Wednesday's Top Upgrades (and Downgrades)



In general, this series focuses on actual upgrades and downgrades from Wall Street. With earnings season in full swing, however, most analysts are being kept busy just crunching numbers and plugging them in to create new price targets this week.

Fine and dandy. So today, we're going to examine three of the Street's most interesting price tweaks on some of the most interesting companies on the market, beginning with...

Coke is it! (Or is it?)
(NYSE: KO - News) wowed Wall Street with its first-quarter earnings report yesterday. Profits of $0.89 per share gained 8.5% over last year's Q1 and met Wall Street's consensus. Revenues of $11.1 billion ran nearly 6% higher than expected -- and the quarter now under way should be bigger still. Analysts predict a cool $13 billion in revs, and maybe a bit more. This all has the folks at UBS feeling optimistic about Coke and upping their price target from $73 to $77. Is that enough of a gain, though, to make investors bite (or sip)?

Probably not. Today, Coke sits at $74 and change, and UBS's promise of a 4% profit over the next 12 months falls flat. Even a generous dividend policy suggests we're looking at less than 7% in potential profits for a year's "work" holding onto Coke shares. It's no surprise, then, that UBS remains neutral on the shares. With the stock at 20 times earnings, investors looking for a bargain should conclude that Coke isn't it.

Intel: A smarter choice?
So what about Intel (Nasdaq: INTC - News)? Like Coke, Intel reported earnings yesterday and exceeded expectations. Intel, however, beat on both earnings ($0.56 per share pro forma, versus an expected $0.53) and revenues, which at $12.9 billion were also ahead of consensus. Like Coke, Intel is garnering some analyst love, with Longbow adding 13% to its price target for the stock and predicting that the shares will hit $34 within a year. The analyst thinks you should buy Intel, but is that really good advice?

On one hand, Intel shares look fairly priced at 11.6 times earnings, with 11.6% long-term growth predicted -- the very definition of fair value. While reporting a headline number of $2.7 billion net income, a closer reading of the company's earnings report reveals that Intel's actual cash profits for the quarter were ... zero. Zilch. Literally no dollars. Every single dollar generated as operating cash flow last quarter was quickly invested in capital spending. This level of spending may be necessary to keep the business viable and fend off challenges from competitors such as ARM Holdings (Nasdaq: ARMH - News), but nonetheless, it shows us that Intel's quality of earnings is a whole lot less than what most people think.

Open house for Lennar
Last but not least: Lennar (NYSE: LEN - News). Earlier this week, we took Wall Street to task for being either early, or maybe late, to the party on homebuilding stocks. It depends on how you look at it.

With companies like Lennar far off their lows and trading far in excess of book value, it's clear that the big bounce has already happened. On the other hand, weak earnings and a high stock price, combined with a miserable sentiment report out of the National Association of Homebuilders (NAH), suggest that a return to strong profits is still quite a way off. Yet housing stocks have been rising.

So what's an analyst to do? You can hardly recommend selling Lennar. That would look pretty dumb if the stock kept rising. But then, absent good reason for the rise, it's hard to recommend buying, either. The safest course is to just keep raising your price target in tandem with the stock's rise -- and this is what analyst Compass Point decided to do today, upping Lennar to $25 a share but keeping its recommendation at "neutral."

This may make sense to an analyst, but to investors it's portfolio suicide. At 61 times earnings, Lennar is expensive even if analysts' pie-in-the-sky prediction of 29% annualized earnings growth for the next five years pans out. But if the NAH survey is right, and housing's still in the dumps, then this stock's overpriced, plain and simple.

Fool contributor Rich Smith owns no shares of, nor is he short, any company mentioned above.

The Motley Fool owns shares of Intel and Coca-Cola. Motley Fool newsletter services have recommended buying shares of Intel and Coca-Cola. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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