Google Inc (GOOG) Among Monday’s Top Upgrades & Downgrades

But G-III may not deserve either one.

Sure, on one hand, I see the appeal in G-III’s “14 price-to-earnings ratio,” which looks attractive enough in light of consensus expectations for 20% earnings growth at the company. But there are two problems with this buy thesis: The price and the earnings.

Price-wise, calling G-III a 14 P/E stock fails to take into account the more than $240 million in net debt being toted around on G-III’s balance sheet. Factor that into the valuation, and the stock’s “enterprise value” to earnings ratio is closer to 18 than to 14.

As regards earnings, G-III failed to include a cash flow statement with its recent fourth-quarter earnings release, so it’s hard to say for certain whether the company generated real free cash flow in line with the $2.80 in earnings per share that it reported. What we do know for certain is that the company burned cash steadily in the first three quarters of last year (as it usually does), so going into the fourth quarter, at least, G-III was firmly free cash flow negative. The company’s 10-K filing may show that all’s well with the company — or it may not. But until we see the numbers therein, it’s too early to call G-III a buy.

Neutral on Northrop Grumman
Last but not least, we come to defense contractor Northrop Grumman Corporation (NYSE:NOC), recipient of an upgrade to “neutral” from investment banker JPMorgan.

Northrop, like most of its brethren in the military-industrial complex these days, is dogged by concerns that cuts to defense spending will curtail its ability to earn a profit. But while I’m not dismissing these concerns entirely, it does seem to me that the low valuation on Northrop shares more fully prices in the risk of defense cuts.

Northrop shares sell for only about two-thirds of annual sales, after all, which is one of the lower valuations you’ll find among its peers. Northrop costs about nine times earnings, largely due to the fact that analysts aren’t expecting the stock to grow these earnings at all — but actually to shrink them a bit — over the next five years.

Even so, though, this “bad” growth news means that if Northrop just holds the rudder steady and maintains its current level of profitability, its $2.3 billion in annual free cash flow will produce enough cash to buy back every single share of the company’s stock — or alternatively, to back up the firm’s entire market cap with cash-in-the-bank — in less than seven-and-a-half years. That prospect, it seems to me, is more than good enough to justify JP’s neutral rating on the stock. It might even be good enough to justify a “buy.”

The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com.

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