M&A Chatter Pushes This Railroad Too High
Stifel Nicolaus made a bold call on Monday, downgrading Kansas City Southern (NYSE:KSU) to “Sell” after a 40% 2013 rally. The firm specifically notes that its rally was due to M&A speculation, and that now the company’s valuation is too high.
Kansas City Southern (NYSE:KSU) is trading at 5.75 times sales with a P/E ratio of 31.50, and it posted revenue growth of just 1% during its last quarter. Compared to the S&P 500 and its P/E ratio of 19, Kansas City Southern (NYSE:KSU) does appear a bit pricey. After all, this is a railroad company, not a technology stock — yet it’s trading at metrics greater than Google’s, while the overall railroad industry trades at a valuation relative to the market. Therefore, I would have to agree that Kansas City Southern (NYSE:KSU) is a “Sell”.
Jefferies Expecting A “Bumpy Ride” From this Retail Company
Jefferies’ downgrade of Bed Bath & Beyond Inc. (NASDAQ:BBBY) wasn’t quite as harsh as Stifel’s, yet the reason was the same: valuation. Jefferies downgraded Bed Bath & Beyond Inc. (NASDAQ:BBBY) to “Hold” from “Buy,” and lowered its price target from $76 to $71, saying that it expects a “bumpy ride”.
While Jefferies does expect a “bumpy ride”, the firm also notes that Bed Bath & Beyond Inc. (NASDAQ:BBBY) could eventually become a leader in the home-furnishing retail space. This basically means that Jefferies anticipates short-term problems, yet believes that Bed Bath & Beyond Inc. (NASDAQ:BBBY)’s long-term prospects are promising.
In 2013, Bed Bath & Beyond has seen gains of 21% and currently trades with a P/E ratio of 14.80 (far below the industry average of 18.0) and a price/sales ratio of 1.38. Furthermore, it saw top-line growth of 25% during its last quarter. Therefore, I’m not sure where the analyst is finding fault.
Bed Bath & Beyond Inc. (NASDAQ:BBBY) is not overvalued by any stretch of the imagination. In fact, it meets the requirements of a value investment, with better-than-its-industry growth, while trading at a discount to the industry average.. With that said, I see no reason to sell at these levels, and believe that Jefferies’ call will be proven to be wrong.
Another Illogical Call on Valuation
Goldman downgraded Synovus Financial Corp. (NYSE:SNV) to “Sell” on Monday with a $2.50 price target, citing valuation as the primary reason. According to Goldman, Synovus Financial Corp. (NYSE:SNV) has seen an M&A speculative rally, and its earnings and fundamentals don’t support its valuation.
Shares of Synovus Financial Corp. (NYSE:SNV) fell almost 3% on news of this downgrade. But much like Bed Bath & Beyond, I find its valuation-related downgrade hard to assess. Alongside B of A and Citigroup, Synovus Financial Corp. (NYSE:SNV) trades at a fairly significant discount to its $3.32 in book value per share. Therefore, I don’t consider Synovus too expensive, especially considering the financial sector’s strong performance over the last year. In fact, I’d consider Synovus Financial Corp. (NYSE:SNV) one of the cheaper stocks in the space.
Conclusion
Each of these downgrades was made on the basis of valuation. Yet I only identify one of these three stocks trading at levels that exceed its industry averages. For the most part, these calls don’t appear fundamentally warranted.
Investors can use this as a lesson: Seek temporarily weakened stocks that have fallen for the wrong reasons. In the case of Bed Bath & Beyond Inc. (NASDAQ:BBBY) and Synovus Financial Corp. (NYSE:SNV), I would monitor both closely, and watch for signs that their fundamentals are getting stronger.
The article Monday’s Market-Moving Downgrades Worth Noting originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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