Thursday'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'll look at why one analyst is ordering up a bouquet for 1-800-Flowers (FLWS), while a second is sending Under Armour (UA) to the showers, and several more have begun clipping coupons at Bed, Bath & Beyond (BBBY).

Who doesn't like flowers? Nobody!
Spring has sprung, and summer begun. Before the bloom comes completely off the rose, The Benchmark Co. has decided to rush out a new buy rating on 1-800-Flowers. According to the analyst, this small-cap purveyor of special delivery flowers, which prices at just $3 and change today, could cost you a five-spot within a year.

And you know what? Even that price might be a bargain. Selling for a low-seeming P/E ratio of just 14, Flowers looks cheap relative to Wall Street estimates that it will be growing earnings at 16% per year over the next five years. Gilding the lily is the fact that Flowers generates significantly more free cash flow (about $24 million) than it reports as net income ($16 million). And what this means, basically, is that at less than nine times annual cash production, the stock is much cheaper than it looks.

Benchmark's right. 1-800-Flowers is a "buy."

Don't take the "over" on Under Armour
In other consumer-focused news, analysts at UBS are just about ready to send Under Armour to the showers. Shares of the sportswear specialist have gained more than 40% over the past year. But at a share price that costs 52 times earnings -- and infinity times the free cash flow that UA currently doesn't generate -- the valuation on this one is looking a bit winded.

As UBS relates, UA's ability to steal market share from Nike (NKE) was key to the analyst's previous enthusiasm for Under Armour, as was the momentum UA had built up in spring apparel. UBS worries, though, that Nike's moves to cut the prices of its goods has deprived UA of momentum, and given Nike a chance to win back share previously lost to its upstart rival.

It's hard to argue with this call, either. Fifty-two times earnings is an awful lot to pay for a sneaker maker that's coming unlaced. In fact, even if all goes as planned, and Under Armour is able to grow its profits 20% per year, as most of Wall Street still expects, 52 times earnings is probably about twice what an investor should pay to own a share of Under Armour.

Long story short, at today's high prices, you're probably better off shorting this one than going long.

Is Bed, Bath a better buy?
Housewares retailer Bed, Bath & Beyond turned in a respectable quarter last night, reporting 5% sales growth and a 24% improvement in profits. But gross margins are down, and management is warning that this quarter's earnings might not look so good.

Lowered expectations begat lowered price targets from Wall Street this morning, as tic-tac-toe, three-in-a-row, analysts at Canaccord Genuity, Oppenheimer, and UBS dialed down their optimism. But even this bad news isn't as bad as it sounds.

The least optimistic of these analysts still expects Bed, Bath shares will fetch $71 apiece in 12 months, which is close to what the shares cost pre-earnings, and suggests nearly $10 upside from where the shares trade today. Meanwhile, the most optimistic analyst -- Oppenheimer -- says Bed, Bath could go even higher, and perhaps top $80 within a year. Who's right?

Actually, maybe none of them. Consider that at 14 times earnings, and an even pricier price-to-free cash flow ratio, Bed, Bath shares already sell for a small premium to what you'd ordinarily want to pay for 14% profits growth. Given that the shares already cost slightly too much, expecting them to rise in price just as earnings start to come under pressure seems a bit unrealistic. Wall Street was wrong before about Bed, Bath. It's not "beyond" the realm of possibility to imagine they'll be wrong again in 12 months' time.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Amazon.com and Under Armour. Motley Fool newsletter services have recommended buying shares of Amazon.com, Under Armour, Nike, and Bed Bath & Beyond. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. Motley Fool newsletter services have recommended creating a bear put spread position in Under Armour.

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