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 include an upgrade for Best Buy Co., Inc. (NYSE:BBY), a nearly-as-good hike in price target for Jack in the Box Inc. (NASDAQ:JACK) — but for Denny’s Corporation (NASDAQ:DENN), a downgrade.
Good news first
We begin the abbreviated trading week on a bright note, as Best Buy wins twin endorsements from each of Barclays (overweight) and Stifel Nicolaus (buy). According to Barclays, Best Buy shares can hit $20 within a year. Stifel goes even further, positing a $23 price target on this $17 stock. But are they right?
If all you knew about Best Buy was what it reports under GAAP accounting, it would be hard to explain the analysts’ optimism. After all, while rumors certainly swirl about a potential Best-Buyout by its founder, Best Buy shares don’t look obviously attractive to most investors, seeing as the company’s not currently earning any profit at all.
Look a little deeper, though, and you’ll see that Best Buy really is profitable where it counts: on the cash flow statement. There we find that the company generated more than $2.5 billion in free cash flow last year. At an enterprise value of $7.4 billion, this means the stock is selling for less than three years’ worth of cash profits.
So while I can’t tell you whether Best Buy shares sell for $20 or $23 one year from now, what I can tell you is this: If Best Buy keeps generating cash at the rate it’s been doing, then within three years, the company will have more cash in the bank than its stock currently costs. And that’s a bargain in my book.
Surprise! Jack in the Box is overpriced!
It’s certainly a better bargain than the idea Oppenheimer floated this morning. Reiterating its outperform recommendation on Jack in the Box, the analyst upped its price target to $36 — presumably because at $30 and change, Jack was getting too close to its old price target of $32, and Oppy didn’t want to have to downgrade to neutral.
That’s a logical move to make, but it isn’t the right one.
Priced at nearly 24 times earnings already, paying no dividend, and carrying a heaping helping of debt to boot, the fast-food chain (which also owns Qdoba) already sells for way, way more than its projected 13% growth rate justifies. Free cash flow, while finally positive after five years of cash burn, remains weak. In short, there’s very little to recommend Jack in the Box at today’s prices. Oppenheimer may like it, but I’d suggest you let them buy it. You can do better.