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Splunk, Inc. Message Board

  • tammyle7 tammyle7 Sep 18, 2012 3:32 PM Flag

    SPLK a dangerous play (article)

    Friday's Top Upgrades (and Downgrades)

    By Rich Smith | More Articles
    September 14, 2012 | Comments (1)

    CAPS Rating 1/5 Stars

    Down $37.80 $-0.55 (-1.43%)

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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 top trio of newsmakers includes newly buy-rated Splunk (Nasdaq: SPLK ) , now-downgraded Cracker Barrel (Nasdaq: CBRL ) , and for Oracle (Nasdaq: ORCL ) , a hike in price target. Let's dive right in.

    Splunk goes "pop!"
    Shares of curiously-named Splunk popped 3% today, on news that the "real-time operational intelligence" provider has snagged an upgrade from Needham & Co., which now rates the stock a "buy." Arguing that American companies are experiencing a "data explosion," and that Splunk is "one of the few pure-play companies to benefit from [the] important trend" of managing and exploiting all this data, Needham says this stock is likely to hit $42 a share within a year.

    Of course, Splunk stock already costs $39 a share, so post-upgrade, there's really only about an 8% profit in it -- and no dividend -- even if Needham is right. So, is 8% good enough for you?

    It probably shouldn't be, not once you look at the risks. Unprofitable today, and with no history of making profits, Splunk may be a nice momentum play but, as an investment, its merits look tenuous. The firm has free cash flow, but so little that its price-to-free-cash-flow ratio is currently in the triple digits. Long story short, there's a little bit of upside here, but a whole lot more downside.

    And speaking of downside ...
    Country-themed restaurateur Cracker Barrel got hit with a downgrade from KeyBanc this morning, ahead of next week's expected Q4 earnings report. KeyBanc sees "elevated commodity costs" -- read: "the high cost of a kernel of corn" -- weighing on profit margins in the near term.

    Longer-term, the analyst still views the company "favorably," noting that "guest traffic and [same-store sales] have been positive the past two quarters." But, while I'd ordinarily applaud an analyst taking a long-term stance, in Cracker Barrel's case, I have to say that the numbers don't justify even the muted optimism KeyBanc expresses. The company trades for 17.5 times earnings today, which seems a bit high, in light of consensus projections for 10% earnings growth. On the plus side, Cracker Barrel pays a tidy 2.4% dividend. On the minus side, it's also carrying a fair amount of debt -- about $460 million net of cash on hand.

    In short, fine business, lousy stock price. KeyBanc's right to put this one on a shelf.

    And speaking of shelves ...
    BMO Capital Markets hasn't been optimistic about Oracle for quite some time. At present, the analyst has only a "market perform" rating on the stock -- about equivalent to a "hold." Yet, the stock's been on something of a tear of late, presenting BMO with a dilemma: Should it put up, or shut up?

    This morning, the analyst decided to kick the can a bit farther down the road, maintaining its neutral stance on the stock, but upgrading its price target $3, to $33 -- about what Oracle shares cost today. This suggests two things: First, BMO isn't sufficiently confident in its analysis of the stock to recommend selling the stock, expecting it will fall to the old target price of $30. And, second, the analyst still really doesn't like Oracle -- certainly not enough to upgrade the shares to "buy."

    But it should. And you should seriously consider buying the stock.

    Why? Because with $13.1 billion in trailing free cash flow -- fully 30% more cash profit than the company is permitted to call "net income" under GAAP accounting rules -- Oracle currently sells for an enterprise value of less than nine times the amount of cash it generates in a year. That's plenty cheap for a projected 11%-plus grower like Oracle. And the stock's 0.9% dividend yield? That's just the icing on the cake.
    The Motley Fool is NOT IN BUSINESS at the moment...
    Because too many investors lack confidence. Too many good, hard working people are giving up on their dreams. That's why we're suspending business as usual this month. And instead, supporting a never-before-seen investor "movement" that’s already spread to 5 continents...

    Sentiment: Strong Sell

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    • It's always dangerous to buy a company with no profits at more than 20 x sales.

      The only short term upward factor is a substantial beat of the next quarterly report. Meanwhile the downward risk factors are: bubble valuation, increasing GAAP net losses, expiry of Lockup in october, dilution (20% dilution was announced in last conference call), stock based compensation and upcoming competition.

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