Monday'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. This morning, we'll start off with a breakfast of organic mac 'n cheese courtesy of new IPO Annie's (BNNY - News), then flip on the television and see what's happening at LG Display (LPL - News). Later on, we'll head out to Lowe's (LOW - News) in search of a real bargain.

No bounce for BNNY
At last report, no fewer than five separate analysts -- Credit Suisse, Stifel Nicolaus, RBC Capital, JPMorgan Chase, and Canaccord Genuity -- had initiated coverage of Annie's. (Expect more to come.) Most of them like the stock, which isn't terribly surprising, seeing as they all underwrote the offering. What is surprising is the write-up from one underwriter who breaks from the majority.

Canaccord Genuity starts off optimistically enough, mind you, praising Annie's as having "one of the strongest brands in the natural/organic food industry," and believing the company will "deliver strong growth, high margins and impressive financial returns." The problem with Annie's, Canaccord says, is that "the valuation is full and already reflects the favorable outlook."

No argument there. At 30 times earnings, Annie's shares already trade at a 50% premium to the overall food industry, and a 50% premium to industry standard-bearer Kraft. And while organic food purveyors are no strangers to nosebleed valuations -- Hain Celestial at 33 times earnings, Lifeway Foods at 47 times -- BNNY had better hop to it and show some seriously strong growth if it wants to hold onto its present valuation.

Topeka turns cold
"It's hot in Topeka," goes the cult Cartoon Network clip. But this morning, a new stock shop by the name "Topeka Capital" (curiously, based in New York City) is causing rumblings on Wall Street as it initiates coverage on a series of stocks -- and rates each and every one of them a "hold." Corning, AU Optronics, LG Display all got initiated this morning, but the analyst is assigning price targets below current market price on both Corning and AUO. The only one of these three flat-screen-television plays that Topeka feels even lukewarm about, let alone hot seems to be LG Display (targeted for an $11.50 share price that's about $1 higher than today's market price).

But does even that one deserve your investing dollars? After all, LG Display isn't currently profitable. It's been burning cash for two years straight and hasn't generated truly significant free cash flow since 2008. Priced at 23 times the earnings it might earn two years from now (again, it's not earning anything today), Topeka's right to be cold on LG Display.

Lowe's could go higher
Pretty depressing so far, but let's not end on a down note. Turns out, there's one new rating this morning that has a bit more potential to go higher than Annie's or LG Display possess: Lowe's. This morning, analysts at Morgan Stanley gave the stock an upgrade to outperform, and working from today's price of $31, the shares just might do that.

Sure, at first glance Lowe's isn't an obvious choice for value. Priced at 22 times earnings, but expected to grow at just 15% per year over the next five years, the stock offers a PEG ratio of roughly 1.5. Take a closer look, though, and what do we find?

Over the past year, Lowe's has generated more than $2.5 billion in real cash profit from its business, even as GAAP accounting limited the amount of profits it could report to just $1.8 billion. That's a 36% discrepancy, folks, and what it means is that when valued on free cash, Lowe's carries only about a 15 times multiple -- right in line with expected growth rates. Add a 1.8% dividend yield on top of that, and Lowe's is a stock priced to outperform. Just like Morgan Stanley says it is.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of The Hain Celestial Group and Corning. Motley Fool newsletter services have recommended buying shares of Corning and The Hain Celestial Group. Motley Fool newsletter services have recommended writing covered calls on Lowe's Companies.

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