The Fresh Market Inc (TFM), Guess?, Inc. (GES): Thursday’s Top Upgrades (and Downgrades)

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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 an upgrade for AMC Networks Inc (NASDAQ:AMCX), and a better price target for Guess?, Inc. (NYSE:GES), but for The Fresh Market Inc (NASDAQ:TFM), it’s…

The Fresh Market Inc (NASDAQ:TFM)

Time to mark down the day-old produce
Whole Foods wannabe The Fresh Market Inc (NASDAQ:TFM) reported earnings last night, and its stock is getting roundly punished for the numbers this morning. Shares are down 8%, and counting, on news that the company missed sales estimates, merely met expectations on second-quarter earnings ($0.32 per share), and is looking at either missing, or missing badly, analyst expectations for full-year earnings as well.

The Fresh Market Inc (NASDAQ:TFM) says fiscal 2013 profits per share will likely range from $1.50 to $1.55, versus consensus expectations of $1.59 a share. Partly in response to this bad news, and partly as a simple exercise in “taking profits” after the stock’s 33% outperformance of the market over the past six months, investment megabanker UBS decided today to cut its rating on The Fresh Market Inc (NASDAQ:TFM)– taking the stock down one notch to “neutral,” and leaving its $1.56-per-share price target unchanged.

This, however, is quite literally the least UBS could do. What it should have done is downgrade the shares to “sell.” Here’s why:

The Fresh Market Inc (NASDAQ:TFM) currently costs 35 times earnings, pays no dividend, and is expected to post growth rates of about 20% per year over the next five years. Now, 35 times earnings is already a pretty rich price to pay for 20% growth — let alone the fact that yesterday’s guidance shows us the company is already falling short of growth expectations. Factor in the fact that TFM’s cash flow statement shows that the company produced only $17.7 million in real free cash flow over the past year, versus a reported $69.3 million in GAAP “profit,” and this company is already a whole lot less profitable than meets the eye.

At a price-to-free cash flow ratio north of 135, The Fresh Market Inc (NASDAQ:TFM) shares look as overpriced as its wares.

Guess?, Inc. (NYSE:GES) these shares are going up?
A second retailer reporting earnings yesterday — and good earnings this time — was Guess?, Inc. (NYSE:GES). The company reported fiscal second-quarter 2014 profits of $0.52, which was $0.16 ahead of estimates, on revenues that likewise trumped expectations.

Here, too, though, investors were met with curbed expectations for the future, as Guess?, Inc. (NYSE:GES) warned that same-store sales declined 2% in the second quarter, and predicted it will earn only $0.34 to $0.38 in the current third fiscal quarter, versus expectations of $0.40.

Investors are forgiving Guess?, Inc. (NYSE:GES) this last bit of bad news, however, and hanging their hopes on the fact that the second quarter’s surprising profits haul will help lift the company as high as $1.92 per share in full-year earnings, a number that — if it happens — will exceed estimates for $1.79-per-share profits.

This hope probably lies behind Telsey Advisory Group’s decision to up its price target on Guess? this morning, to $30. On the other hand, though, even $30 isn’t a particularly high hurdle to clear for Guess, given that its shares now cost $30.65 after today’s run-up. So… is the stock worth it?

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