Earnings season is coming to a close, and we are starting to take a look at the companies we cover in our EquityAnalytics department. We are updating price targets and upgrades/downgrades for our 125+ companies we cover. Today, we are looking at the following companies from our coverage - Changyou (CYOU), DR Horton (DHI), Ryland Homes (RYL), SAP (SAP), Standard Pacific (SPF), and Under Armour (UA).
The chart below shows new ratings, price targets, and buy/sell ranges versus old ones:
(Click chart to enlarge)
CYOU - Maintain at Buy, Decrease PT from $46.50 to $40
We continue to believe Changyou is one of the best Chinese internet companies that combines a strong growth model with good value. This company is growing at 14%-18% per year in sales, but it is also extremely cheap with a PE of 5.5 and forward PE of 4.5. The company is much less of a risk factor than many other Chinese internet companies. The company has zero debt outstanding, and the company outperformed our latest earnings model. The reason for our price target decrease was two-fold. For one, we upped our discount factor as the market continues to decrease its risk tolerance for Chinese internet stocks. Guidance was a bit weak for the company, but it was not far enough off to mean that CYOU should be discounting in the way it is. Downside risk seems limited and upside seems strong.
DHI - Maintain at Buy, Increase PT from $17.50 to $20
DR Horton is one of our favorite residential construction companies as it has one of our highest scores for EquityAnalytics in a number of categories that we cover such as Profitability, Financial Health, and Management. DR Horton has one of the lowest debt:revenue ratios in the industry. We upped our price target after the latest round of earnings for DHI came in better than we expected. We upped our projections for 2012 and 2013 as the company seems to be moving toward stronger margins as well as has a strong backlog.
RYL - Upgrade from Hold to Buy, Increase PT from $19 to $26
We've upgraded Ryland from Hold to Buy as we believe the recovery story for Ryland is strong right now. Despite its low scores on the company's EquityAnalytics and its lack of profitability, the company does have fairly strong value right now that is not pricing in significant growth over the next several years. While many analysts saw the last round of earnings as a reason to downgrade, we see it as a reason to be more excited. We all know the past for homebuilders and present, but what we all are searching for are the companies that will do the best if and when the housing industry does show some strength. Ryland seems to be one of the companies that is offering speculative value. For one, it is in full belief that margins are set to improve. Profitability seems to be likely by the end of this year. New orders increased nearly 25% while the backlog increased nearly 30%. The trend seems positive, and our model is not pricing in significant profitability until 2013.
SAP - Maintain at Hold, Increase PT from $59 to $75
SAP has been growing at very significant rates as of late, and the latest round of earnings was strongly above our expectations. The company is benefiting drastically from a move to new product development as well as the acquisition of SuccessFactors (SFSF), which will continue to benefit the company's move into cloud networking and cloud software. The company is executing at a very high rate, and we do believe that at this price, currently, the stock has gotten a bit ahead of itself. It has increased 23% since the beginning of the year. That rate is high for a stock that typically has a low beta and little volatility. We believe a move back to around $60 will represent a great buying opportunity. The company, though, is operating at somewhat unsustainable margins in our view as well that may limit upside to around the $75 area.
UA - Maintain at Sell, Increase PT from $62 to $64
Under Armour continues to be a Sell candidate for us as we believe the company is pricing in way too much success even with a consistent 25% increase in sales and operating profit each year for the next five years. Our $64 model prices in fairly flat margin growth with a 25% increase in sales each year through 2015. Even with that, we still cannot seem to understand how the market is pricing this stock. Additionally, we have given it a very minimal discount factor since it is a high growth name and has less risk aversion. Even so, for this stock to be $80+ in our analysis, UA would need to grow operating income to around $450M-$475M by 2015. That number is just not achievable. Competition continues to exist, and while the company has built a small economic moat, the moat is not going to allow it to continue to maintain such a stronghold in the marketplace. We believe that in apparel manufacturing a 46 PE and 28 forward PE are very expensive. Correction may be due at any sign of weakness.
Disclosure:
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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