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 new upgrades for Men's Wearhouse (MW) and TJX Companies (TJX) . The news isn't all good, though. Before we move on to those two, let's take a quick look at why one analyst is...
Cutting ties with United Technologies
As you've probably heard by now, United Technologies (UTX) reported Q2 earnings yesterday , and the verdict is in: "Nothing stood out as exceptional, and 2014 cash flow guidance was reduced."
At least, that's how analysts at Wells Fargo are summarizing the quarter. Warning that Street projections for United Technologies' forward earnings are overly optimistic, Wells proceeded to cut its rating on the stock to "market perform" this morning and warned that UTC will in all likelihood "miss earnings" next year by about 5%.
According to Wells, the best United Technologies is likely to report next year is $7.25 in profits earned per share. That's a fair sight better than the $6.18 per share the company has reported over the past 12 months, granted. But it still leaves the stock selling for about 15 times next year's earnings. The best you can say about such a valuation is that, if analysts who follow UTC are right, and the company manages to achieve 12% earnings growth over the next five years, then between that growth rate and the firm's 2% dividend yield, 15 times earnings might not be too much to overpay for the stock.
Even viewed in this most favorable light, though, the stock looks no better than fairly valued today. Wells Fargo is right to pull its buy rating. There will be plenty of time to re-recommend the stock once a decent margin of safety opens up after the next stock market pullback.
Will you like the way Men's Wearhouse looks (in your portfolio?)
Turning now to the day's good news, we begin with Men's Wearhouse, now finally in possession of its erstwhile archrival, Jos. A. Bank. Men's Wearhouse completed its absorption of Jos. A. Bank in June, and one month later, analysts at Goldman Sachs have taken a fresh look at the reinvented company -- and declared it a winner.
As quoted on StreetInsider.com this morning, Goldman says it's reinitiating coverage of Men's Wearhouse with a buy rating because "MW has the opportunity to more than double EPS from $2.22 LTM to $5.15 by 2016." Goldman sees the combination of the two companies as controlling 30% of the men's suits market in America, and believes that the company's core business, at least, will continue growing profits at a long-term average rate of 17%.
Expectations for Jos. A. Bank's contribution are more limited, however. And with most analysts looking at the combined company, and projecting only 12% annual long-term earnings growth, it's hard to see how investors will profit from following Goldman's advice and paying the 42 times earnings valuation currently attached to the stock.
Granted, this picture could change as the merger takes shape, updated financials are reported, and merger "synergies" begin to appear. For the time being, though, I think investors are best advised to remain skeptical of Goldman's endorsement -- and hold off on buying shares of Men's Wearhouse.
Is TJ Maxx a fashion leader?
I'm similarly skeptical of our other retailer upgrade of the day -- TJX Companies, owner of the TJ Maxx chain of stores. This morning, Northcoast Research announced an upgrade to buy for TJX, saying that sales are likely to accelerate going forward, sparking long-term earnings growth.
Most analysts agree that TJX has only modest growth potential, however, with 12% annualized earnings growth being the most common assumption. If you ask me, TJX is going to have to grow a whole lot faster than that in order to justify the 18-times earnings valuation on its stock.
Meanwhile, the company's results from last quarter showed TJX growing earnings at just a fraction of one percent, and growing sales less than 5%. That's obviously too slow to justify the stock's 18 times multiple to earnings. Until management proves that it can do better than that -- much better -- I'm going to have to say that this upgrade, too, is not worth paying attention to.
Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.