Wednesday’s Top Upgrades (and Downgrades): Cree, Inc. (CREE), Harris Corporation (HRS), AeroVironment, Inc. (AVAV)

On the minus side, AV’s new earnings guidance tells us that despite appearing to cost only “13 times earnings” today (according to Yahoo! Finance), the company’s going to earn so little this year that its P/E ratio will soon soar as high as 44. The company’s also reporting exceedingly weak free cash flow, even if the good news is that it’s not as weak as it looked just a few quarters ago. FCF for the trailing 12 months now clocks in at $7.3 million, implying a price-to-free-cash-flow ratio of 56 for the company — a valuation even worse than the forward P/E.

Result: There’s little question that AV is no buy at today’s depressed profits, and still too-high prices. The only question is whether AV’s a sell. (And the answer, I fear, is “yes.”)

When Harris met Sell-y
Similarly bleak news — if slightly less so — greeted Harris Corporation (NYSE:HRS) investors this morning, as analysts at Oppenheimer shrugged off news that Harris has just won a big Air Force meteorological satellite contract, and downgraded the shares to “underperform,” regardless.

Is the downgrade deserved? It’s hard to say. Although technically “unprofitable” as GAAP defines such things, Harris actually generated considerable cash profit last year, generating about $676 million in positive free cash flow. That’s enough cash to give this stock a price-to-free-cash-flow ratio of 7.6, and an enterprise value-to-free-cash-flow only moderately less attractive at 10.3.

These aren’t exactly high prices, folks — especially not when set next to AeroVironment’s sky-high valuations and compared side-by-side. Although analysts see faint hope of Harris growing earnings any time soon, with only 3% annualized growth projected over the next year, the simple fact is that with Harris still paying a 3.1% dividend yield, providing valuable services to the government, and selling for very low P/FCF and EV/FCF ratios, I simply don’t agree that the stock must be sold.

Long story short: Harris may not be the world’s best buy, but it’s not so awfully expensive that you need to sell it, either. For my money, the stock’s still worth a hold on the potential that earnings growth may turn out to be not as slow as the analysts fear.

Motley Fool contributor Rich Smith owns shares of AeroVironment. The Motley Fool recommends AeroVironment, Goldman Sachs, and Home Depot. The Motley Fool owns shares of AeroVironment.

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

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