Tuesday'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, our headlines feature sell ratings on a pair of big health care companies -- Intuitive Surgical (ISRG) and AstraZeneca (AZN) , balanced by ...

A big buy recommendation for BlackBerry
Last night's revelation that Microsoft (MSFT) was willing to pay big bucks to acquire cash-burning Nokia (NOK) had an unexpected result of making rival smartphone maker BlackBerry (BBRY) seem more attractive this morning.

According to StreetInsider.com, Merrill Lynch is warning that the combination of Nokia's money-losing smartphone business with Microsoft's ample cash coffers is "mostly negative" for companies that compete with Nokia -- like BlackBerry. Regardless, StreetInsider says that as of Tuesday, a research shop by the name of "Makor" has decided to initiate coverage of BlackBerry not with the logical "sell" or "neutral" ratings, but instead with a "buy."

Makor says BlackBerry shares, selling for $10 and change today, are destined to hit $14.60 within a year -- a 41% jump -- and investors are leaping aboard, as BlackBerry rises 2.4% in early Tuesday trading. But is that the right move?

There may be something to the idea that, if Microsoft will shell out $7.2 billion to buy a cash-burning Nokia cell phone division, it follows that someone else might spend even more money to buy unprofitable -- but free cash flow-positive -- BlackBerry. However... who?

I honestly don't see any buyers on the horizon for BlackBerry. And while the prospect of buying a free cash flow-stream of $1.9 billion annually -- for a market cap less than three times that sum -- is certainly intriguing, the fact remains that BlackBerry's profits are expected to shrink 6% per year over the next five years, so the free cash flow number is likely to shrink as well. Time may be running out for BlackBerry to find a suitor.

Is Intuitive Surgical crashing?
Switching tracks now to examine the day's bad news, StreetInsider has Chicago-based First Analysis Securities downgrading robotic surgery specialist Intuitive Surgical to an "underweight" rating, which news may explain why the stock is trading down slightly.

The stock hasn't really recovered from its big crash back in July, when Intuitive first warned investors to expect weak earnings -- then missed analyst estimates just a couple weeks later. Yet even so, still trading at 22 times earnings, First Analysis has its doubts that Intuitive Surgical stock is a bargain. Free cash flow at the firm -- $758 million over the past 12 months -- is still running comfortably ahead of reported GAAP earnings ($706 million). Yet, expectations for long-term earnings growth have sunk into the mid-to-low teens. As a result, the stock doesn't look particularly attractive even at its price-to-free cash flow ratio of 20, or its enterprise value-to-FCF ratio of 18, either.

To justify these kinds of earnings multiples, Intuitive simply has to find a way to grow faster than analysts think it can -- and until Intuitive proves the analysts wrong, First Analysis is probably right to be cautious.

AstraZeneca is no star
Speaking of companies with less-than-attractive growth prospects, analyst estimates for Britain's AstraZeneca look positively bleak. On average, analysts expect to see this company's earnings erode at the rate of nearly 10% per year, every year, for the next five years. Little wonder then that, looking at the stock and its 12.5 P/E ratio, analysts at Copenhagen's Danske Bank still aren't convinced the stock is cheap.

On Tuesday, Danske cut its rating on AstraZeneca from "hold" to "sell." This comes even though the company is churning out $7.3 billion annually in free cash flow and using that cash to pay its shareholders a beefy 5.7% (according to S&P Capital IQ) dividend yield.

That's a very attractive number, of course, even without earnings growth. The question, of course, is how long AstraZeneca can afford to pay such a rich dividend -- or how long it will consider it wise to spend that money on dividends, rather than, say, additional product research or acquisitions of promising target companies. Because with profits on the downturn, there's really little other than the dividend to recommend this stock to investors.

All it should take is one announcement of a dividend cut to send investors fleeing, and AstraZeneca stock falling.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical. The Motley Fool owns shares of Intuitive Surgical and Microsoft.

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