Wednesday’s Top Upgrades (and Downgrades): WellPoint, Inc. (WLP) and Fossil, Inc. (FOSL)

Page 1 of 2

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 a pair of downgrades for WellPoint, Inc. (NYSE:WLP) and Fossil, Inc. (NASDAQ:FOSL). On the plus side, though, one analyst thinks that …

Norwegian Cruise Line is bound for richer shores
The day begins on a bright note for shareholders of cruise ship operator Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH), which this morning received a price target hike — and a reiteration of its “buy” rating — from ace analyst Stifel Nicolaus.

WellPoint, Inc. (NYSE:WLP)

Norwegian reported strong earnings earlier this week, reporting on Monday that its Q4 earnings per share were $0.04 — four times higher than the Street consensus of just a penny-a-share. Revenues came in a bit light, granted ($503 million versus the estimated $513 million). On the other hand, Norwegian said it’s likely to earn no less than $0.02 per share this current quarter, and perhaps as much as a full nickel — either of which result would easily trounce analysts’ estimate of a penny-a-share loss. This news prompted won Norwegian an upgrade to “buy” from Nomura Securities yesterday, and today Stifel’s also doubling down on the stock. But if you ask me, that’s a mistake.

Why? Simple: The stock costs too much.

Consider: With $0.94 a share in 2012 profit, Norwegian now costs a bit more than 30 times trailing earnings. If the company can maintain the 32% profits growth rate it showed in 2012, that might look attractive — but 30%-plus growth rates are dreadfully hard to maintain over long periods of time.

Plus, Norwegian’s P/E ratio of 30 doesn’t factor in the company’s nearly $3 billion net debt. It doesn’t consider the fact that Norwegian’s real free cash flow is just $95 million — just 56% of reported net income. Valued on enterprise value and free cash flow, rather than market cap and earnings, Norwegian actually looks very expensive indeed, at an EV/FCF ratio of 90. It’s so expensive, indeed, that even if the company could grow at 30% a year for the next five years, I’d say this stock is still overpriced.

Fossil should be buried
Speaking of overpriced stocks, a couple days ago we took a look at the downgrade Benchmark Capital assigned to Fossil ahead of Q4 earnings. Now that Fossil’s numbers are out — $948 million in quarterly revenue, and earnings of $2.51 per share — Fossil’s catching another downgrade today (to underperform) from the folks at FBR Capital.

Page 1 of 2