This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines include an upgrade for Infinera Corp. (NASDAQ:INFN), but downgrades for both Cabelas Inc (NYSE:CAB) and LeapFrog Enterprises, Inc. (NYSE:LF). Let’s hop right in, beginning with why…
LeapFrog may not hop as high
The trading week’s beginning on a less aggressive note for shareholders of tot-gaming conglomerate LeapFrog, downgraded this morning to “buy” from a previous recommendation of “strong buy” at Ascendiant Capital.
Essentially, what this means is that Ascendiant still likes the prospects of the company that made three of the four best-selling toys of 2012. Still, with earnings coming out as soon as Wednesday, the analyst sees no point in getting ahead of ourselves. While LeapFrog certainly looks buyable at a price-to-earnings ratio of just 11, and a projected long-term growth rate of 20%, those numbers could change in a jiffy when LeapFrog reports its latest earnings tally.
In short, Ascendiant is suggesting investors look both ways before trying to play Frogger on the Earnings Season Superhighway. Take a breather for now, examine the numbers when they come out, and then decide whether you really want to buy more of this stock.
To me, that sounds like sound advice. After all, while the P/E on this one looks good, LeapFrog is generating significantly less free cash flow than its GAAP earnings suggest — only about $25 million across the past four reported quarters. That suggests the stock may not be quite as cheap as it looks, and argues strongly in favor of caution heading into earnings day.
Cabela’s versus the bears
Wall Street’s even more worried about the prospects of sporting goods retailer Cabela’s this morning, as Feltl & Co. downgrades the shares from buy to hold. And once again, the analyst is right to be cautious.
While it’s true Cabela’s generates greater free cash flow than does LeapFrog, and is growing nearly as fast (17% projected over the next five years), its P/E ratio — 20 times earnings — is still quite high. Also important: While LeapFrog is a company with $50 million cash and no debt, Cabela’s is much more highly leveraged, sporting a balance sheet piled high with $2 billion more debt than cash.
Result: At an enterprise value-to-free cash flow ratio of 28, Cabela’s shares already price in all of its strong growth prospects and more. The company’s going to have to grow even faster than Wall Street thinks it will to justify a valuation this high.
Getting aggressive on Infinera
Last but not least, we come to Infinera, an unprofitable networking equipment maker for which expectations always seem to run high. Today is no exception, as analyst MKM Partners urges investors to rush right out and buy a few shares ahead of earnings — which are due out as early as tomorrow.
MKM says this not because the company’s expected to wow us on Tuesday, mind you. To the contrary, most analysts on Wall Street think Infinera will report a $0.06-per-share loss, equivalent to what it lost a year ago. If they’re right, that’ll bring total 2012 losses to $0.40 per share — but here’s the thing: In 2013 Infinera is expected to cut those losses by 75% (to $0.10 a share), en route to an eventual transformation into profitability. It’s this prospect of improved performance going forward — and maybe even some management guidance that would confirm Infinera is on track — that has investors feeling optimistic about Infinera’s chances tomorrow.
As for me, though… I’m still looking at numbers that show Infinera burning increasing amounts of cash ($100 million over the past four reported quarters alone), and feeling skeptical. Infinera remains a “show me” stock. Mere promises just won’t cut it.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Infinera and LeapFrog Enterprises (NYSE:LF). The Motley Fool owns shares of Infinera and LeapFrog Enterprises.
The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.
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