I think it is, but to be honest, I think this stock is quite a bit more attractive than 3M. Here’s why: Lear Corporation (NYSE:LEA)’s free cash flow isn’t great. At just $331 million for the past year, it’s a far cry from the $1 billion in net profits the company has claimed to have earned over the period. Still, $331 million is enough to give the stock a 17.5 price-to-free cash flow ratio. That’s cheaper than 3M, and Lear Corporation (NYSE:LEA) offers the added benefit of a faster rate of estimated growth. Analysts peg it at better than 14% over the next five years, which, when added to the company’s 1% dividend yield, gets Lear Corporation (NYSE:LEA) stock close to fair valuation.
Meanwhile, traditional P/E investors can’t help but be attracted by the PEG ratio you get from dividing Lear Corporation (NYSE:LEA)’s 5.1 P/E by its 14% growth rate.
All in all, I don’t think the stock’s quite as cheap as its inflated earnings make its P/E ratio appear. But it’s far from a lost cause. If Lear Corporation (NYSE:LEA) can grow as expected, and maybe produce just a bit more cash from its business, the stock could reach UBS’ $70 price target — and then surpass it.
How healthy is Whole Foods?
Finally, we come to Whole Foods Market, Inc. (NASDAQ:WFM) — like Lear, downgraded to a variant of “neutral,” but with no reduction in price target. (This time, it’s Cantor Fitzgerald doing the downgrading, and retaining a $54 price target on the stock.)
I admit to being conflicted about this one, because Whole Foods Market, Inc. (NASDAQ:WFM) is certainly a superior business. The problem is that its share price is similarly superior — as in, too high to justify. The stock costs 40 times earnings today — more, if you value it on free cash flow, which is currently flowing in at the rate of about $0.94 for every $1 in claimed “net income.”
Maybe the stock can hold on to this premium valuation if Whole Foods Market, Inc. (NASDAQ:WFM) can wow investors with its earnings report Wednesday. Longer-term, though, I just don’t think the company’s projected growth rate — 18% annually according to the analysts — is fast enough to justify a 40 times earnings valuation.
Long story short, I’d probably rather be short this one than long.
The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends 3M and Whole Foods Market (NASDAQ:WFM). The Motley Fool owns shares of Whole Foods Market.
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