This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, as earnings season gets under way in earnest, analysts are busy tweaking their price targets to track changes in earnings and guidance. We’ll be taking a look at three such tweaks today, for popular stocks: SanDisk Corporation (NASDAQ:SNDK), Johnson & Johnson (NYSE:JNJ), and HollyFrontier Corp (NYSE:HFC).
Good news first
Let’s take these in order, beginning with SanDisk Corporation (NASDAQ:SNDK), which is up more than 2% today after reporting $1.06 per share in profits on $1.5 billion in revenues — beating analyst estimates on both counts. Speaking of counts, the number of analysts upping their price targets on the stock had reached five at last count, with Needham & Co. leading the pack with a projection of $80 a share.
That target is close to $20 above where the shares now trade, suggesting a potential 31% profit in the stock. But can investors realistically hope to capture those profits?
Yes, it very well might. SanDisk Corporation (NASDAQ:SNDK) turned in a truly magnificent quarter yesterday. Thanks to the beaucoup profits, the company’s P/E ratio now stands just a hair below 21 — versus the near-31 times earnings valuation still being shown on Yahoo! Finance’s key statistics page. If the company succeeds in hitting the 28% annualized, long-term growth estimate that analysts have it pegged for, 21 times earnings is an absolute steal of a deal on this stock. Plus, with trailing free cash flow now clocking in at $940 million — versus “only” $718 million in GAAP net earnings — this stock’s arguably even cheaper than it looks.
Fact is, at a price-to-free cash flow ratio of less than 16 today, I think SanDisk Corporation (NASDAQ:SNDK) will be a great bargain if the stock even posts growth in the upper teens over the next five years. If it gets into the 20-percent range, though, look out … above!
Paging Dr. Profit
In contrast, I’m less enthused about Johnson & Johnson (NYSE:JNJ), the buy rating Argus Research is still assigning it, and the new $104 price target Argus has suggested.
Don’t get me wrong. Johnson & Johnson (NYSE:JNJ)’s report yesterday was fully as good as SanDisk Corporation (NASDAQ:SNDK)’s with revenues ($17.9 billion) and per-share profit ($1.32) both beating expectations. My objections to this stock center less on the success of the business, and more on the price that investors are being asked to pay to own a piece of that business.
Simply put, Johnson & Johnson (NYSE:JNJ) shares cost too much. Based on the most recent data the company has provided us (which does not include free cash flow data, tsk, tsk), Johnson & Johnson shares now trade for nearly 20 times earnings. That’s quite a lot to pay for a company that few analysts see growing earnings at much more than a 6% annualized rate over the next five years.
In fact, even Johnson & Johnson (NYSE:JNJ)’s generous 2.9% dividend yield isn’t enough to entice me to buy these shares. As great a company it may be, Johnson & Johnson (NYSE:JNJ)’s stock price is a prescription for portfolio underperformance.
And speaking of underperformance…
One of the very few stocks getting hit with a reduction in price target today is oil refiner HollyFrontier Corp (NYSE:HFC). Over at Imperial Capital, analysts just cut $10 off their target price for Holly shares. (And Holly didn’t even report earnings yesterday).