Friday's Top Upgrades (and Downgrades)

Motley Fool

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 upgrades for Tiffany (TIF) and Panera Bread (PNRA). But it's not all good news, so before we get to those ratings, let's find out why...

Starz is no star
With apologies for starting off the news on a down note, our first rating Friday comes courtesy of ace stockpicker Stifel Nicolaus, which initiated coverage of pay-cable channel Starz (STRZA)with a sell rating this morning. It's not the only analyst predicting falling Starz, either. Simultaneously with Stifel's rating, analyst Evercore announced a similar "underweight" rating on the stock, and predicted the stock will remain stuck at its current share price of about $16 a share all year long.

What's not to like about Starz? Well, aside from the obvious objection that they misspelled their own ticker symbol -- "STRZA" -- there's overvaluation to consider.

Oh, I know -- technically the stock sells for a pretty attractive P/E ratio. In fact, Yahoo!'s key statistics page has this one pegged for a P/E of just 1.1. Problem is, that ratio's based on a GAAP earnings number that simply isn't supported by Starz's cash flow statement. According to GAAP, Starz may have "earned" $1.7 billion over the past 12 months. But the company's free cash flow number was a lowly $171 million -- just 10% of reported income.

Even worse, analysts on average expect to see Starz's income decline over time, falling a bit less than 1% on average, per year, every year, over the next five years. Personally, I suspect that prediction's probably too pessimistic (the average media company is expected to grow profits in excess of 15% per year over the same time period), and I think Starz may be worth owning at a price-to-free cash flow  ratio of 11.1. But for now, at least, the analysts disagree.

Panera Bread looks fresh
In happier news, Panera Bread won an upgrade to buy from analyst Miller Tabak this morning, ahead of its fourth-quarter earnings report due out Tuesday, Feb. 5. Miller's pretty optimistic about the upcoming report, and thinks Panera shares could rise to a yeasty high of $190 a share within a year -- better than a 19% increase from today's share price. But is Miller right?

Investors seem to think so, bidding up Panera's shares by more than 2% in early trading, but me, I've got my doubts. Sure, there's a lot to like about this stock. Analysts have Panera pegged for 19% annualized earnings growth over the next five years, for example -- fast! Also, free cash flow at the firm is strong. In contrast to Starz, where GAAP "earnings" vastly overstate true cash profitability, Panera actually generates a smidge more free cash flow ($161 million) than the company claims for GAAP profit ($160 million).

Still, this leaves the stock trading at a lofty 29 times earnings and free cash flow alike. Even on a 19% growth rate, that's a significant premium -- making today's $158 share price probably too high a price to justify, let alone Miller's projection of $190.

Tiffany -- sparkly!
Last but not least, we come to diamond hawker Tiffany, subject of a downgrade to hold from Canaccord Genuity yesterday, but getting a vote of confidence from Brit banker HSBC today.

According to HSBC, not only is Tiffany a great buy at today's share price of $63 and change, it's actually headed even higher, and could top out at $74 a share within a year.

Really? $74? Listen, folks, what was true yesterday, when Canaccord downgraded Tiffany shares, is just as true today when HSBC says the opposite. With a 2% dividend yield and an 11% growth rate, Tiffany isn't the worst stock in the world, but it's vastly overpriced based on trailing free cash flow of only $74 million -- and a price-to-free cash flow ratio of 107. That means Tiffany shares are even more overpriced than the jewelry Tiffany sells -- and you don't even get the pretty blue box.

My advice: Don't be fooled by the seemingly reasonable P/E of less than 20. Tiffany stock is a budget-buster by any definition, and not worth the money.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Panera Bread. The Motley Fool owns shares of Panera Bread and Tiffany & Co.

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