3 Upgrades Worth Noting on Wednesday
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Analysts were hard at work on Wednesday -- not only making calls -- but good calls. In this piece, I am looking at three such calls that were thorough, logical, and should be used as part of your research. Then, I'll explore which of these three calls is the best!
Calling against the trend
Lazard’s Ryan Hutchinson is especially bullish when it comes to Riverbed Technology (NASDAQ: RVBD). Hutchinson notes that the company’s Granite storage optimization gear and OPNET’s NPM software (network performance management) will boost growth while “creating a stickier customer base.”
Hutchinson spoke with CFO Ernie Maddock as part of his research – leading to his “Buy” rating – and is now confident that the company can integrate OPNET and benefit from improvements in federal spending.
Riverbed has seen its stock decline 21% in 2013. After an early pop on Wednesday of 3%, shares are currently trading lower by 0.50%. The reason for these losses has been the company’s slow growth in its WAN hardware business. Moreover, investors are concerned with the outcome of OPNET and federal spending; two areas where Hutchinson is bullish.
In my opinion, Hutchinson’s research was thorough and he made his call after both channel checks and talks directly with the company. This is a company that is still growing at more than 30% year-over-year and is trading at just 13 times next year’s earnings. While it remains risky, I think it might be worth a small investment position.
“Long-term” price target boosts shares
Robert Baird raised Tesla Motors’ (NASDAQ: TSLA) price target on Wednesday to $118 and shares popped more than 5% to just shy of $100. Tesla Motors has now rallied 200% in 2013 and Baird believes that the ecosystem being built (including charging stations) will produce long-term growth. Baird specifically notes the potential of Model X and Generation III models as being the future of Tesla and its growth.
The stock boomed on Wednesday – just $19 shy of Baird’s price target – but it appears as though investors do not realize that this is a long-term target. Baird is basing the upgrade on ecosystem expansion and models that are not yet available in the market. Therefore, Baird is suggesting minimal returns over the next two years.
Personally, I find this upgrade both responsible and accurate. For the last several months, analysts have jumped on the Tesla bandwagon and have discounted that much of the gains are speculative. If Tesla can reach its goal with more than 200 charging stations in the next few years and build on the success of the Model S then I could see a $118 price target as reasonable in the next few years. As of now, a price/sales of 11.55 is too expensive in a space that trades at 0.50 times sales.
Removing a significant overhang boosts the outlook
The future of Spectra Energy’s (NYSE: SE) legacy natural gas pipeline and storage assets has been the subject of much debate for the last several months. On Wednesday, Spectra removed that speculation when it dropped those assets into Spectra Energy Partners. This move makes the company much more financially secure, and analysts are “buying” the move.
Spectra is currently trading higher by 10% after dropping its assets. So far, three different analysts have upgraded the stock, including Deutsche Bank from Hold to Buy.
The firm specifically notes the improvements to cash flow that will be created. It states that Spectra will receive 50% of the incremental cash from the drop-downs, yet gets to remove the overhang. As a result, Spectra will be boosting the percentage of its cash flows from its MLP from 8% to over 50%!
In other words, Spectra is going to becoming much more efficient, with much higher profits. This is a stock trading at 23 times earnings, and with margins about to rise, I can’t help but to agree with Deutsche Bank and the other analysts who are upgrading the stock.
Honestly, I think that each of these analysts made good calls – but I think Lazard’s “Buy” on Riverbed is by far the very best of the day.
“When assessing an upgrade/downgrade you want to see more than just stock movement and a price target. You want to see reasons for the call, and those reasons should include channel checks, conversations with management, and conversations with those who are close to the company such as suppliers.” Taking Charge With Value Investing (McGraw-Hill, 2013)
The Riverbed upgrade included a conversation with management, macro analysis, and forward looking expectations based on current market conditions. Thus, the notes alone had all the main components of a good call. Then, you incorporate the weakness in shares of the stock, and I believe it could a good investment opportunity.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Riverbed Technology, Spectra Energy., and Tesla Motors . The Motley Fool owns shares of Riverbed Technology and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!