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 an upgrade for Huntington Bancshares (HBAN) and a downgrade for Visa (NYSE:V). Also, we'll find out why the critics love Lions Gate Entertainment (LGF). Without further ado...
Wall Street hearts Huntington
Our first notable ratings move of the day is Huntington Bancshares, which just scored an upgrade from Compass Point in reaction to fourth-quarter earnings. Yesterday, you see, Huntington came out with a pretty nice earnings number -- $0.19 a share in fourth-quarter earnings, or $0.02 ahead of estimates. On top of that, Compass says the earnings outlook for 2013 is "improved." Meanwhile, the downside is limited because while "concerns" remain regarding net interest margin compression and net interest income, mortgage banking, and expense ratios, these worries are already "more than priced into the stock" at its current price of 10.6 times earnings.
Me, I'm not so sure. On one hand, 10.6 sure looks like a cheap valuation. On the other hand, though, Huntington's only expected to grow its earnings at about 6% per year going forward. That's a good 25% slower than your average regional banking stock is expected to grow over the next five years, and probably too slow to justify even a 10.6 times earnings valuation.
Don't get me wrong: Huntington's not egregiously overpriced. What's more, its generous 2.4% dividend yield should give some downside protection to the stock. Still, at today's price it still doesn't look cheap enough to justify a buy.
Visa? Go ahead and leave home without it
Speaking of stocks that aren't obscenely overvalued but simply just not cheap enough to excite investors... R.W. Baird announced this morning that it's fallen out of love with Visa, and is downgrading to neutral.
Why? In contrast to the story at Huntington, the problem isn't that Visa isn't growing fast enough. To the contrary, at an estimated five-year growth rate of 18%, Visa's tearing up the track, same as it ever was. The problem here is that at a P/E ratio of nearly 50, the growth prospects seem fully priced into the stock.
Mind you, Baird isn't saying you need to sell Visa. Remember: This is a company generating cash at more than twice the rate it reports the stuff as "net earnings" on its income statement. Even so, at a price-to-free cash flow ratio of roughly 23, the stock's no bargain on 18% growth estimates. It's fairly valued at best, and deserving of the downgrade to neutral.
The cat's meow
Last, and seemingly least, we come to filmmaker Lions Gate Entertainment. On the surface at least, this stock seems the most expensive of the bunch. I mean, giving a $2.4 billion market cap to a company that only earned $7 million in profits over the past year? Where's the logic in that?
And yet, despite the apparent overvaluation, Wunderlich Securities has decided to bump up its price target on buy-rated Lions Gate by 21%, to $23 a share, ahead of the fiscal third-quarter 2013 earnings report due out Feb. 11. Why?
The short answer is that, much like Visa, there's more to Lions Gate than meets the eye -- or shows up on the income statement. Reviewing the company's cash flow statement, we quickly see that Lions Gate is a much more profitable operation than it appears, having generated $67 million in positive free cash flow over the past year, or more than nine times reported earnings.
Even so, that leaves us here with a stock still valued at 36 times free cash flow, which is a bit pricey. Twenty-six percent long-term growth projections at Lions Gate are encouraging, but probably not enough to justify investing in the stock, Wunderlich's endorsement notwithstanding. Factor in the company's $1.4 billion debt load and its complete lack of a dividend, and the stock simply looks too expensive to roar ahead next month, no matter how good the earnings report winds up being.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Visa. The Motley Fool owns shares of Huntington Bancshares.
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