By Larry Gellar
We've identified 5 widely held stocks that analysts don't think too highly of. While Automatic Data Processing (NASDAQ:ADP), E*Trade (NASDAQ:ETFC), and Progressive (NYSE:PGR) are receiving true downgrades, price target and/or earnings estimates have been reduced for Xerox (NYSE:XRX) and Boeing (NYSE:BA). Let's see what's been happening with these 5 stocks:
Automatic Data Processing
Recent performance: Automatic Data Processing fell below $48 in November, but the stock is now trading for over $55 a share.
Recent headlines: Automatic Data Processing just reported earnings. Both profit per share and revenue were in line with analyst estimates, although the company did lower its projections a bit for next year's profit growth. That was merely due to the sale of an asset, however, and other important statistics look good for ADP. Bookings grew 14% on a quarter-to-quarter basis and are expected to grow another 12% in the coming year. Additionally, ADP is introducing exciting new products such as Run, a Web-based payroll manager, and Vantage, a piece of software for human capital management.
What we think: Automatic Data Processing has a dividend yield of 2.80%, and we expect those dividends to keep up or maybe even improve a bit. This company is by no means flashy, but its products and services are essential for businesses around the country. Also, ADP offers an attractive price to earnings ratio (21.71) compared to similar companies such as Insperity (NYSE:NSP) and Paychex (NASDAQ:PAYX).
Analyst action: Goldman Sachs downgraded E*Trade from Buy to Neutral, and the firm now has a price target of $9 on the stock.
Recent performance: E*Trade was over $9.50 about a week ago, but the stock is now trading $8 per share.
Recent headlines: E*Trade fell short of analyst expectations for revenue, but more importantly, the company unexpected posted a loss for the previous quarter. Low interest rates have hurt the company's ability to generate profit from assets, but more importantly, E*Trade's lending operations are having some serious problems. E*Trade had to increase its loan loss provisions by $67 million and wrote down $15 million worth of loans.
What we think: Investors should stay away from E*Trade. We're forecasting a low trading volume for 2012, which will translate into future disaster for the online trading web site. Also, the stock's price/earnings to growth (1.49) is higher than competitors like Charles Schwab (NYSE:SCHW) and TD Ameritrade (NASDAQ:AMTD) even though there's no really reason for investors to pay a premium for ETFC. Investors looking to make a play in the financial services industry should turn their attention to regional banks or high-quality national banks. Those businesses are better equipped to provide value-adding services in this tough economy.
Analyst action: Credit Suisse (NYSE:CS) reduced both its price target and earnings estimates for Xerox. The new price target is $9.
Recent performance: Xerox almost hit $9 about a week ago, but the stock has now plunged to below $8.
Recent headlines: Xerox's earnings matched analyst expectations, but revenue was a bit lower than anticipated. The big surprise, though, was Xerox's pessimistic view of the current quarter. According to management, the fiscal situation in Europe is hurting the company significantly.
What we think: It's hard to justify a Xerox buy when Hewlett-Packard (NYSE:HPQ) is trading at lower price to earnings (8.43) and price to sales (0.44) ratios. Unfortunately, Xerox's current business model is very sensitive to uncertainty, such as that being experienced in Europe right now. IT Outsourcing and Technology are two areas that Xerox is showing weakness in, and it seems unlikely that these divisions will see a turnaround anytime soon. Xerox is also in the midst of dealing with a nagging pension. The company was able to boost fourth-quarter results by putting on a temporary freeze, but investors can't expect this to keep up forever. As for dividends, Xerox does have a dividend yield of 2%, but Canon's (NYSE:CAJ) 3.20% dividend yield is even more impressive.
Analyst action: Goldman Sachs (NYSE:GS) downgraded Progressive to Sell and now has a price target of $18 on the stock.
Recent performance: Progressive went below $18 in December, but the stock price is now over $20.50.
Recent headlines: Progressive is adding 1,106 new jobs at five of its call centers. Those jobs will be in areas such as service, claims, and sales, and Progressive has had a surprisingly high amount of labor demand the past few years. Progressive also reported earnings last week. Net income beat analyst expectations, and statistics like net premiums earned and net premiums written were two bright spots. Those last numbers increased by 4% and 8% respectively. Auto policies in particular did well, and the biggest issue in the earnings report was Progressive's trouble generating investment income.
What we think: It's hard to justify a Progressive buy right now when Allstate (NYSE:ALL) is offering a 2.90% dividend yield. In fact, Allstate has other things going for it as well. We like the company's new claim satisfaction guarantee because insurance is an extremely customer-driven business. Customers are unlikely to redeem the guarantee, but they will like the way it sounds when contemplating which insurance carrier to sign up with.
Analyst action: Citigroup lowered its earnings estimates for Boeing, although the bank still has a Buy rating on the stock.
Recent performance: Boeing temporarily fell below $63 in November, but the stock price is now over $75.
Recent headlines: Boeing just released a strong earnings report, where the company announced a 20% year over year increase in net income and 18% year over year increase in revenue. The good news ends there, though, because Boeing's estimates for 2012 were far below analyst expectations. While Wall Street's average prediction for 2012 earnings was $4.90 per share, Boeing said that number would be between $4.05 and $4.25.
What we think: We have a feeling that Boeing management is just trying to be conservative, but this stock probably got a bit too high now that the 787 Dreamliners are starting to come out. Other aerospace/defense plays like Lockheed Martin (NYSE:LMT) and Northrup Grumman (NYSE:NOC) represent better value for investors. Both of those stocks have lower price to earnings and price to sales ratios than Boeing. It's also worth mention that shareholders need to keep an eye on specific trends at Boeing. For instance, management mentioned that a large portion of the company's Dreamliners will need extra work before they're ready, so it remains to be seen how quickly the company can put out the new planes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.