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 pair of big dividend payers getting upgrades — Verizon Communications Inc. (NYSE:VZ) and Dominion Resources, Inc. (NYSE:D). Also, we’ve got one dividend-less wonder getting downgraded:
According to CS, Under Armour Inc (NYSE:UA) shares have only “limited potential… over the next 12 months due to the company’s current premium valuation.” Priced at a lofty 63 times earnings — and a nosebleed-inducing 120 times its inferior levels of free cash flow — Under Armour Inc (NYSE:UA) shares appear vastly overpriced, even for their projected 20%-plus projected long-term earnings growth rate.
Incidentally, despite downgrading the shares, CS agrees that Under Armour Inc (NYSE:UA) has a “good long-term revenue and earnings growth outlook,” and is benefiting from “multiple expansion in the athletic sector.” But there’s a limit to how far such things can expand. Even giants of the industry, like Nike and Adidas, only cost 25x and 31x earnings, respectively, while Columbia Sportswear sells for a modest 19 times earnings.
Costing multiples 2x to 4x what its competitors’ earnings fetch, Under Armour Inc (NYSE:UA) shares are priced to go nowhere for some time to come — or even to fall.
Verizon places a collect call
Speaking of stocks that look like they cost a lot of money — Verizon — the nation’s second biggest telco by revenues, costs a staggering 88 times earnings today, or more than three times the P/E at larger competitor AT&T. And yet, this morning, we find analysts at Evercore recommending that investors buy Verizon Communications Inc. (NYSE:VZ). Why?
As you can probably guess, Evercore sees Verizon’s acquisition of total control over Verizon Communications Inc. (NYSE:VZ) Wireless as a big plus for the company — and it may be right about that. Although Verizon will be taking on a heaping helping of debt to finance its purchase of Vodafone Group Plc (ADR) (NASDAQ:VOD)‘s share of VW, what it gets out of the purchase may be worth even more.
According to S&P Capital IQ, Verizon Communications Inc. (NYSE:VZ) Wireless earned $16.7 billion last year, and generated nearly that much cash profit, as well — $16.3 billion. That’s more than 10x the GAAP profit of its new sole owner, and nearly as much free cash flow as Verizon Communications Inc. (NYSE:VZ)-proper generated, as well. Focusing only on GAAP earnings, post-merger, we should be looking at a company earning enough profit to give it a debt-adjusted P/E of less than 15 (and an even cheaper P/E if you don’t count the debt — which you should).
