Wednesday’s Top Upgrades (and Downgrades): SAIC, Inc. (SAI), Analog Devices, Inc. (ADI) and More

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, Wall Street analyst RBC Capital Markets hogged all the headlines as it issued downgrades on defense contractors SAIC, Inc. (NYSE:SAI) and L-3 Communications Holdings, Inc. (NYSE:LLL). On the plus side, the analyst does like one company having nothing to do with defense, though, so let’s check out why one analyst is …

Devising a better future for Analog
Semiconductor maker Analog Devices, Inc. (NASDAQ:ADI) disappointed some investors yesterday, when it reported a fiscal Q1 2013 profit that fell a penny short of estimates (at $0.44 per share). But not everyone’s upset. In fact, after taking a good, hard look at Analog’s results, RBC Capital announced this morning that far from being discouraged by the results, it’s actually raising its price target on the stock to $46.

Why? Well, for one thing, if Analog missed estimates by a penny yesterday, it promised to earn back that penny in the current quarter. According to the company, Q2 profits could be anywhere from $0.49 to $0.55 a share. The midpoint of that range would therefore be $0.52 — or a penny above consensus.

RBC says it’s encouraged by “restocking” and improved capex trends in the company’s industrial market, which accounts for 45% of sales. Nevertheless, the analyst is reluctant to make an actual “buy” call on the stock, noting that “it is too early to measure the magnitude and speed of the recovery in the current cycle.”

Most analysts agree that over the long term, Analog’s probably only going to grow earnings at about 3% per year going forward. That number justifies RBC’s caution. Although Analog has a lot going for it — strong free cash flow that backs up 98% of accounting earnings for one thing, and a $3.2 billion net-cash hoard for another — 3% growth probably won’t be good enough to move the needle on a stock that already costs 22 times trailing earnings. Long story short, I’d still rather be short this stock than long.

SAIC spells “sell”
Meanwhile, if RBC has reservations about Analog Devices, the analyst is downright pessimistic about the chances for defense contractor SAIC. This morning, RBC cut its rating on the stock from “sector perform” to “underperform,” and cut its price target to $11 a share.

Here, too, the analyst is right, and this time, we’ll give RBC kudos for taking the plunge, and actually advising investors to dump an overpriced stock. At an Analog-like P/E ratio of 22 times earnings, SAIC looks overpriced for the 10% annualized growth it’s expected to produce over the next five years. SAIC’s beefy 3.9% dividend yield provides some downside cushion on the stock, and the company’s strong free cash flow — fully 25% better than the $178 million in trailing GAAP earnings it reports — means that stock’s actually a bit cheaper than it looks.

Still, it’s nowhere near cheap enough to be worth buying. It’s not as bad a bargain as Analog, granted, but it’s still a sell.

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

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

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

Top 6 Cities For The Ultra Rich to Live in Comfort

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

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!