Thursday'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, we start off with a look at Baidu's (BIDU) new price target, then find out why Wall Street just shot Aflac's (AFL) duck and told Fuel Systems Solutions (FSYS) it's not the solution, it's the problem. Let's dive right in.

Bid higher
Last month's earnings beat at Baidu -- the company known as China's Google -- set the shares afire. One day after reporting better earnings than analysts thought possible, the stock popped 7.5%, and Baidu hasn't looked back since.

At last report, Baidu shares were fetching north of $130 apiece, or about 20% higher than pre-earnings, and if analysts at HSBC Securities are to be believed, the stock's not done running yet. This morning, HSBC crunched some numbers and came to the conclusion that Baidu's worth at least $157 a share, meaning a stock that's already up 20% could go up another 20% over the course of the next year.

Difficult to believe? Yes. But it's also entirely accurate. Priced at just 34 times earnings today, Baidu sells for a discount to the 40% annual growth it's expected to produce over the next five years. Bump that share price up to $157, as HSBC is projecting, and Baidu would still only be "fairly" valued, and not a penny overpriced.

Duck hunting!
With a plaintive croak, Aflac, the nation's most famous supplemental health and life insurer, succumbed to a downgrade this morning. The analyst making the call, FBR Capital, thinks that after rising 20% over the past year, the shares are likely to only perform about as well as the broader market from here on out.

FBR is wrong.

In fact, at just over eight times earnings, Aflac shares already cost only about half the P/E routinely awarded to its rivals in the insurance space, which trade for 16 times earnings and up. Moreover, Aflac looks cheap in its own right; 8.3 times earnings is hardly a lot to pay for a stock expected to grow earnings at better-than-11% per year over the next five years. Add in the extra profit from a near-3% dividend, and Aflac looks well-positioned to fly higher, faster, and farther than stocks of similar feather.

You're not the "Solution." You're the problem.
Finally -- and with apologies for ending on a down note -- we come to Fuel Systems Solutions, subject of a similar downgrade to "market perform" this morning. This time, it's Northland Securities making the downward call, and it's not hard to figure out why.

Yesterday, Fuel Systems announced Q2 earnings numbers that beat estimates with a stick -- $0.36 per share earned, versus an expected $0.19. That's pretty impressive, considering that the firm said revenues actually declined year over year, down 7% to $109 million, with automotive sales dropping 6%.

Unfortunately, Fuel Systems cut itself off at the knees when, in announcing the "earnings beat," it also warned investors not to expect more of the same. Sales for the full year are expected to miss consensus targets, and could be as low as $405 million -- less revenue than Fuel Systems has generated in any year since 2008. Suffice it to say that is not the direction investors usually want to see things going, and Fuel Systems suffered a severe sell-off -- down 12% -- in response to the news yesterday. Today's downgrade, in contrast, is having little effect on the shares, as shorts close their bets against Fuel Systems.

Don't get too excited by a temporary uptick, though. Fuel Systems is, in fact, in quite a bit of trouble. While technically positive for per-share earnings under GAAP, the company's burning cash today, a situation that declining sales will not soon remedy. Worse, the situation doesn't appear to be temporary. In fact, Fuel Systems has seen sales lag for two straight years, and now we know it's working on a third.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Baidu.com and Google. Motley Fool newsletter services have recommended buying shares of Google, Baidu.com, and Aflac.

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