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 include an upgrade for Bed Bath & Beyond Inc. (NASDAQ:BBBY) , but downgrades for both OfficeMax Incorporated (NYSE:OMX) and Tiffany (TIF) . Let's dive right in, beginning on a bright note as...
Bed, Bath wakes up on the right side Thursday dawned bright and sunny for Bed Bath & Beyond shareholders. For, rolling out of bed and online, what did they find but an analyst at Oppenheimer, upgrading their shares to "outperform."
According to Oppy, shares of Bed, Bath that currently cost just $59 and change could rise to $71 within a year. If the analyst is right, that would make for a clean 20% profit. But is Oppy right?
Actually, maybe, yes. Here's why: At first glance, Bed, Bath shares don't look particularly cheap or expensive, either one. Priced at 13.6 times earnings, the stock costs a bit more than the average home furnishings chain. Most companies in this industry actually cost a bit closer to 13.1 times earnings. On the other hand, though, Bed, Bath isn't your typical home furnishings store. To the contrary, it's probably one of the best in the business, boasting above-average growth rates (12.3%), strong free cash flow that backs up nearly 93% of reported net income, and a robust balance sheet boasting $785 million in cash, and no debt worth mentioning.
Plugging these numbers into my calculator, I come up with an enterprise value-to-free cash flow ratio of 12.5 for Bed, Bath, which is right in line with the firm's projected rate of growth. In other words, what we have here is a great company selling for a good price -- and a price that should rise over time as the company continues to execute. Cautious investors may still want to wait for an out-and-out discount on the stock. But for an operation as good as Bed, Bath is, there's no guarantee a better price will ever emerge.
OfficeMin Speaking of great retail operations... OfficeMax isn't one. The office supplies superstore earns just 1.7% operating margins on its sales, a number almost literally 10 times smaller than the 15.5% that Bed, Bath books.
According to investment banker KeyBanc, this number simply isn't good enough to justify buying more of OfficeMax , which needs to show "improvement in the core office supply business" to become buyable -- that, or merge itself into a better operator. KeyBanc cut its rating on OfficeMax to "hold" this morning, arguing that "major balance sheet catalysts have played out."