Friday's Top Upgrades (and Downgrades)

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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 headlines include higher price targets for each of boot maker Deckers (DECK) and clothier Gap (GPS). But it's not all good news, so let's start off with a quick look at how...

Con-Way ended up in a ditch
The week's ending on a bleak note for Con-Way (CNW) shareholders, as investment banker Stifel Nicolaus withdraws its endorsement from the shares, and downgrades to "hold."

Con-Way, you see, presented at a transportation industry investors conference that Stifel hosted in Florida a couple of weeks back. While we don't know exactly what Con-Way told the attendees, whatever it was, it apparently failed to impress Stifel. And so, after waiting a polite two weeks for Con-Way to get out of earshot, Stifel began warning investors away from the stock today.

And rightly so.

Oh, sure, at first glance I admit that Con-Way shares look attractive. The near-19% annualized earnings growth projections of Wall Street analysts appear to justify a high price -- maybe even the 18.7 P/E these shares bear. But look a little deeper, and you'll find some serious issues with Con-Way's stock.

For example, the company's carrying about $750 million in debt. Added to the market cap, that would push the stock's P/E up past 26, a price too high for the growth rate to justify. Even worse, the earnings that Con-Way boasts are of exceedingly low quality. Free cash flow at the firm amounted to just $18.3 million last year -- a far cry from the reported $104 million GAAP earnings figure. Valued on free cash, the stock sells for an enterprise value-to-FCF ratio of 147, meaning it's vastly overpriced for its prospects... and deserving of an even stronger rebuke than a mere downgrade to "hold."

Gap-ing up 
Better news greeted Gap shareholders today, as analysts at Canaccord Genuity responded to Thursday's earnings beat by upping their price target to $39 a share. Gap reported earning $0.73 a share on 5% comps growth, beating analyst estimates for both earnings and revenues, and dropping the P/E down to 14.3.

Even better, and in contrast to Con-Way, when valued on its superior free cash flow of $1.3 billion annually, Gap shares are actually a bit cheaper than they appear on the surface. Priced at 11.6 times free cash flow, with a 1.6% dividend yield and a 9.4% projected growth rate, Gap shares look close to fairly valued to me -- and to Canaccord, too, apparently, because despite raising its target price, the analyst maintained a hold rating on the stock.

Granted, that doesn't argue particularly strongly in favor of Canaccord's prediction that the stock will gain another 15%. But at least it suggests the stock has little downside from today's share price.

Deckers clicks
 Last but not least, we come to Uggs boot maker Deckers, recipient of a similar hike in target price -- this time from Jefferies & Co. Citing "better than expected" fourth-quarter earnings, "cleaner inventories, improving SSS trends and margin tailwinds from lower sheepskin costs," Jefferies upped its target price on the shares to $65 -- predicting a 42% profit for anyone who buys the stock even after today's amazing 13% jump in share price.

That sounds pretty aggressive. The company hasn't yet reported its free cash flow number for last year, while at last report, things were looking pretty grim, with Deckers showing lots of red ink on the cash flow statement. What's more, priced at 12.4 times earnings, and pegged for only 8% long-term earnings growth, the shares really don't look cheap enough to justify the kind of leaps-and-bounds share price growth that Jefferies is promising.

Granted, the analyst seems to think that Deckers is lowballing its earnings guidance, and could give investors an "upside earnings revision in the coming [quarters]." If Jefferies is right about that, it's just possible that 12 times earnings won't seem an unreasonable price to pay for the stock.

Still, personally, I'd recommend waiting to see the company's cash flow statement before coming to any firm conclusions on the stock. On balance, I have to say that the numbers we know today, and the free cash flow numbers we had to work with last quarter, argue in favor of caution. For the time being at least, the stock still doesn't look cheap enough to buy.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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