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 Whole Foods Market, Inc. (NASDAQ:WFM) and Finish Line Inc. (NASDAQ:FINL) . There’s some good news, too, of course…
Overoptimistic about Under Armour Inc (NYSE:UA)
Well, sort of good news. This morning, Janney Capital Markets announced they’re raising their price target on Under Armour Inc (NYSE:UA). The analyst still doesn’t recommend buying the stock, mind you. But they do think it’s worth a bit ($2) more than they used to — $56 a share, to be precise — and that’s about 11% more than the shares cost today.
But is Janney right?
With Under Armour Inc (NYSE:UA) shares having underperformed the S&P 500 by more than 9 percentage points over the past year, a lot of shareholders will be hoping Janney’s right. Unfortunately, they’re likely to be disappointed. While it’s a fine company, and a fine business in its own right, the sad fact is that Under Armour Inc shares remain woefully overpriced already, and unlikely to gain much in value.
The good news about Under Armour Inc is that the company is finally generating free cash flow again, and indeed, generating more free cash than it currently reports as its “net income” under GAAP. Yet even so, priced at 42 times earnings, and paying no dividend, Under Armour Inc costs about twice what you’d expect a company growing at 21% (as UA is) to go for. As a result, while I’m no longer as pessimistic about Under Armour Inc (NYSE:UA) as I used to be, the simple truth is that Janney’s half-right about the stock: It may be worth more than it used to be, but it’s still not cheap enough to risk buying.
Whole Foods Market, Inc. (NASDAQ:WFM) is half-bad
Now let’s see if we can find more value in the stocks that Wall Street is downgrading. First up is Whole Foods, which got clipped by a downgrade to neutral from Piper Jaffray this morning, and is leading the supermarket sector lower. Piper sees sales growth and margin expansion slowing at the organic foods retailer, and this throws into question Wall Street’s assumption that Whole Foods will be able to grow its profits at 19% per year over the next five years.
When you consider that Whole Foods Market, Inc. (NASDAQ:WFM) was already looking pretty pricey at a P/E of 32, and 19% growth, the suggestion that Whole Foods might actually grow even slower than this is causing some justifiable nervousness among investors.
Once again, what we have here is a truly terrific company, and one with strong cash profits-production, selling for a price that’s just too rich for the company’s performance to support. While I won’t say the stock looks doomed, I do agree with Janney that it costs too much to buy.