Stocks go up, stocks go down -- and so do analysts' opinions of them. This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. This morning, we'll examine new buy ratings for AMC Networks (AMCX - News) and Guess? (GES - News), then move on to the multiple downgrades now hitting JPMorgan Chase (JPM - News).
Stifel is just mad for Mad Men
First up, ace analyst Stifel Nicolaus clicked AMC Networks over to buy this morning, encouraged by a report that showed the Mad Men maker earning 45% more profit in first-quarter 2012 than it had a year ago. Revenues rose 21%, including a 30% bump in ads as advertisers flocked to hock their wares to viewers of niche favorites such as Mad Men, The Walking Dead, and The Killing. But is this stock just a fad, or is Stifel really onto something?
At first glance, the former seems likely. AMC currently costs 21 times earnings, which doesn't sound like much. But few analysts believe AMC can grow profits much faster than 13% per year over the long term -- slower than the average 15.6% rate of increase more widely posited for the industry. If that's the case, then AMC is arguably overpriced.
But here's the thing: It may not be the case. AMC is way more profitable than it looks. Last year, the $240 million in free cash flow it produced exceeded reported net income by nearly two times. The differential is in large part because AMC has much higher depreciation charges than it spends on capital expenditures. Yesterday, the company continued the trend as it posted free cash growth of 58%. If AMC keeps posting 45% earnings-growth quarters like the one it just did, growth estimates will have to go up. Like the "walkers" on The Walking Dead, shorts won't be able to stop this stock... short of putting a bullet in its head.
Guess it's time to buy...
In other happy news, shareholders of jeans maker Guess? were treated to a brand new buy rating from Standpoint Research today. The independent analyst is taking a conservative stance on the stock, highlighting its generous 3% dividend, and predicting 35% store count growth over the next five years. (Ratings-reporter StreetInsider.com notes that Guess? management is promising 45% growth.)
Even with the more conservative outlook, Standpoint concludes that Guess? is a buy, and it's not hard to see why. The stock only costs about 9.4 times earnings, after all -- and is even cheaper if you back out the company's $480 million in net cash. Yet most analysts foresee 11% long-term growth at Guess?. And of course, there's that 3% dividend to consider, offering investors a little extra walking-around money while they await a rebound. All in all, a strong buy thesis, and an excellent little stock to consider hanging in your equities closet.
Finally, we come to the worst news of the day: JPMorgan Chase's $2 billion blunder. Last night, the multinational megabank admitted that some poor hedging decisions made in its London office have cost it $2 billion in trading losses. This morning, as the stock sank under a wave of mutilation, analysts are deserting the ship. Already FBR Capital and Stifel Nicolaus have announced downgrades, with FBR in particular lopping 26% off its price target, and predicting Chase will be lucky to hold onto its $37 stock price a year from now.
At today's prices, the stock still looks cheap at 8.4 times trailing earnings, and 6.8 times next year's. But buyer beware: These numbers don't include the $1 billion in losses Chase expects to book this year (as its corporate and private equity unit swings from guidance of $200 million in profit, to $800 million in losses). Nor do they anticipate the remaining $1 billion charge that Chase will presumably take later on, as it marks to market the rest of the losses from its $2 billion boondoggle.
Granted, even this huge loss could look like a rounding error for a company of Chase's size ($17.5 billion earned over the past 12 months). Even if you took the whole hit at once, Chase's profits would only shrink by about 11%, and its P/E ratio rise to about 9.4. For a 3% dividend payer with a 7.6% estimated long-term growth rate, that's still cheap. It's just not as cheap as most people thought Chase was yesterday.
Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Guess? and JPMorgan Chase. Motley Fool newsletter services have recommended creating a stock repair position in Guess?.