Quiksilver, Inc. (ZQK), Pfizer Inc. (PFE): Tuesday’s Top Upgrades (and Downgrades)

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 big upgrade for Quiksilver, Inc. (NYSE:ZQK), an even bigger downgrade for Pfizer Inc. (NYSE:PFE), and for Polaris Industries Inc. (NYSE:PII), a new “buy” rating. Let’s start with that one.

Polaris lights up the night
Somebody must have wished upon a star last night, for investors in Polaris Industries Inc. (NYSE:PII) Industries awoke this morning to find their stock “initiated at buy” by Swiss megabanker UBS. Shares are already up 1.2% in response — nearly three times the gain on the Dow. But are these gains deserved?

Maybe. Sure, priced at 21 times earnings, Polaris Industries Inc. (NYSE:PII) doesn’t look particularly cheap. But this stock has several things in its favor, which make it cheaper than it looks. For one, the company’s got no net debt — to the contrary, its bank account is brimming with nearly $275 million more cash than debt.

Free cash flow at Polaris Industries Inc. (NYSE:PII) is a stellar (pun intended) $342 million, or 4% more than the “net income” that the company claims under GAAP. Finally, the stock is projected to grow its profits at nearly 16.7% and pays a modest 1.8% dividend yield — for a total estimated return of 18.5% annually.

Priced today at an enterprise value-to-free cash flow ratio of 18.3, I see the stock as modestly underpriced and one of the better values available in today’s generally overpriced stock market.

Haste makes waste at Quiksilver
Now if only I could say the same thing about today’s other buy recommendation. Tuesday also saw Quiksilver, Inc. (NYSE:ZQK) upgraded to “buy” at analyst B. Riley, with a new price target of $9.25. But here, the picture’s nowhere near as pretty as Polaris.

Unprofitable today, and burning cash even faster than it can report GAAP losses, Quiksilver, Inc. (NYSE:ZQK) experienced $75 million in negative free cash flow over the past year — and with a balance sheet showing it burdened with $766 million more debt than cash, that’s not a trend Quiksilver, Inc. (NYSE:ZQK) can long endure.

Even the stock’s fans on Wall Street see Quiksilver, Inc. (NYSE:ZQK) earning only enough to bring its forward P/E ratio down from “infinity” to 28 times earnings based on next year’s earnings prognostications. But with these same optimistic analysts saying earnings over the next five years will only grow at a 15% annual clip, that multiple to earnings — should Quiksilver, Inc. (NYSE:ZQK) even earn anything — still seems to high to justify a “buy.”