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 J.C. Penney Company, Inc. (NYSE:JCP) and Electronic Arts Inc. (NASDAQ:EA). But the news isn’t all good, so before we get to those two, let’s take a quick look at why…
ValueClick Inc (NASDAQ:VCLK) got toggled off
Google Inc (NASDAQ:GOOG)‘s mini-rival in the market for online ads, ValueClick Inc (NASDAQ:VCLK), beat earnings by a couple of cents in yesterday’s earnings report. Unfortunately, this good news isn’t translating into good grades on Wall Street, as a whole series of analysts cut their ratings on the stock to various flavors of “hold.” Stephens and Cantor Fitzgerald, Craig-Hallum and Raymond James — one and all, the analysts are downgrading ValueClick today — but why?
Well, let’s see here. ValueClick Inc (NASDAQ:VCLK) reported $0.42 per share in profits for the first quarter. That’s a good start, but the news gets worse from there. Earnings in the current fiscal second quarter are expected to range from $0.38 to $0.40 per share, versus $0.41 estimated. Revenues, which already fell a hair short of estimates in the first quarter, are now believed likely to miss second-quarter targets by more than 5%.
In short, it looks like things are slowing down for ValueClick Inc (NASDAQ:VCLK), and for a stock that was already only expected to grow earnings at 13% per year — despite carrying a P/E ratio of more than 19 — that’s not good. It is not, however, a reason to sell the stock, and I’ll tell you why.
Whatever its GAAP earnings numbers may say, ValueClick Inc (NASDAQ:VCLK) is in fact a whole lot more profitable than it looks. Last year, the company generated $138 million in positive free cash flow — 35% more than it reported as net earnings under GAAP. This trend accelerated in the first quarter of this year, with ValueClick generating $48.1 million in positive free cash flow — 83% more than its reported earnings. By my calculations, the company’s now generating real cash profit at the rate of nearly $140 million per annum, and ValueClick Inc (NASDAQ:VCLK) stock now costs only about 14.5 times that free cash flow.
That makes the stock, if not exactly cheap, then not nearly as expensive as it looks. So while I still wouldn’t go out and buy it, I do think it’s safe to hold.
J.C. Penney is doing it… wrong
Now let’s move on to the more unabashedly “good” news… in a manner of speaking. Yesterday, J.C. Penney Company, Inc. (NYSE:JCP) preannounced its sales for the fiscal first quarter, warning investors to expect about a 16% year-on-year decline from first-quarter 2012 levels.
On the face of it, that’s not very good news at all. On the other hand, with the news out of the way, analysts may be thinking the stock has room to surprise us to the upside when its official results come out on May 16. Analysts at Maxim Group appear to be adhering to this line of thinking, and this morning, they upgraded Penney shares from sell to hold.