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 pair of new buy ratings for salesforce.com, inc. (NYSE:CRM) and pending acquisition ExactTarget Inc (NYSE:ET). But the news isn’t all good, so before we address those two, let’s check in on the housing industry real quick.
American Woodmark Corporation (NASDAQ:AMWD) has termites
Cabinet maker American Woodmark Corporation (NASDAQ:AMWD) — a big source for cabinetry in both new homes and remodels — beat analyst estimates with a 2-by-4 yesterday, reporting $0.34 per share in Q4 income, or $0.13 more than had been expected. Revenues similarly thumped estimates.
And yet, today we hear that analysts at Griffin Securities are downgrading the stock to “hold.” Is that fair?
Actually, yes, it just might be, for while there’s no denying Woodmark turned in a terrific quarter, the valuation on this stock is getting just a wee bit pricey.
Based on trailing-12-month earnings, Woodmark shares now sell for a valuation north of 53 times earnings. Free cash flow at the company — which is great, by the way, at $18.4 million, or nearly twice GAAP “profits” — still leaves Woodmark shares selling for more than 28 times earnings. That seems a bit much to be paying for a firm expected to grow profits at only 8% per year over the next five years. Fact is, even if Woodmark were able to maintain the 26% pace of sales growth it reported in Q4, and keep it up quarter after quarter, for the next five years straight, I’d still think 28 times free cash flow is only fair valuation for the shares.
Given that almost no company ever manages to maintain that kind of growth pace for long, however, there’s just one, inescapable conclusion: American Woodmark shares are overpriced.
Good news for ExactTarget shareholders
Somewhat better news greeted investors in online marketing firm ExactTarget Wednesday — although not quite on the order of the 52% leap in share price that followed yesterday‘s news of its buyout by salesforce.com, inc. (NYSE:CRM).
Responding to news of the buyout, analysts at Deutsche Bank upped their rating on ExactTarget Inc (NYSE:ET) to “hold,” suggesting a) the analyst was wrong about the stock having been overvalued before Salesforce decided to buy it, and also b) that Deutsche is pretty sure the sale will be consummated, and ExactTarget shares won’t lose their buyout premium.