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 new buy rating for Bloomin’ Brands Inc (NASDAQ:BLMN), and an upgrade for Ann Inc (NYSE:ANN). But the news isn’t all good, so before we get to those two, let’s take a look at why one analyst thinks that…
Arcelor Mittal is smelting down
The day opened on a sour note for shareholders of world’s-largest steel maker ArcelorMittal (ADR) (NYSE:MT), which this morning got hit with a downgrade to “underweight” by investment banker Morgan Stanley. Although down 15% over the past year, ArcelorMittal (ADR) (NYSE:MT) shares have gained 9% since their lows earlier this month. Morgan Stanley, however, believes these games are “unsustainable,” and that the shares are due to fall again.
Unprofitable, and trading for 35 times trailing free cash flow, ArcelorMittal (ADR) (NYSE:MT) shares look richly valued today. Analyst expectations for future earnings growth vary widely, ranging from uber-optimistic predictions of 98% annual earnings growth, to declines averaging more than 13% per year, every year, for the next five years. The midpoint on these expectations, however, is a consensus expectation of approximately 20% average annual earnings growth over the long term. Impressive as that may be, it’s probably not enough to justify a 35 times multiple to free cash flow.
Morgan Stanley is right to be nervous, and right to downgrade the shares.
Turning now to happier news, shareholders of Bloomin’ Brands Inc (NASDAQ:BLMN) are seeing the shares turn green this morning, as Bloomin’ leads the market up on the back of a new buy rating from British banker Barclays.
Barclays initiated the stock at “overweight” Tuesday, assigning Bloomin’ Brands Inc (NASDAQ:BLMN) a $29 price target. While perhaps a tad optimistic, I think Barclays is on the right track here.
Bloomin’ Brands Inc (NASDAQ:BLMN) shares cost about 24 times earnings today. They boast superior free cash flow — about $181 million, or roughly 50% more than reported net income. This strong free cash flow is counterbalanced by a heavy debt load, however, resulting in an enterprise value-to-free cash flow ratio of 23 — roughly equal to the stock’s P/E. Both these numbers seem too high, given that Bloomin’ Brands Inc (NASDAQ:BLMN) brands pays no dividend, and is only expected to grow at approximately 17% per year over the long term.
The valuation’s not completely out of whack, however. While I wouldn’t buy Bloomin’ Brands at today’s price, I would keep an eye on the stock as a potential buy on a pullback.
How far can ANN run?
Last but not least, we come to a stock I’ve mentioned positively in the past. Ann Inc (NYSE:ANN) is benefiting from an upgrade to buy from investment banker Janney Montgomery Scott this morning. StreetInsider.com is quoting the analyst praising “improved product” and “attractive valuation” at Ann Inc (NYSE:ANN), and predicting the stock could rise 16% in price over the next year (to $38 a share).