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 a better price target for Pandora Media Inc (NYSE:P) shares, and an upgrade for Lumber Liquidators Holdings Inc (NYSE:LL). But the news isn’t all good, so before we get to those two, let’s find out why one analyst is…
Pushing the eject button on Lockheed Martin
We begin the day’s news on a down note, as analysts at UBS cut Lockheed Martin Corporation (NYSE:LMT) shares to “sell.” Details on the reasoning for this downgrade aren’t widely known just yet, but it may have something to do with a Reuters report out over the weekend, which suggests Lockheed Martin Corporation (NYSE:LMT)’s F-35 Joint Strike Fighter may be too expensive to win a multibillion-dollar Korean fighter jet contract it’s been competing for.
Reuters is giving Boeing the edge in winning Korea’s “F-X III” fighter contract competition, suggesting it will beat out both Eurofighter’s Typhoon and Lockheed Martin Corporation (NYSE:LMT)’s F-35. Meanwhile, a shipment of Lockheed F-16s, destined for Egypt, is being held up by Pentagon officials worried about the implications of continuing to send arms to a government that’s increasingly turning its guns on its own people.
These twin developments threaten to rob Lockheed of billions of dollars in expected revenue. And with Lockheed Martin Corporation (NYSE:LMT) already expected to be facing a long-term growth rate in the single digits, but selling for a P/E in the double digits, it’s arguable that Lockheed Martin Corporation (NYSE:LMT) stock is already too expensive to buy. A shortfall in revenues — and earnings — could cause the stock’s sub-14 trailing P/E to rocket sharply in future years, making a cheap-seeming stock look much more expensive.
UBS’ decision to hedge against that risk today, before the overvaluation becomes apparent, may be the right move.
Good quality Lumber?
Moving on to happier tidings, shares of building supplies specialist Lumber Liquidators Holdings Inc (NYSE:LL) are getting a boost today from an upgrade to “buy” at Jefferies & Co. According to StreetInsider.com, Jefferies is predicting a “long runway” of profits growth at the flooring retailer, which is benefiting from “housing tailwinds.”
Jefferies had better be right about that, though, and the runway had better be very long indeed, if it’s to justify the valuation on these shares.
Priced at upwards of 43 times earnings today, and selling for more than 49 times its inferior free cash flow, Lumber Liquidators Holdings Inc (NYSE:LL) is only expected to grow its earnings at about 18% per year over the next five years. Don’t get me wrong — that’s a respectable growth pace. But it’s not nearly fast enough to support a 40-ish-times-earnings valuation on the stock. One huff, one puff from Mr. Market, and Lumber Liquidators Holdings Inc (NYSE:LL) shares could come tumbling down.
The trouble with Pandora
And speaking of overpriced stocks — Pandora Media Inc (NYSE:P). Ever the optimist, banker Needham & Co. announced this morning that it’s increasing its price target 25% on Pandora Media Inc (NYSE:P)’s already buy-rated shares, and predicting Pandora Media Inc (NYSE:P) will hit $25 within a year.