DryShips Inc. (DRYS), InvenSense Inc (INVN), Abercrombie & Fitch Co. (ANF): Thursday’s Top Upgrades (and Downgrades)

Sensing value at InvenSense

Wrapping up, we now turn to InvenSense Inc (NYSE:INVN), a maker of tiny electronic widgets that, for example, tell your tablet computer which way is up. InvenSense shares received a new buy rating from Needham & Co. this morning, which initiated the company at a $20 price target. According to Needham, “InvenSense Inc (NYSE:INVN) offers investors a unique opportunity to capitalize on the rapidly expanding motion sensor capabilities found in mobile handsets as well as numerous other electronics devices. InvenSense has a winning technology approach that we believe will remain ahead of competitive offerings and extend its customer penetration from Samsung and smaller mobile handset vendors such as HTC, into other major opportunities such as Apple.”

Many other analysts agree. On average, Wall Street estimates that InvenSense Inc (NYSE:INVN) will grow its earnings at 18.5% annually over the next five years. That’s not a half-bad growth rate, albeit probably a little expensive given that the stock trades for 28 times trailing earnings today. The bigger problem at InvenSense is that its cash profits don’t measure up to the earnings it’s reporting under GAAP.

Trailing free cash flow at the company amounts to only $35 million — about $0.64 per $1 reported as GAAP profits. This means that the company is trading for approximately 43 times free cash flow today. So even if analysts are right about the growth rate — even if Needham is right about InvenSense Inc (NYSE:INVN)’s opportunities — the price is still so high as to make it unlikely that InvenSense will “grow into its valuation” anytime soon.

Long story short: I like the company, I like the business, but I just can’t recommend buying InvenSense at this valuation.

Fool contributor Rich Smith owns shares of Apple and Abercrombie & Fitch. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and InvenSense.

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

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