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 TiVo Inc. (NASDAQ:TIVO) and Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR). But the news isn’t all good, so before we get to those two, let’s take a quick look at why today is a…
Scary day for Monster Beverage
Missed earnings estimates and renewed reports of health concerns about its energy drinks translated into a downgrade for shares of Monster Beverage Corp (NASDAQ:MNST) Thursday. Analysts at Gabelli & Co. cited slowing U.S. energy drink sales, losses on business abroad, and negative publicity as all being factors contributing to their decision to cut Monster Beverage Corp (NASDAQ:MNST)’s rating from “buy” to “hold.”
But if all those reasons aren’t enough for you, here’s one more: Monster Beverage Corp (NASDAQ:MNST) costs too much.
Priced at 29 times earnings, even the 19% projected earnings growth rate isn’t fast enough to make Monster Beverage Corp (NASDAQ:MNST) shares worth buying. Add in the fact that the company’s not living up to analyst expectations already, and the case for downgrading the stock only gets stronger.
Now, factor in the fact that the profits Monster Beverage Corp (NASDAQ:MNST) does earn aren’t all that high in quality — free cash flow last year fell about $95 million short of the $340 million in “net income” the company claimed to have earned — and there’s really no reason to risk buying these shares. The value just isn’t there.
Green Mountain looking greener
Preferring the tried and true over the canned and new, investors are bidding up shares of coffee maker Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) today — up an astounding 26% as of this writing. Why?
A big second-quarter earnings beat yesterday evening probably had something to do with it. Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) reported $0.93 earnings per share Wednesday, or $0.20 more than analysts had it pegged for. Management also promised to deliver as much as $3.15 per share in profit for this year, or $0.31 better than estimates — so the company seems to think the second quarter won’t be the only one in which it “beats earnings” this year.
And yet… I still can’t agree with analyst Dougherty & Company’s decision to resume coverage of the stock with a buy rating, or with Lazard’s decision to lift its price target to $95. Even if Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) succeeds in growing its profits at 19% per year over the next five years, as analysts project it will, the stock’s 32-times-earnings valuation more than prices in this prospect. Plus, while not performing as poorly as it once was, Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) still isn’t generating as much free cash flow as it claims to be “earning” under GAAP.