Wednesday’s Top Upgrades (and Downgrades): Dicks Sporting Goods Inc (DKS), Dreamworks Animation Skg Inc (DWA), Riverbed Technology, Inc. (RVBD)

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 upgrades for Dicks Sporting Goods Inc (NYSE:DKS) and Dreamworks Animation Skg Inc (NASDAQ:DWA). But it’s not all good news, so let’s start off with one analyst who thinks that…

Riverbed is a dry hole
In a (very) delayed reaction to Riverbed Technology, Inc. (NASDAQ:RVBD)‘s underwhelming Q4 earnings report ($0.29 per share, in line with analyst estimates), analyst Wunderlich Securities announced this morning that it’s cutting its price target on the tech star to $19 per share. Mind you, Wunderlich still likes the stock and recommends buying it. It just doesn’t think Riverbed Technology, Inc. (NASDAQ:RVBD) is going up as much in share price as it once did.

But that’s OK. In fact, with Riverbed Technology, Inc. (NASDAQ:RVBD) shares currently costing only $15 and change, a move to $19 is more than OK — it would be about a 22.5% gain in value from today’s prices. What’s more, I think such a move is achievable.

After all, with free cash flow four times as strong as its reported earnings, Riverbed Technology, Inc. (NASDAQ:RVBD) shares today only cost about 12x free cash flow — roughly equal to the stock’s forward earnings multiple. With long-term profit growth still projected to average 22.5% annually over the next five years, the stock’s not expensive at all at today’s prices. Fact is, even after Riverbed Technology, Inc. (NASDAQ:RVBD) reaches Wunderlich’s new, lowered price target, I think it will still have room to run higher.

Dick’s dodges market downturn
Better news greeted shareholders of Dicks Sporting Goods Inc (NYSE:DKS) this morning, when they awoke to find their share upgraded to buy by investment banker Monness, Crespi, Hardt. Indeed, the $61 target price Monness now ascribes to Dick’s suggests even greater upside than Wunderlich posited for Riverbed — a potential 28% gain from today’s prices.

There’s just one problem with Monness’s projection, however. It’s wrong.

Priced at 22 times earnings already, and projected to grow these earnings at 15.5% annually over the next five years, Dicks Sporting Goods Inc (NYSE:DKS) looks expensive on its face. Drill down into the firm’s cash flow statement, though, and you’ll notice the stock is actually even more expensive than it looks. With trailing free cash flow of only $219 million, Dick’s only generates about $0.75 in real cash profit for every $1 it reports as “net income” under GAAP. As a result, a stock that looks expensive at a “22 P/E” looks positively overpriced once you realize that it costs nearly 27x free cash flow.

Result: Even Dicks Sporting Goods Inc (NYSE:DKS) modest 1% dividend yield isn’t enough to move the valuation needle on this stock. A growth of 15.5% simply isn’t fast enough to justify a 27x multiple on the stock, and Dicks Sporting Goods Inc (NYSE:DKS) is destined to fall.