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 include a downgrade for Quicksilver Resources (KWK), an upgrade for UnitedHealth Group (UNH), and, right out of the gate -- a brand-new buy rating for Churchill Downs (CHDN). Let's dive right in.
Bad news first
First up, Quicksilver Resources announced this morning that it's selling a 25% interest in its Barnett shale oil and gas properties to a Tokyo Gas subsidiary for $485 million. On the surface, this sounds like good news, $485 million being pretty significant money. But why, then, is Credit Agricole responding to the news by downgrading Quicksilver to "sell"?
The answer probably has less to do with the sale itself than what necessitated it. Quicksilver, you see, isn't a profitable operation -- nor do analysts expect it to become one next year, either. The company's deeply in debt -- about $2 billion worth. And it's continuing to burn cash, as it's done for years, having spent $258 million more on capital improvements last year than it took in as operating cash flow.
With not enough cash coming in the door, Quicksilver had to raise some by selling off assets in the Barnett. Problem is, every time it does this, it reduces the level of assets from which it can earn income in the future -- effectively selling Peter to pay Paul. Unless the company can start generating enough cash from its business to pay its bills, there's probably only one way this story can end... and rather than wait it out, Credit Agricole flipped ahead to the last page this morning.
United... wealth?
In happier news, shareholders of megainsurer UnitedHealth learned today that ace analyst Standpoint Research is endorsing their stock, applying a buy rating and upping its price target on the shares to $69.
It's right to do so.
Priced under 11 times earnings, UnitedHealth looks cheap on its face with an 11% projected long-term growth rate and a modest 1.5% dividend yield. In fact, though, the company's even cheaper than that. With $6.1 billion in trailing free cash flow, UnitedHealth generates about 10% more cash profit in a year than GAAP accounting standards allow it to report as "net income." Even penalizing the company for its sizable debt load, this works out to an enterprise value-to-free cash flow ratio of only 10.5 -- which again, looks mighty cheap relative to the company's growth prospects and dividend payments.
Long story short, in a market that looks expensive pretty much everywhere you look these days, UnitedHealth is one of the few remaining stocks that still looks cheap enough to buy.