Yes. To an extent, I think they are. Just on the face of it, you can see that United Parcel Service, Inc. (NYSE:UPS) shares cost a pricey 95 times earnings today. Personally, I don’t put too much stock in that P/E ratio, knowing as I do — and as you should, too — that UPS is a strong cash generator, which churned out $4.5 billion in free cash flow last year. Still, this leaves the stock trading for 18 times cash profits, and with an enterprise value-to-free-cash-flow ratio that’s even higher than that, once you factor in debt.
A 2.9% dividend yield lessens the pain of ownership on this one, but still, 18-plus-times free cash flow seems too much to pay for an 11% grower like United Parcel Service, Inc. (NYSE:UPS). (And if last week’s earnings warning is any indication, UPS may not even grow as fast as that).
Riverbed Technology, Inc. (NASDAQ:RVBD) running dry?
A second downgrade today is Wunderlich’s takedown of Riverbed Technology, Inc. (NASDAQ:RVBD), which the analyst says costs too much — and with which I disagree.
Wunderlich’s characterization of its downgrade to “hold” as a valuation call makes sense initially. After all, at 71 times earnings, Riverbed Technology, Inc. (NASDAQ:RVBD) looks not that much less overpriced that UPS at 95 times earnings. However, also like UPS, Riverbed Technology, Inc. (NASDAQ:RVBD)’s valuation can be deceiving — because the company generates just so much more cash profit than GAAP accounting rules let it report as “net income.”
Last year, Riverbed Technology, Inc. (NASDAQ:RVBD)’s free cash flow practically ranneth over, approaching $247 million, versus GAAP net income of less than $40 million. That means that this stock which appears to cost “71 times earnings” can more accurately be described as costing just 10.5 times free cash flow. With a projected growth rate of nearly 22% annually over the next five years, that’s a pretty cheap price investors are being asked to pay for Riverbed’s abundant growth. If you ask me, it’s a price worth paying. I think the stock’s still entirely cheap enough to buy…
…and judging from how well the stock is holding up in Monday trading, despite the downgrade, it appears a lot of other investors agree with me.
Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Riverbed Technology and United Parcel Service (NYSE:UPS). The Motley Fool owns shares of Riverbed Technology.
The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com is written by Rich Smith.
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