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. Let's check out a new buy rating for Boingo Wireless (WIFI), a better price target for CBS (CBS), and a downgrade for Sunrise Senior Living (SRZ).

Boingo? Seriously?
We begin with a note of levity, as eminently respectable analyst DA Davidson lends some credibility to a company with a just as eminently silly name: Boingo Wireless. (If it helps to jog your memory, you've probably seen their Wi-Fi hotspot stations at the airport). According to the analyst, this small-cap stock with the $7 stock price has big potential, and will rise to $9 a share within a year. But is that promise realistic?

Actually, yes -- it's a whole lot more realistic than you think. Sure, on the one hand Boingo looks pretty expensive on the surface. 40 P/E ratio, 15% growth rate -- what's there to like in that?

But dig a little deeper, and you'll notice that with an enterprise value of under $150 million, but trailing free cash flow in excess of $15 million, the business of Boingo is actually quite cheap. As it turns out, 15% profit growth at Boingo is more than enough to support the valuation. And the $9 target price on this stock with the silly name? It's seriously doable.

I spy an overpriced CBS
A second stock worthy of consideration -- at least, Wall Street thinks so -- is CBS. On Thursday the analysts at Caris tweaked their valuation on the TV network upward by $2, predicting CBS shares will hit $41 a share a year from now.

You might want to pause before changing the channel in response to this rating, however. At 16 times earnings, CBS already fetches a small premium to the 14% long-term growth rate Wall Street has it pegged for. Plus, performance in the television sphere over the "long term" is never assured. (Remember when NBC was top o' the heap, back in the Friends years? And where are they now?)

Finally, CBS doesn't have the free cash flow advantages of a Boingo to lend its shares the support their too-pricey P/E lacks. Indeed, actual free cash flow at the company is barely three-quarters of what CBS reports for its "net income," fuzzing the valuation picture and suggesting this already not-cheap stock is more expensive than meets the eye.

The sun also sets
 And now, we come to our third and final featured rating: Sunrise Senior Living. By all rights, a nation with a swelling "pensioner" class, with millions of Baby Boomers aching (often literally) to retire, should be a great macro environment to be in the retirement home business. Why, then, did Stifel Nicolaus just downgrade Sunrise -- probably the most recognized name in the industry?

Mainly because Sunrise rival Healthcare REIT (HCN) announced a plan to buy Sunrise for $14.50 per share Wednesday . On the face of it, this certainly seems to limit upside to the stock, and if the deal goes through as planned, chances are that Sunrise's run is already done. Two factors, however, suggest that there's still hope for Sunrise to rise a bit further.

For one thing, lawyers are already swarming, complaining that Sunrise management is basically giving away the store at the current buyout price. (If successful, or if the publicity attracts a higher offer, such lawsuits could scuttle the deal and result in a higher purchase price by another acquirer.) For another thing... this is exactly what shareholders should hope happens.

You see, with free cash flow for the past 12 months coming to more than $87 million, and most analysts projecting 18% long-term growth for Sunrise, the valuation on this stock is actually less than 10 times annual cash generation. Sunrise is nowhere near expensive at the buyout price. Indeed, it's still cheap enough that there's reason to believe the company could either attract a better offer from another acquirer -- or do just fine on its own if the Health Care REIT deal falls through.

In the worst-case scenario, a buyer at today's prices has the Health Care REIT offer ($0.22 above the current share price) to rely on, and they'll get tiny profit out of it. Best case, the deal gets renegotiated -- or never happens at all -- and a buyer today gets to make even bigger profits tomorrow.

Fool contributor Rich Smith holds no position in any company mentioned. Motley Fool newsletter services have recommended buying shares of Health Care REIT.

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