Thursday’s Top Upgrades (and Downgrades): Honeywell International Inc. (HON), Tractor Supply Company (TSCO), United Natural Foods, Inc. (UNFI)

Page 1 of 2

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 downgrades for Tractor Supply Company (NASDAQ:TSCO) and United Natural Foods, Inc. (NASDAQ:UNFI), but a big hike in price target at Honeywell International Inc. (NYSE:HON).

Good news first
Earnings Analysis: Honeywell International Inc. (NYSE:HON)Let’s tackle that one first. Honeywell shares are surging this morning — up more than 1%, or three times more than the Dow — on reports that the company has just reaffirmed that it can hit its growth targets for this year. Management says it’s on track to achieve 4% to 5% sales growth, and 6% to 11% profits growth in fiscal 2013, ending the year with per-share profits of as much as $4.95.

This prospect convinced analysts at Stifel Nicolaus to add $6 to their price target on the stock, which Stifel now thinks could hit $80 by year-end. There’s just one problem with that analysis, though.

It’s wrong.

Priced at 19.5 times trailing earnings, Honeywell International Inc. (NYSE:HON) shares already look richly priced for the 10%-plus earnings growth analysts expect it to produce over the next five years — growth that already looks to be at the high range for what Honeywell’s saying it can achieve. Free cash flow at the company, at $2.6 billion, lags reported net income by 10%, showing Honeywell to be even more expensive than it looks.

Indeed, even if all goes perfectly, and Honeywell maxes out its profits guidance this year, the stock would still cost more than 14.5 times earnings — overpriced for 10% growth and a 2.4% dividend yield. And that’s the best case scenario. Worse case, Honeywell International Inc. (NYSE:HON) falls short on its growth promises, and looks even more overpriced than it already does. To my Foolish eye, this argues in favor of a decline in stock price — not a surge to $80 and beyond.

Tractor Supply stalls
Meanwhile, the news for stocks Wall Street does not like is even worse. Tractor Supply Company (NASDAQ:TSCO), for example, just got hit with a downgrade (to “hold”) from Feltl & Co. This is strange, because according to StreetInsider.com, Feltl actually thinks the stock could rise to $112 a share over the course of the next 12 months.

It might. With 17% earnings growth projected for this year, and for each of the next five years, Tractor Supply looks likely to keep investors happy, and keep on keeping them happy, as earnings rise higher and higher. But what if the momentum stalls?

Already, Tractor Supply shares look overvalued at 27 times earnings. The dividend payout here is minimal, just 0.8%. Free cash flow is weak, with Tractor Supply Company (NASDAQ:TSCO) generating only about $0.82 in real cash profit for every $1 it claims to be “earning” under GAAP. So long as the company maintains its growth pace, I suspect investors may be willing to ignore the obvious overvaluation. But if Tractor Supply misses the gas pedal just once, investors are going to slam on the brakes.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!