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Verizon Communications Inc. (VZ), Dominion Resources, Inc. (D): Friday’s Top Upgrades (and Downgrades)

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:

Verizon Communications Inc. (NYSE:VZ)

Under Armour Inc (NYSE:UA) Shares of sportswear company Under Armour are under pressure this afternoon, down more than 2% as of this writing, and most likely in response to a downgrade to “neutral” out of Credit Suisse.

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).

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