By Larry Gellar
Here are five of the most recent analyst downgrades. Certain market trends appear to be hurting Alcoa (AA) and Juniper (JNPR). Meanwhile, some analysts are arguing that Acuity (AYI) and Netflix (NFLX) are simply too inexpensive right now. Choice Hotels (CHH) saw a downgrade on earnings estimates and potentially shrinking margins. Let’s see what’s been happening with these stocks:
Keybanc downgraded Acuity Brands from Buy to Hold now that the stock is so expensive. Briefly trading for below $35 per share in October, the stock price is now almost $60. Most recently, Acuity Brands reported terrific earnings, which is one factor that’s sent the stock skyrocketing. The company beat expectations for both revenue and net income, although it did take a one-time charge due to severance packages that will be paid to laid off employees. In fact, the company may have to do a similar charge later in the year in order to fight rising costs in other aspects of its business. Acuity also recently announced the release of its Lithonia Lighting STLED Luminaire, so that too could affect the stock going forward. Important competitors for Acuity include Cooper Industries (CBE) and Hubbell (HUB.A). Those stocks have lower price-to-earnings ratio but higher price-to-sales ratios, and their margins are also a bit different than Acuity’s. Acuity boasts the best gross margin (40.65%) but has the lowest operating margin (10.51%). As for cash flows, $161.1 million of operating cash flow came into the company during fiscal year 2011, although only $27.7 million of operating cash flow came in for the three months after that.
Credit Suisse downgraded Choice Hotels (CHH) from Neutral to Underperform. Earnings estimates were also reduced, and Credit Suisse’s price target for the stock is now $32. That’s a few dollars below where the stock is now, although the company just announced a new board director. Here’s what CEO Stephen Joyce had to say: “As a company, we're always looking to add board members with relevant experience to our industry. As a seasoned veteran of the airline industry, John has a shared experience of many areas of business like eCommerce and distribution that also directly relate to hospitality.” Choice Hotels has been sliding lately, and shareholders are certainly hoping that the company can turn things around. Despite trading for nearly $39 per share not too long ago, the stock is now close to $35. Important competitors for Choice Hotels include Marriott (MAR) and Wyndham Worldwide (WYN). Those stocks have lower price/earnings to growth and price-to-sales ratios, so investors should take a careful look at them as well. Choice Hotels has much better margins than Marriott and Wyndham though – those numbers are 56.83% gross and 27.98% operating. As for cash flows, Choice Hotels had $144.94 million of operating cash come in during 2010, and $105.89 million of operating cash come in during the first three quarters of 2011.
JPMorgan reduced both earnings estimates and price target for Alcoa, although the bank still has an Overweight rating on the stock. According to JPMorgan, the key issues for Alcoa are low aluminum prices combined with higher expenses. In fact, Alcoa just released its earnings report, and results were mixed. The company did pretty well considering the current aluminum situation, so it’s really just a question of where aluminum prices go from here. We believe that aluminum prices are set for a rebound, and such a scenario would definitely improve Alcoa’s price for its current level of $9.60. The stock has clearly taken a hit considering shares were going for over $16 back in July. Investors should also keep an eye on the situation in Europe. For instance, Alcoa is closing a smelter in Italy, and here’s what spokesman Mike Belwood had to say: “…an uncompetitive energy position combined with rising raw material costs and lower aluminum prices led to the plan to curtail the plant.” Another interesting aluminum play is Aluminum Corporation of China (ACH). That company has significantly lower margins than Alcoa, but it also has a lower price-to-sales ratio. Both of these stocks have a beta of ~2.1.
Oppenheimer, Goldman Sachs, Jefferies, and UBS all lowered their earnings estimates for Juniper Networks. Amongst other problems, many of Juniper’s clients aren’t spending as much, and the company is losing market share in its routers division. In fact, JNPR stock has been moving down for quite some time now. Despite trading for over $30 per share in July, JNPR stock is now just above $21. Part of that is from the recent announcement that the company wouldn’t be meeting analyst expectations. Both revenue and net income figure to be a bit less than industry insiders were predicting. To add insult to injury, Marthin De Beer from Cisco (CSCO) is saying that Juniper’s problems don’t reflect Cisco’s situation. That’s a nice way of saying that Juniper is falling behind. Meanwhile, price-to-earnings and price-to-sales ratios are higher for Juniper than Cisco and Alcatel-Lucent (ALU). Whether investors will continue to pay this premium remains to be seen, although Juniper’s gross margin of 65.61% during the past year is certainly impressive. Cash flows also look good. The sum of the company’s operating and investing cash flows was positive for both 2010 and the first three quarters of 2011. Regardless, investors may want to check out this article, which goes into more detail about Juniper’s current problems.
Bank of America Merrill Lynch downgraded Netflix from Neutral to Underperform due to the stock being too expensive. The bank’s price target for NFLX is $85, which is a mark that Netflix passed not too long ago. Indeed, the stock has been on a bit of an upswing since the beginning of the new year, up over $20. One rumor that’s causing this is a possible purchase of the company by Yahoo (YHOO). That doesn’t seem particularly likely, although it does show that Netflix is a desirable asset right now. In fact, we still think Netflix is a good short, even while it's down. Netflix also released some of its streaming data recently. Those numbers show that Netflix is still a very popular service despite some of the unpopular decisions made in 2011. Netflix is also starting business in the United Kingdom, and we think that market will be receptive to the company’s services. Competition for Netflix remains fierce though. A new deal between Disney (DIS) and Comcast (CMCSA) could make Netflix seem less appealing, for instance. Compared with Amazon (AMZN) though, Netflix boasts lower price-to-earnings, price/earnings to growth, and price-to-sales ratios. It also has better margins – those numbers are 36.56% gross and 13.42% operating. Potential investors should note that this stock has a beta of 0.09.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.