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 upgrades for both Quest Diagnostics Inc (NYSE:DGX) and Panera Bread Co (NASDAQ:PNRA). The news isn’t all good, however, so before we get to those two, let’s find out why one analyst is…
Short-circuiting Tesla’s run
Amidst all the enthusiasm (shares up 14%) over Tesla Motors Inc (NASDAQ:TSLA)’s announcement yesterday that it achieved a 22% “non-GAAP gross margin” in the second quarter, one analyst is striking a sour note this morning. Reminding investors that indeed, yes, Virginia, valuation still matters, Barclays Capital announced this morning that it’s downgrading Tesla Motors Inc (NASDAQ:TSLA) shares to “equalweight.”
Personally, if I were writing the report, I’d probably have downgraded even further than that. But at the very least, Barclays looks to be on the right track here.
Why? Let’s look at just one little detail in Tesla Motors Inc (NASDAQ:TSLA)’s report, which seems to me just a wee bit hinky. According to Tesla Motors Inc (NASDAQ:TSLA), the second quarter saw the company hit 22% gross margins for the first time — if, that is, you exclude the effects of not only ZEV credits, but also all “costs related to deliveries of Model S during the period not recognized in automotive cost of revenues but recorded in operating lease vehicles, net.”
One effect of this caveat is to remove $123.9 million in costs from the “cost of automotive sales” line in Tesla Motors Inc (NASDAQ:TSLA)’s income statement. One more important effect is that it permits Tesla Motors Inc (NASDAQ:TSLA) to claim it achieved a 22% “non-GAAP” gross margin, while a more traditional calculation of gross margin might show the company to be earning negative 5.3% gross margins. Combine this fact with the fact that Tesla showed negative operating cash flow for the second time in three quarters during the second quarter — guaranteeing negative free cash flow for the company — and at the very least I would say that “caution” should be the watchword for Tesla investors.
Barclays’ downgrade is appropriate.
Quest Diagnostics Inc (NYSE:DGX) for bargains
Happier news awaited investors in medical lab test company Quest Diagnostics Inc (NYSE:DGX) this morning, as analysts at Maxim Group announced an upgrade to “buy,” sending shares up 1.8%. Maxim sees Quest Diagnostics Inc (NYSE:DGX) shares hitting $73 within a year. I don’t know about that, but I do agree that the shares are undervalued.