By Larry Gellar
Here we have 5 of the most recent analyst upgrades. CVS Caremark (NYSE:CVS) and Macy’s (NYSE:M) continue to outdo their competition. Meanwhile, Capital One (NYSE:COF) and Marriott (NYSE:MAR) are making unique value propositions that investors should keep an eye on. L-3 (NYSE:LLL) has been tapped by the Air Force to continue making F-16 systems. Let’s see what specifically has been happening with these stocks:
FBR Capital Markets added Capital One Financial to its Top Pick List due to acquisitions that should improve earnings going forward. One such acquisition is ING Direct, which is a branchless bank. In fact, the liquidity from that business will help to offset the risk that Capital One is taking on by buying HSBC’s (HBC) U.S. credit card segment. More importantly, though, neither transaction should put Capital One at risk of becoming a highly regulated financial institution. That has many investors excited, and the stock price has moved up over $5 per share since December. Regardless, price-to-earnings and price-to-sales ratios for Capital One are still pretty low compared with companies like American Express (NYSE:AXP), which could see $66 by 2013, and Discover Financial Services (NYSE:DFS). One statistic investors will have to keep an eye out for, though, is credit card delinquencies. In fact, Capital One has had that number increase for three straight months. Regardless, operating cash flows for Capital One remain strong - $8.142 billion came in during 2010, and $5.916 billion came in during the first three quarters of 2011. That allowed the bank to pay down a significant amount of debt during that time period. Potential investors should note that this stock has a high beta – 2.17.
Credit Suisse increased its price target for CVS Caremark to $48. Earnings estimates were also bumped up, and Credit Suisse has an Outperform rating on the stock. As many investors know, Walgreens (WAG) and Express Scripts (NASDAQ:ESRX) are no longer working together, which means many customers will have to switch their prescriptions to pharmacies like CVS. In fact, CVS is planning to take advantage by instituting a special Internet program to help the transition. Here’s what CVS/pharmacy’s Papatya Tankut had to say: “CVS/pharmacy is committed to helping TRICARE members on their path to better health, which is why we want to make it as easy as possible for members whose insurance may no longer be accepted at their current pharmacy to transfer their prescriptions to us.” CVS stock has actually been on quite an upward trend as investors have come to realize that Walgreens was not going to make a deal with Express Scripts. Trading for less than $34 per share in October, the current stock price for CVS is nearly $42. That’s caused CVS’s price-to-earnings, price/earnings to growth, and price-to-sales ratios to become higher than competitors like Walgreens and Wal-Mart (NYSE:WMT). Compared with peers, CVS’s gross margin of 19.71% isn’t terrific, although operating margin of 5.93% is much better.
Credit Suisse increased its price target for Macy’s to $36. Earnings estimates were also bumped up, and Credit Suisse has an Outperform rating on the stock. On the debt side of things, Macy’s is offering $550 million of senior notes due in 2022, and $250 million of senior notes due in 2042. That money will be used for general corporate purposes, possibly including the payment of shorter-term debt. In fact, it’s a move by Macy’s that investors should applaud because the company will be able to secure low interest rates after a solid holiday season. Sales numbers in a variety of categories such as same-store, comparable-store, total, and online were all up nicely. Additionally, Macy’s was able to rake in that revenue without reducing prices too much – a move that figures to help keep up margins. Investors should note that Macy’s margins – 40.49% gross and 8.85% - are very competitive when compared with companies like Dillard’s (NYSE:DDS) and Saks (NYSE:SKS). Those stocks have lower price-to-sales ratios, though, so they too should be considered. Macy’s has also shown itself to be intelligent about stores that aren’t performing so well. As described here, some underperforming stores will be closed down, but Macy’s hopes to re-employ those workers that are affected.
Bank of America Merrill Lynch upgraded Marriott to Buy and gave it a price target of $40. Marriott continues to offer a variety of promotions to bring in new customers, such as this one. It’s a move targeted to reverse bad business caused by the economy, although investors should also keep track of the company’s legal issues. The hotel is actually in a heated dispute with Aqua Hotels and Resorts in Hawaii. The issue is that Aqua Hotels and Resorts essentially took over a Marriott hotel while its franchise owner was in disagreement with Marriott. Regardless, Marriott stock has been on a nice little upswing. Despite trading for just over $28 per share in December, the stock price is now almost $33. That’s helped to make Marriott’s price-to-earnings ratio a whopping 53.78, which is significantly higher than competitor Intercontinental Hotels Group (NYSE:IHG). Additionally, gross margin for Marriott is only 10.19%, and operating margin is only 4.08%. Operating cash flows haven’t been too shabby for Marriott, however. $1.151 billion came in during 2010, and $885 million came in during the first three quarters of 2011. Recently, that’s allowed the company to make some aggressive stock repurchases. Dividend investors should note that this stock has a dividend yield of 1.30%.
Deutsche Bank upgraded L-3 Communications to Buy and gave it a price target of $77. Not to be confused with Level 3 Communications (NASDAQ:LVLT), this defense company is quietly making important strides. For instance, the company just won the U.S. Air Force’s blessing to continue making its F-16 Training System. The contract is for devices support for pilot and maintenance functions and could be worth up to $469.5 million. Operating cash flows have already been pretty good at L-3 though - $1.461 billion came in during 2010, and $984 million came in during the first three quarters of 2011. In fact, that’s allowed to L-3 to make a sizable amount of stock repurchases, which in turn has helped the stock creep upward. Briefly trading below $63 per share in November, the stock price now is almost $68. Other interesting defense companies that investors should consider include Honeywell (NYSE:HON), Lockheed Martin (NYSE:LMT), and Raytheon (NYSE:RTN). L-3 has the lowest price-to-earnings and price-to-sales ratios, however, and it also boasts the best operating margin (10.78%). In other news, L-3 is acquiring Danaher’s (NYSE:DHR) Kollmorgen Electro-Optical unit for $210 million. Look for this move to help out L-3’s naval-related business.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.