Activision Blizzard, Inc. (ATVI), McDermott International (MDR): Wednesday’s Top Upgrades (and Downgrades)

Fossil did not provide an update on free cash flow, or even a cash flow statement with yesterday’s earnings announcement. But if we presume that the company’s free cash flow numbers were roughly as strong as its earnings numbers, this would still suggest that the stock is as overpriced and valued on FCF as it is on GAAP earnings. Citigroup is right to downgrade it.

McDermott dissed
Finally, we come to McDermott International (NYSE:MDR), which reported an “earnings miss” fully as large as Fossil’s “earnings beat” earlier this week. On Monday, McDermott International (NYSE:MDR) announced that it had transformed last year’s second-quarter profit into a $0.63-per-share quarterly loss this past quarter. This morning, analysts at Stifel Nicolaus responded to the miss by downgrading McDermott International (NYSE:MDR) to “hold,” and criticizing the company for “poor execution over the past few years.”

Stifel is right to be concerned. Although McDermott International (NYSE:MDR) only technically became unprofitable earlier this year, and has reported strong GAAP profits for most of the past five years, its ability to generate positive free cash flow has markedly deteriorated over the past two years. Combined, fiscal years 2011 and 2012 saw McDermott burn through more than one-quarter billion dollars in negative free cash flow. As of today, the company’s record of burning through $277 million in negative free cash flow over the past 12 months looks even worse than its reported GAAP loss of $38 million.

Fact is, while some shareholders may be upset to learn of Stifel’s downgrade to “hold,” I think the analyst is actually being too lenient. A company incapable of generating positive cash flow for its shareholders does not deserve to be even “held,” much less “bought.”

The article Wednesday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Fossil. The Motley Fool owns shares of Activision Blizzard and Fossil.

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