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 feature a coffee-and-doughnuts paired upgrade for Starbucks Corporation (NASDAQ:SBUX) and Krispy Kreme Doughnuts (NYSE:KKD). But the news isn’t all good, so before we get to those, let’s find out first why…
Mosaic Co (NYSE:MOS) got shook up
We start off the day on a down note for Mosaic Co (NYSE:MOS) investors, as Citigroup pulls its buy rating on the fertilizer stock and downgrades to “neutral.” According to the analyst, one big reason for the downgrade is Mosaic’s Tuesday announcement that it’s having to delay implementation of a stock buyback from shareholder Cargill, until at least November. This removes a certain “floor” that investors had been counting on to support the stock price.
Such a floor could have come in handy, notes Citi, because demand from India for phosphates and potash looks weak in the near term. Citi cites a weak Indian rupee as hurting the country’s ability to pay for fertilizer imports. Plus, the analyst thinks inventories in the country are already high, which could work to dampen demand.
Citi’s not the only analyst with a negative outlook on Mosaic, either. The consensus on Wall Street is that the stock, which trades at 12 times earnings today, will earn less this year than last. Mosaic’s set to resume growing earnings next year, however, but only at about 8% per year over the next five years. For a company that costs 12 times earnings, and that generates only about one-third as much actual free cash flow as it reports for GAAP net income, that seems too-slow growth to support a buy argument.
With a price-to-free cash flow ratio in excess of 40 today, I’d say Citi is making the right call in removing its buy rating.
Coffee and doughnuts
Now for the good news: Just in time for breakfast this morning, analysts at Davenport & Co. announced a pair of new stock initiations. The highly rated stockbroker is now covering both Starbucks Corporation (NASDAQ:SBUX) and Krispy Kreme Doughnuts (NYSE:KKD) Doughnuts — and wouldn’t you know it? Davenport likes ’em both.
Details on the ratings are sketchy right now, but here’s what we know: Davenport has initiated both stocks with buy ratings. The analyst thinks Starbucks Corporation (NASDAQ:SBUX), currently at $65 and change, will go to $76 within a year — about a 15% gain, on top of Starbucks’ modest 1.3% dividend yield. Krispy Kreme Doughnuts (NYSE:KKD), meanwhile, could enrich investors nearly twice as much. The analyst sees this one going from just under $18 to as high as $23 within a year’s time. That’s about a 29% gain (but no dividend, sorry).
But which of these stocks is the better bet? Let’s take them one at a time:
Starbucks Corporation (NASDAQ:SBUX)
Priced at 33.5 times earnings, Starbucks is clearly the cheaper of these two stocks (Krispy Kreme Doughnuts (NYSE:KKD) costs upward of 50 times earnings). Projected to grow earnings at nearly 19% per year over the next five years, Starbucks is also a fast grower. That said, it’s neither cheap enough nor growing fast enough to justify a buy rating at this time.