Sometimes an analyst issues a revised outlook or changes his/her rating, but does not inform investors of the reasons behind the call. These typically move stocks on the call alone; the price target and outlook. However, some analysts provide detailed reasons behind the call; these are the outlooks that should be noted and used as part of your fundamental research. Therefore, I am taking a look at three key downgrades on Thursday and determining the best way to utilize the information.
|Ulta Salon, Cosmetics & Fragrance, Inc.||(NASDAQ:ULTA)||Credit Suisse||Neutral|
Telecom Creates Industry Fears After Earnings
Shares of CenturyLink fell more than 20% after the company missed Q4 earnings expectations, issued weak guidance, and cut its dividend. The company set itself up for the perfect analyst attack, and as a result, six major analysts downgraded the stock.
Citi, perhaps the harshest with its downgrade, downgraded the stock to Neutral due to its dividend cut. The firm notes that the cut indicates that telecom companies need to maintain balance sheet flexibility during a slow growth period. The firm also said that the company’s guidance also implies free cash flow that is well below its expectations.
My take is that although CenturyLink’s decision to cut its dividend is bad for short-term investors, it was necessary with the company returning a yield of almost 9%! CenturyLink is now a fair value stock, and despite all the negatives the company did announce a $2 billion buyback program and Fitch upgraded its debt from BBB- to BB+, which could have long-lasting effects. Therefore, I’d wait a few days, maybe a couple weeks, but with expectations being lowered, I think it would make a good Buy.
A Strange Executive Resignation Leaves Many Wondering
Perhaps one of the weirdest stories of the day was that of CEO Chuck Rubin and his decision to leave Ulta to become the CEO of Michaels Stores. Ulta has been one of the best retailers/stocks in the market over the last five years. The company has great growth prospects, continues to grow organically, and has zero debt. Yet the CEO decides to leave for Michaels, a company that is almost the complete opposite for reasons that are unknown.
I think it’s a fishy story, as do analysts at Credit Suisse, who downgraded the stock because of this news. The stock is currently lower by 10.5%, and investors can’t help but worry if there might be more to this story or if there were problems with the company. Who knows, perhaps he left for more money, but at this point, I wouldn’t touch the stock.