more money from investing customer funds for interest could lift “Chuck” to about $2 a share in annual earnings… eventually.

So much for the future, but what about the present? Personally, when I look at Schwab’s numbers today, I see a company with a $21.2 billion market cap, $1.1 billion in annual free cash flow, and about a 19 times price-to-free cash flow ratio. That doesn’t look at all unreasonable given Schwab’s projected 18% annual earnings growth rate, and its modest 1.5% dividend yield.

As a result, although I’m ambivalent on Bernstein’s suggestion that interest rates will soon rise, boosting Schwab’s net interest margins and lifting the stock 40% to a $23 target price, I do believe the stock is fairly priced — or even a bit cheap — based on the numbers Schwab is producing today. Upside potential aside, I see little downside in the stock, and agree with Bernstein that Charles Schwab is likely to outperform the market.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Dean Foods Company and WhiteWave Foods.

The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

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