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 higher price targets for both Zebra Technologies Corp. (NASDAQ:ZBRA) and Stanley Black & Decker, Inc. (NYSE:SWK). Unfortunately, it’s not all good news. So let’s start with a quick rundown of why…
Angie’s off the buy list
Angie’s List Inc (NASDAQ:ANGI) shares surged 24% in Thursday trading, responding well to the online contractor-evaluator’s confirmation that it beat earnings estimates in the fourth-quarter with a $0.04-per-share profit — when a $0.02-per-share loss had been expected. Angie’s promise of $51 million or more in fiscal 2013 revenues — also ahead of estimates — didn’t hurt, either.
Nevertheless, the quick turnaround in sentiment over Angie’s List has one analyst thinking now is a great time to get while the getting’s good. As StreetInsider.com related, Barrington worries that: “given this dramatic price increase … the stock could trade sideways or down in the near term due to profit taking.”
Worse, Angie’s still expected to lose money next year. Barrington estimates the company could report as much as a $0.15-per-share loss in the current first quarter “due to seasonality.” Barrington is therefore downgrading to “market perform,” reasoning that investors should take profits now, then wait on the sidelines for another buying opportunity.
Well, they’re half right. Angie may have made a small profit in the fourth quarter, but the fact remains that the company remains a deeply unprofitable operation year-round. Full-year net losses at Angie are still pushing $53 million. The rate of negative free cash flow, meanwhile, topped $43 million, and is still rising. Considering the market is currently valuing this cash-burning machine at nearly $1 billion, I’d say that if you were lucky enough to make a profit on Angie yesterday, the better advice is to take profits now… and don’t look back.
A second company reporting positive earnings news this week was Zebra Technologies, a maker of RFID “smart-label” printers that reported healthy $0.68-per-share profits Tuesday, when the market was looking for only $0.67. After crunching the numbers, Imperial Capital announced today that it’s upping its price target on Zebra to $45… but still not recommending the stock.
And once again — they’re half right about that.
Priced at nearly 19 times earnings, but projected to grow these earnings at barely 8% annually over the next five years, Zebra looks horribly overvalued at first glance. Read between Zebra’s lines, of course, and you’ll find the company generates lots of cash ($161 million last year)as well as holding lots of the green stuff (about $390 million) in the bank.
That still only works out to an enterprise value-to-free cash flow ratio of 12, however, and given the slow growth rate and lack of any dividend payment, it’s still not quite enough to justify buying Zebra. In fact, considering that the midpoint of Zebra’s guidance this week actually fell a bit short of expectations, I wouldn’t be at all surprised to see the stock fall back a bit.
Stanley could power higher
And finally, we close with a real rarity during earnings season: a stock that’s getting a price target hike despite not having any earnings news whatsoever to report.