Monday's Top Upgrades (and Downgrades)

Motley Fool

Stocks go up, stocks go down -- and so do analysts' opinions of them. This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we're looking at a couple of moves in the automotive world, as General Motors (GM - News) gets its sticker price cut, while further down the supply chain, KAR Auction Services (KAR - News) wins an upgrade. Then we'll switch gears and take a look at a new buy rating just awarded to Active Network (ACTV - News). Let's dive right in.

Generally unimpressed
We begin with GM, which had a couple of interesting developments today. On the plus side, the company's joint venture with SAIC in China is reporting "record sales" for the first five months of 2012, while here at home the Chicago Fed is forecasting "strong auto sales" in the U.S. this year. On the minus side, some investors are starting to worry whether GM's decision to pressure TV advertisers on their ad rates will backfire, costing GM its chance to participate in the bullish environment for car sales.

But GM is also trying to cut costs in other ways, for example, by transferring $26 billion worth of its $134 billion projected pension obligation to insurer Prudential (PRU - News), at a cost of 110% of the expected obligation. Over at UBS, analysts worry that this move will hurt earnings in the short term, and are cutting earnings estimates over the next three years by $0.10 per share "to reflect higher pension expense."

UBS also sliced $2 off its price target for the stock (now $30), but this still leaves almost 50% upside in the shares -- and GM could be good for it. After all, at just 6.3 times trailing earnings, but with forward earnings growth pegged at 13%, the stock looks cheap already. It's hard to see how a cleaned-up balance sheet would make it look any less so.

"I have $14.50. Do I hear $21?"
Further downstream, analysts at Robert W. Baird announced an upgrade to outperform for KAR Auction Services. Currently selling for $14 and change, Baird thinks KAR could motor to $21 within a year -- again, close to 50% upside. And Baird could be right.

Sure, on the surface KAR looks like more primer than paint. Its 35 P/E ratio isn't ordinarily a price you'd want to pay for the 9% long-term growth Wall Street foresees at KAR. But flip the hood, and what do we find? $216 million in free cash flow, or more than three times the "earnings" that KAR's allowed to report under GAAP. Valued on free cash, therefore, KAR sells for a much more attractive P/FCF ratio of 9.2, which doesn't seem unreasonable given the growth rate. While not the cheapest stock in the lot, KAR should be good for a few more miles.

Active could move
Last but not least, we come to Active Network, which according to Barrington Research is now the "foremost provider of [software as a service] event/organization management." This morning, Barrington initiated coverage of Active with an outperform recommendation.

Why? As StreetInsider.com tells us, Barrington believes Active has grabbed "first mover advantage, critical mass, and sticky communities in many of its verticals." Add to this an "attractive valuation," "moderate" chances of getting bought out, and plenty of opportunities to expand its business both nationally and internationally if a buyout doesn't happen, and Barrington thinks Active could run to $17 over the next 12 months.

Or more. Priced just below $14 today, Active looks more than cheap at about 20 times free cash flow, with 35% annual growth projected over the next five years. Toss in $80 million or so worth of excess cash in the bank, and the valuation on this one only looks more attractive. So far, investors are giving a tepid response to Barrington's endorsement, bidding Active shares up a lethargic 0.6%. But make no mistake: This stock has legs. Active could run far.

Fool contributor Rich Smith holds no position in any company mentioned. Motley Fool newsletter services have recommended buying shares of General Motors and Active Network.

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