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 a pair of upgrades for favorites Apple Inc. (NASDAQ:AAPL) and Pandora Media Inc (NYSE:P). But the news isn’t all good for everyone.
The week opened on a bleak note for shareholders of industrial conglomerate 3M Co (NYSE:MMM), as Morgan Stanley pulled its “overweight” endorsement and downgraded the shares to “neutral.” And yet, 3M shares are up more than 0.8% in early trading, so it doesn’t look like investors are too worried by the downgrade. Should they be?
Actually, yes. They should. After outperforming an ebullient stock market this past year, 3M Co (NYSE:MMM) shares now trade for a pretty pricey 17 times earnings. If that doesn’t sound like much to you, though, consider: Most analysts who track 3M’s progress doubt the company can grow its earnings even 9% per year over the next five years (it’s averaged less than 7% earnings growth over the past five years).
Credit: 3M Co (NYSE:MMM)
Free cash flow at the firm shows that it’s more expensive than it looks already, with cash profit for the past 12 months coming in about 12% below the company’s reported “net income” of $4.4 billion. That means that this stock with the “17 P/E” actually sells for closer to 20 times its actual annual cash profits — despite a projected percentage growth rate of less than half that.
True, 3M Co (NYSE:MMM) does pay a nice dividend, currently yielding 2.3%. But with 10-Year T-bills now paying even more interest than that, 3M’s dividend has ceased to be as big of a draw as it once was. With the stock itself overvalued on both P/E and P/FCF measures, I see little reason left to want to buy it.
Time to play Pandora?
Happier news greeted investors in Pandora Media Inc (NYSE:P) Monday, as a new upgrade from Morgan Stanley (yes, them again) helped to lift the stock more than 3%. According to the analyst, “Pandora is establishing itself as the ‘Netflix, Inc. (NASDAQ:NFLX) of Radio’: a truly disruptive form of content consumption that offers investors the best pureplay exposure to the secular shift of broadcast radio dollars to online channels.”
Morgan Stanley’s particularly impressed with Pandora’s move to integrate its service into automobiles, saying this was “the lone remaining hurdle to competing with broadcasters for meaningful share of radio dollars.” With this hurdle now leapt, Morgan Stanley is ready to recommend buying the stock, and predicts Pandora will hit $24 within a year.
And maybe it will — but it shouldn’t. Automobiles notwithstanding, and comparisons to other overpriced media stocks likewise, there’s little basis for thinking Pandora is worth anywhere near the $4.2 billion market cap that a move to $24-a-share would give it.