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 upgrades for both AMC Networks Inc (NASDAQ:AMCX) and Bankrate Inc (NYSE:RATE), but a downgrade for LabCorp Holdings. Let’s dive right in.
AMC no longer among the “walking dead”
First up, barely a week has passed since AMC Networks Inc (NASDAQ:AMCX) confirmed that the season finale of The Walking Dead scored a record-high viewership for the series. Now, analysts at B. Riley & Co. think they see signs of life in AMC shares. On Friday, B. Riley removed its sell rating from AMC stock, upgrading the shares to “neutral” and assigning a $61 price target.
Forgive investors if they’re not exactly jumping out of their coffins with enthusiasm for the upgrade, though. After all, AMC already costs more than $65 a share, so a prediction that the shares might be worth $61 a year from now is hardly cause for rejoicing.
But here’s the thing: AMC Networks Inc (NASDAQ:AMCX) investors might have more to get excited about, if they focus less on what analysts are saying and more on the numbers. Last year, AMC generated $550 million in real free cash flow from its business — four times the amount of “GAAP” profit it is permitted to report. This gives the stock a price-to-free cash flow ratio of just 8.6. It suggests that if AMC succeeds in hitting projected targets for profits growth — 21% — the shares could be worth far more than the $65 they currently cost… and deserve a far better rating than just “neutral.”
Bank on Bankrate?
A more enthusiastic upgrade appeared this morning from analysts at Stifel Nicolaus, who had kind words for mortgage and credit card info provider Bankrate Inc (NYSE:RATE). Stifel thinks the stock — currently at $12 and change — should be worth $17 in a year.
But while Stifel’s on the right track here, $17 might be a bit of a stretch. You see, Bankrate may look expensive at 44 times earnings. But with free cash flow that exceeds reported net income by a factor of two, it’s probably more accurate to think of the stock as selling for “20 times cash profits” than as costing “44 times earnings.”
Fact is, with a 22.5% projected long-term growth rate, Bankrate probably is a bit undervalued at today’s prices. It probably is worth buying. Just don’t go banking on the 35% profit that Stifel is promising you. Absent another burst of irrational exuberance in an already overheated market, it’s not going to happen. Bankrate’s worth more than it costs today… but not that much more.