This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we'll find out why analysts think Coach (COH) has profits in the bag, play a game of Guess? (GES), and ask Vringo (VRNG) what the heck it is.
Coach has it in the bag
Investors weren't best pleased by the earnings Coach reported last week. With profits matching expectations, but sales falling short, Coach shares quickly shed nearly 20% of their value.
But what goes down must come up -- or so hope the analysts at Canaccord Genuity, which this morning upgraded the shares to "buy" with a $71 price target. Arguing that "investors overreacted following COH's report of weakness in its N.A. factory business in Q4," Canaccord says, "the stock's current multiples of 14x F2013E EPS and 8x F2013E EV/EBITDA provide investors with an attractive entry point." China in particular is expected to "become a greater contributor to profitability as it ramps from 11% of the store base in F2012 to a projected 21% by F2017."
If Canaccord sounds excited about the stock's prospects, it's not without reason. At 16 times earnings, Coach shares don't carry much of a premium to their 14% long-term projected growth rate. What premium there is, is easily paid for by the stock's generous 2.3% dividend yield. At worst, the stock looks fairly valued. At best, it's a premium brand selling for a plebeian price.
In contrast to Coach's optimism, consider the downgrade (to "hold") that Standpoint Research just leveled at Guess? On the surface, Guess? looks anything but pricey. Its 11.4 P/E ratio compares well to its 11.5% projected growth rate. Plus, Guess? pays an even bigger divvy than does Coach -- 2.8%!
So why did Standpoint downgrade? According to StreetInsider.com, the analyst is basically making a valuation call, and collecting profits on the stock's 19% run-up since mid-May.
Arguably, the stock remains undervalued even after the run-up, thanks to its hefty dividend yield. But lacking the premium brand status of Coach, Standpoint is deciding that discretion is the better part of value... and getting while the getting is good.
Is Vringo the fifth Beatle?
And finally, class, we have a new student joining us today -- mobile video software maker Vringo. It's not exactly a household name, so if you've never heard of it before, you'll be surprised to learn that Vringo has actually been public for more than two years now! (What's more, the stock has more than doubled over the past year.)
This kind of performance creates its own publicity, and this morning, Vringo caught the eye of analysts at Maxim Group, which initiated the stock at "buy." Maxim is pointing to the "video ringtone" app maker's recent settlement with AOL as portentous of a similar settlement being reached with Google (GOOG). As Maxim argues: The AOL victory "offers confirmation that there is validity to the Vringo/Innovate Protect search patents."
Working some back-of-the-envelope numbers, Maxim suggests that if Vringo can extract a settlement from Google as well as AOL, the company could conceivably begin collecting $92 million a year in high-margin royalty payments. To put that number it context, $92 million is about three-quarters of the company's current market cap.
Speaking of which, as a small-cap penny stock, and one with no profits today, but potentially quite a lot of profits tomorrow, Vringo fits the definition of a "speculative" investment to a T. But Maxim seems to think the risk is worth it... and with Vringo shares up 7% on the upgrade news, it appears many investors agree.
Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Coach, Google, and Guess?. Motley Fool newsletter services have recommended buying shares of Coach, Guess, and Google. Motley Fool newsletter services have recommended writing covered calls on Guess?. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.