Tuesday's Top Upgrades (and Downgrades)

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This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, for the second day in a row, Wall Street is largely taking a powder, hunkering down against Hurricane Sandy, and keeping ratings changes to a minimum. Across the length and breadth of Wall Street, so far we've only spied one true upgrade or downgrade, so let's start with ...

Dassault's downgrade
Dassault Systems
(DASTY) appears to be the sole recipient of an actual ratings change today -- and not a good one at that. Following up on last week's earnings report featuring 16% revenue growth and 16% pro forma growth in earnings, RW Baird cut shares of the French 3-D design software maker to "neutral" this morning.

Perhaps Dassault should be grateful for Sandy keeping other analysts' heads down, though, because when you look closely at the numbers, it's not entirely clear the company deserves even the neutral rating Baird allowed it to keep. Priced in excess of 32 times earnings, Dassault sells for a big premium to the 12% long-term growth Wall Street expects it to produce. Free cash flow is strong, of course. That's par for the course for software companies. But even so, Dassault's $645 million in trailing free cash implies a valuation of more than 20 times free cash flow, which is still pretty expensive for a 12% grower.

Long story short, when markets reopen Wednesday, I'd rather be short this one than long.

And that's a wrap... almost
That's quite literally "it" for true upgrades and downgrades, ratings-wise, for today. We do have a couple tweaks to price target to report, however, and these affect companies with significantly higher name-recognition than Dassault possesses. First up, Comcast (CMCSA) got a big bump in price target this morning, courtesy of Wunderlich Securities. And in a pleasant surprise, this "price upgrade" appears to be justified.

Comcast at 17 times earnings doesn't look terribly overpriced for 14% growth. And the company even pays a 1.7% dividend yield, bringing the shares even closer to fair value. What really tips the scales in Comcast's favor, though, is the company's huge cash-generating prowess. Over the past year, Comcast has generated a whopping $9.8 billion in total free cash flow, even after netting out capital spending. That number is more than 64% above Comcast's reported "net income" under GAAP, and prices the stock at roughly 10.4 times free cash.

Even with Comcast's sizable debt load ($28.3 billion, net of cash on hand), this yields an attractive valuation on the cable giant. Good enough to justify a price target? Absolutely. Good enough to attract some out-and-out buy ratings from other analysts, once Wall Street gets back up and running? Yes, I think we can safely predict that as well.

Riverbed's rising
A second potential opportunity for investors to keep an eye on is Riverbed Technology (RVBD). With markets quiescent, analyst MKM Partners took the opportunity to quietly cut its price target on the stock this morning (to $20). At first glance, that may seem prudent in light of Riverbed's always-scary P/E ratio, currently pushing 54 times earnings.

Look a little closer, though, and what do we see? Positive free cash flow that, at $223 million, is triple the $70 million in "net earnings" that Riverbed is permitted to report under GAAP, and a valuation of less than 16 times free cash flow. This makes Riverbed look like a bargain if the company comes anywhere close to the 19% annualized profits growth rate Wall Street expects of it.

Lord willing, and the creek don't rise. 

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Riverbed Technology. Motley Fool newsletter services recommend Riverbed Technology and Dassault Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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