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 buy ratings for YRC Worldwide (YRCW) and Keurig Green Mountain (GMCR) . But the news isn't all good. Before we get to those two, let's take a quick look at why Goldman Sachs is...
Knocking the pipes at Flowserve
On a down day for Dow stocks in general, shares of Flowserve (FLS) are suffering worse than most -- down nearly 2% as of this writing. For this, you can thank the unfriendly analysts at Goldman Sachs.
This morning, Goldman announced it was picking up coverage of the industrial flow management equipment maker with a sell rating. Strangely, though, the $78 price target that Goldman assigns the shares is actually $4 more than what Flowserve shares cost today. So what's up with that?
Quoted on StreetInsider.com this morning, Goldman argues that Flowserve has "a solid franchise that generates strong returns." What worries the analyst, though, isn't Flowserve's bottom line, but how investors might react to trends on its topline. Goldman says these top-line growth expectations "could disappoint," and warns that Flowserve's earnings, too, will probably come in 1%-2% below what other analysts are predicting this year and next.
That could be a problem. After all, at 21 times earnings, Flowserve is hardly a cheap stock today. Most analysts expect to see the company produce 14% annualized earnings growth over the next five years, and knocking even a point or two off of that growth thesis would make an already pricey stock look even more expensive.
On top of all this, Flowserve already isn't generating as much free cash flow as its income statement suggests. FCF for the past 12 months was only $375 million, according to S&P Capital IQ data -- a good $120 million behind reported earnings, and enough to shift the valuation proposition even farther toward the "overvalued" end of the scale.
Long story short, I'm in agreement with Goldman Sachs on calling the stock a sell. The only thing I don't get is the $78 price target on a stock that's clearly overpriced at $74. That one's the real head-scratcher.
Green Mountain gets greener
Turning now to the day's good news, we find analysts at Argus Research upgrading shares of Keurig Green Mountain to "buy" -- and sending the stock climbing the mountain, up 3.6% already.
Argus is looking for "solid" revenue and improved earnings at the single-serve coffeemaker-maker through at least next year. The question is whether such short-term performance is enough to justify a long-term buy rating on the stock.