5 Stocks Seeing Big Analyst Downgrades

Includes: AKAM, DPS, PHM, UPS, VMW
by: Investment Underground

By Larry Gellar

Here we have 5 of the latest analyst downgrades. Akamai and VMWare are two technology companies that are facing fierce competition. Meanwhile, UPS, PulteGroup, and Dr Pepper Snapple are three more traditional companies that could be due for a downswing. Let's see what's been happening with these 5 stocks:

Wells Fargo downgraded Dr. Pepper Snapple Group, Inc. (NYSE:DPS) from Outperform to Market Perform because the drink company continues to suffer from high costs. In fact, DPS stock hasn't performed very well lately, which we highlighted last month. The stock almost hit $40 a couple of times in December but is now trading for less than $38.

Dr Pepper Snapple has also been involved in a heated lawsuit with Dr Pepper Bottling Co of Dublin. In order to make things right, Dr Pepper Snapple has agreed to simply buy the company, although it will no longer produce Dr Pepper at its facility. Another interesting headline for Dr Pepper Snapple has been the company's new "Always One of a Kind" advertising campaign. Here's what Dave Fleming, director of marketing for the Dr Pepper drink, recently said:

"Dr Pepper has been one of a kind for more than 125 years, and now it's time to celebrate. The Dr Pepper 'Always One of a Kind' advertising campaign should serve as a catalyst for expressing originality and being authentically you."

Important competitors for Dr Pepper Snapple include The Coca-Cola Company (NYSE:KO) and Pepsico (NYSE:PEP). Dr Pepper Snapple has the lowest price/earnings to growth and price to sales ratios, and Dr Pepper Snapple's margins fall in between Coca-Cola's and Pepsico's.

Guggenheim downgraded PulteGroup, Inc. (NYSE:PHM) from Buy to Neutral because of continued problems in the housing industry. PHM stock is also a bit expensive now. Trading for below $6 in December, the current stock price is over $7.50. That has caused Pulte Homes' price to sales ratio to shoot up to 0.73, which is higher than KB Homes' (NYSE:KBH) but still not as high as DR Horton's (NYSE:DHI) and Lennar's (NYSE:LEN). Regardless, Pulte Homes' gross margin of 12.91% is pretty good compared to those other companies.

Many of Pulte Homes' biggest problems can actually be found on its statement of cash flows. The company had $387 million flow out during 2010 and $328 million flow out during the first 3 quarters of 2011. In 2010, that was caused by large debt payments, and in 2011, that was caused by negative amount of cash from operating activities.

As for recent news, Pulte Homes sold a master-planned community to Wheelock Street Capital. That's a move we like since it'll allow Pulte Homes to increase investment, and the company also stands to benefit from its acquisition of Centex once the economy picks up. More information about the transaction with Wheelock can be found here.

DA Davidson downgraded Akamai Technologies, Inc. (NASDAQ:AKAM) from Buy to Neutral. The firm has a price target of $36 on the stock and noted that corporate outlook for the first-quarter may not be in line with how much the stock has gone up. T

rading for just over $26 not too long ago, the price is now over $32. As described here, Akamai has done a lot of things right. The company is trying a new pricing strategy out, and initial expectations from third-party analysts are that these new ideas will work well. Akamai also recently bought Cotendo, which focuses on Web and mobile acceleration services. It's an especially good move because it'll help Akamai become a force in the cloud-computing sector.

Similar companies to Akamai include Level 3 Communications (NASDAQ:LVLT) and Limelight Networks (NASDAQ:LLNW). Those stocks have significantly lower price to sales ratios, but Akamai has significantly better margins. Those numbers for Akamai are 69.33% gross and 26.68% operating. As for cash flows, Akamai had some big investing outflows in 2010, and 2011 has been characterized by stock repurchases. Regardless, Akamai's cash flows were positive for both of those periods. Potential investors should note that Akamai has a very low beta of 0.30.

JP Morgan downgraded United Parcel Service, Inc. (NYSE:UPS) from Overweight to Neutral. The bank now has a price target of $82 on the stock, and a couple of issues are lower volume and higher costs. Despite those problems, UPS stock has moved up nicely recently. Trading in the high-60s in November, the stock is now almost at $75.

One piece of news that has excited shareholders is expansion in Canada. That'll improve UPS's market share, as will expansion plans in France, Vietnam, Korea, China, and Latin America. One move in particular is a deal with Merck (NYSE:MRK) to deliver pharmaceutical products to some foreign markets where UPS enjoys a logistics advantage. Meanwhile, here in the U.S., UPS enjoyed a terrific holiday season. Christmas week deliveries were up 6% over the previous year. Compared to UPS, FedEx (NYSE:FDX) offers lower price to earnings, price/earnings to growth, and price to sales ratios. UPS has a much better operating margin of 12.41%, however. In fact, operating cash flows have been very strong for UPS. $3.385 billion of operating cash flow came in during 2010, and $5.362 billion of operating cash flow came in during the first 3 quarters of 2011. Dividend investors should note that UPS currently has a dividend yield of 2.80%.

Citigroup downgraded VMWare (NYSE:VMW) from Neutral to Sell. The bank now has a price target of $80 on the stock, and VMWare's server business is not performing as well as it used to. VMWare has been on an upswing though, and the stock was trading below $77 in one part of December. Now it's over $85, which has made VMWare's price to earnings, price/earnings to growth, and price to sales ratios even higher than they already were.

In fact, Citigroup analyst Walter Pritchard says Citrix Systems (NASDAQ:CTXS) is a better choice. That stock has better margins than Citrix and lower value metrics. There are also some aspects of its business model that has Pritchard interested. For instance, Citrix Systems is now using direct sales for some accounts, and it's also in a prime position to benefit from cloud computing.

It's also worth noting that VMWare hasn't had great cash flows. $857.50 million flowed out during 2010, and $79 million flowed out during the first 3 quarters of 2011. Most of that was caused by acquisitions though, so investors shouldn't be too worried. Also, while Citigroup downgraded VMWare, the company did receive an upgrade from Wunderlich Securities, with analyst Brian Freed noting that now could be a good time to buy while the market has pulled back a bit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.