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
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.
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.