T MOBILE US INC (TMUS), Krispy Kreme Doughnuts (KKD): Monday’s Top Upgrades (and Downgrades)

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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 T MOBILE US INC (NYSE:TMUS) and Krispy Kreme Doughnuts (NYSE:KKD), but a lower price target for Annaly Capital Management, Inc. (NYSE:NLY). Let’s dive right in, beginning with why…

T MOBILE US INC (NYSE:TMUS)

T MOBILE US INC (NYSE:TMUS) gets put on hold (and that’s a good thing)
Last week’s news that T MOBILE US INC (NYSE:TMUS) has begun adding net new subscribers for the first time in four years — and begun stealing customers from AT&T to boot — is forcing a bit of a rethink on Wall Street. This morning, analysts at Oppenheimer relented on their “underperform” rating, and upgraded T MOBILE US INC (NYSE:TMUS) shares to “perform,” essentially a hold rating.

Why? According to Oppenheimer, T MOBILE US INC (NYSE:TMUS) has just about completed phase 1 of its LTE network upgrades, which could slow down its costs-growth. The analyst also likes the fact that customer churn is down at the company, and to top it all off, the valuation doesn’t look half bad. Two of those comments are valid. Unfortunately, the point about valuation isn’t one of them.

By all indications, business is indeed turning around at T MOBILE US INC (NYSE:TMUS). And yet, the company remains a money-losing operation, and while costs may come down in the future, right now, T-Mobile’s cash flow statement is still showing negative free cash flow at the company.

Fact is, even if you take Oppenheimer’s statement at face value, and assume T-Mobile will reduce capital spending to, say, the $2.8 billion annual level it was spending from 2010 to 2012, that still only gets T-Mobile up to perhaps $800 million to $900 million in annual free cash flow. Factoring in the company’s debt load, that’s a 27 times free cash flow valuation at best. I think that’s too high a price to pay for the 12% annualized growth that analysts expect T-Mobile to produce over the next five years. Long story short, while I’m a very satisfied T-Mobile customer myself… I would not buy the stock.

Don’t get upset. Here… have a Krispy Kreme Doughnuts (NYSE:KKD)
Is there a better bargain out there? Actually, maybe, yes. Or at least, Janney Capital Markets thinks it has found one. This morning, Janney announced it is upgrading shares of Krispy Kreme Doughnuts (NYSE:KKD) to “buy.”

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