With Children’s Place shares currently costing 17.5 times earnings, that’s a disturbing prediction. Most analysts already see the stock scoring only 8% annual earnings growth over the next five years, which suggests the stock is already overpriced. Slow that growth rate further, as Janney now advises, and a pricey stock becomes even more so.
That said, I don’t think there’s any need to panic here. No matter what the GAAP numbers say, Children’s Place is still doing a fine job of churning out cash — $117 million in free cash flow over the past year, or nearly twice what its income statement suggests the stock is “earning.” At a $1.1 billion market cap, this works out to about a 9.3 times price-to-FCF valuation, which, while a bit rich for an 8% grower, isn’t unreasonably high.
Long story short: Janney’s new neutral rating looks about right to me. But there’s no burning need to rush right out and sell the stock.
Boingo loses its bounce
If only I could say the same about the last, and least, stock on today’s list: Boingo Wireless. Last week, the provider of mobile Wi-Fi hotspots at places like airport terminals announced fourth-quarter earnings that missed Street estimates by half — just $0.03 per share earned, versus $0.06 expected.
The company compounded the miss with a projection of a potential loss in the current first quarter 2013, followed by a full-year profit of only $0.03 to $0.08. That means that this stock, which currently reads at “31.2” for its P/E on Yahoo! Finance, and carries a forward P/E ratio of 39.3, could potentially cost you as much as 223 times what it earns this year, if earnings come in at the low end of guidance. Pretty pricey.
On the plus side, it’s true that Boingo often generates free cash flow in excess of reported net income, so the picture may not be as bleak as it looks. But analysts at Ladenburg Thalmann don’t seem inclined to give Boingo the benefit of the doubt. This morning, they downgraded the stock to neutral, and assigned a $6.50 price target. (That’s about $0.19 below where the stock trades today.)
So far, Boingo shares have already lost 25% of their value over the past 52 weeks, so selling at this point is going to hurt. Still, when you weigh the risks of potentially getting stuck owning a triple-digit P/E stock (growing at less than 20%) versus the potential rewards of finding out (once Boingo files its 10-K report containing updated cash flow information) that the stock isn’t quite as overpriced as it looks, I still think the negatives outweigh the positives. If I were an owner, I’d cut losses and abandon ship on this one today.
Fool contributor Rich Smith owns shares of Crocs, but he holds no other position in any company mentioned. Motley Fool newsletter services have recommended buying shares of Nike. link
The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.
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