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5 Stocks Seeing Big Analyst Downgrades

January 26, 2012 | About:
In this article, I analyze five of the latest analyst downgrades. Avon and Colgate-Palmolive are losing profitability due to changes in the currency market. Meanwhile, Lear, Covidien and SuperValu are facing tough headwinds that could affect future progress. Let's see what's been happening with these five stocks:

Covidien Plc (COV)

Analyst action: Goldman Sachs downgraded Covidien to Neutral due to poor demand.

Recent headlines: Unfortunately for Covidien shareholders, it appears the company will need to do a recall for its Duet TRS cartridges. The product was being used with laproscopic staplers and had caused a number of post-operative casualties. For the time being, only cartridges used for thoracic surgeries are being recalled since other types of surgeries haven't encountered problems. In other news, Covidien announced the hiring of Mark Trudeau, who previously worked as CEO of Bayer Healthcare. Here's what Covidien CEO José Almeida had to say: "Mark has an impressive track record of success in the pharmaceuticals industry, including valuable experience outside the U.S. We are delighted he is joining Covidien to lead the Pharmaceuticals segment, where he will play a critical role in fulfilling our vision of delivering unmatched value to our customers."

Competitors: Compared to Beckton, Dickinson and Company, CR Bard, and Johnson & Johnson Covidien has the lowest price to earnings, price/earnings to growth, and price to sales ratios. That can be partly explained by Covidien's relatively low operating margin of 22.23%.

Other interesting statistics: Covidien's quarterly revenue growth is 15.30% year over year.

Lear Corporation (LEA)

Analyst action: UBS reduced its price target for Lear to $56. Earnings estimates were reduced as well due to poor guidance from corporate.

Recent performance: LEA stock almost hit $50 in October, but now the stock price is just above $41.

Recent headlines: Lear's announcement that 2012 sales would be lower than Wall Street estimates did not take very well with investors. The issue is that Lear is projecting lower European vehicle production, and the company makes certain automobile systems. Regardless, Lear management remains confident, as evidenced by a $300 million increase in its stock repurchase plan. In fact, Lear is also returning value to its shareholders through dividends. A $0.125 quarterly dividend was announced not too long ago.

Competitors: Compared to Johnson Controls and Visteon, Lear has the lowest price/earnings to growth and price to sales ratios. It also boasts the best operating margin — those numbers are 9.21% gross and 5.78% operating.

Cash flows: Lear brought in $100.1 million during 2010 and $22.4 million during the first 3 quarters of 2011. Strong operating cash flows have been the biggest factor in that.

Other interesting statistics: Lear's quarterly revenue growth is 22.70% year over year.

SuperValu Inc. (SVU)

Analyst action: Jefferies reduced both price target and earning estimates for SuperValu due to negative outlook. Price target is now $8 and the firm has a Hold rating on the stock.

Recent headlines: After failing to meet earnings expectations, SVU stock took a big hit. Reduced guidance from management didn't help matters either. While earnings only barely missed, analysts are concerned because of projected decreases in same-store sales. Also, the reported earnings don't include one-time items that shareholders should keep an eye on. The question for investors is whether the current problems are easy to fix or the brand is actually weakening. We like SuperValu's strategy for cutting costs, but people simply aren't shopping at Save-A-Lot or Albertson's as much as they used to.

Competitors: Compared to Kroger, Safeway, and Wal-Mart, SuperValu offers low price/earnings to growth and price to sales ratios. Gross margin of 22.66% and operating margin of 2.75% are two reasons why the stock's multiples have been dragged down.

Cash flows: SuperValu had $39 million flow out during fiscal year 2011 but $24 million flowed in during the 3 quarters after that. The turnaround was mostly caused by lower debt payments.

Other interesting statistics: SuperValu's quarterly revenue growth is -4% year over year.

Avon Products, Inc. (AVP)

Analyst action: BMO Capital reduced both price target and earnings estimates for Avon due to the strength of the dollar. Price target is $24, but the company still has an Outperform rating on the stock.

Recent headlines: Avon Products long-time chairman and CEO Andrea Jung will be relinquishing her CEO role. While the company looks externally for a new CEO, Avon has a host of issues that could make some executives less than eager to take the job. Specifically, Avon has faced bribery charges in addition to suffering from good old underperformance. Here's one quote from Andrea Jung that provides a snippet of Avon's issues: "When I look at the lion's share of the top-line mix, it was in Latin America, and that mix was driven by Brazil. Latin America growth fell below double digits for the first time in over 10 quarters." She's gone now, as we expected, and we're still anticipating a buy-out of Avon's valuable network.

Competitors: Compared to L'Oreal and Revlon, Avon offers a fairly low price to sales ratio. That's probably because investors don't want to pay very much for Avon's poor margins - those numbers are 63.52% gross and 11.26% operating.

Cash flows: $191.7 million flowed out of Avon during the first 3 quarters of 2011, partly due to asset purchases.

Other interesting statistics: Avon has a high dividend yield (5.30%).

Colgate-Palmolive Company (CL)

Analyst action: BMO Capital reduced its price target for Colgate-Palmolive. Like Avon, this company is being hurt by the stronger dollar, and price target is now $90.

Recent performance: Colgate was trading for over $93 in December, but now the stock price is just above $88.

Recent headlines: It's been pretty quiet for Colgate lately, although the company is in a bit of trouble in France. There, the company has been accused of colluding with Procter & Gamble and Henkel. French regulatory authorities say that directors from the companies would meet multiple times per year to keep the price for laundry soap in a certain range. While prices were based on the relative quality of the products, it is likely that the prices were higher than they would have been in a free market.

Competitors: Compared to Procter & Gamble, Clorox, and Church & Dwight, Colgate's price to earnings, price/earnings to growth, and price to sales ratios are pretty high. Investors have proven they're willing to pay for the company's terrific margins - those numbers are 57.89% gross and 23.46% operating.

Cash flows: Colgate had $110 million flow out in 2010, although $455 million flowed in during the first 3 quarters of 2011. Cash flows improved as the stock repurchase program slowed down a bit.

About the author:

Vatalyst.com
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