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'll look at a new buy rating for Old Dominion Freight Lines (ODFL), and find out why analysts are hiking price targets for Abercrombie & Fitch (ANF), but dropping them at Citi Trends (CTRN). Let's tackle the worst news first, and find out why...

Citi trends downward
After gaining 70% year to date, shares of Citi Trends abruptly reversed course yesterday and continue to trend downward today. What's behind the stock's 20% tumble?

First and foremost, an earnings report that can only be described as "epically miserable." The company says it lost $0.54 per share last quarter, a full dime worse than what Wall Street was expecting. Revenues, too, missed the consensus number, rising only 2% in comparison to last year's Q2 -- and same-store sales were actually down 4%.

The news was bad enough to cause analyst MKM Partners to cut $2 off its price target on the stock (now $11). The analyst isn't recommending actually selling the stock just yet -- probably because Citi Trends still has $65 million or so worth of cash in the bank, and even at the present burn rate, that gives the stock plenty of time to figure out a viable model for its business. But there's no time like the present...

Abercrombie & target price hikes
On the flip side of retail, shares of Abercrombie & Fitch spiked yesterday after the company reported better-than-expected earnings. Profits for the fiscal second quarter were $0.19, down significantly from last year's $0.35, but still good enough to win the stock a higher price target from analysts at FBR Capital (which rates the stock an "outperform"). But will it?

"Outperform" the market, that is? FBR thinks so, but you might want to verify before trusting that call. At 30 times earnings, A&F is still one pricey stock, even with analysts predicting earnings will grow 20% per year over the next five years. Adding to the risk, Abercrombie still isn't generating positive free cash flow to back up its less-than-stellar reported profits. To the contrary, according to S&P Capital IQ, over the past 12 months, Abercrombie has burned $40 million. While that cash is being used to fuel international growth, I'd prefer to see it doing so while remaining cash flow positive.

Until it fixes that problem, predicting the stock will go to $45 sounds like a pipe dream.

Keep on truckin'
In contrast, there just might be some hope for investors in Old Dominion Freight line -- the sole "buy" recommendation coming out of stock shop Longbow this morning, out of a set of three trucking companies just initiated. After perusing the trucking sector carefully, Longbow dubbed both Arkansas Best (ABFS) and Con-way (CNW) mere "neutral" stocks, yet it gave Old Dominion a "buy."

Did it deserve it?

Actually, maybe yes. For one thing, the company just finished beating earnings for Q2 -- always a good start. For another, at 16.5 times earnings, Old Dominion doesn't look particularly expensive in light of consensus estimates of 16% long-term earnings growth.

Investors' main concern here should be whether Old Dominion can generate the kind of cash necessary to back up that earnings number, and make that growth rate mean something -- because so far, it's failed in this regard. Over the past five years, OD has sometimes generated positive free cash flow, sometimes burned cash, but overall ... never generated anywhere near the amount of free cash flow as it's claimed to be earning under GAAP accounting standards. To the contrary, taken as a whole, the last five-year timespan has seen OD claim more than $390 million in GAAP earnings, but generate free cash flow of -$33 million.

That may be good enough performance to win a buy rating from Longbow. When it's your money on the line, though, you should probably be a bit choosier where you invest it.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Citi Trends.

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