Friday's Top Upgrades (and Downgrades): MannKind, athenahealth, and Scorpio Tankers

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature new buy ratings for two companies in the health care sector, inhalable insulin specialist MannKind (MNKD) and medical backoffice support shop athenahealth (ATHN) . But before we get to this good news, let's take a quick trip overseas to find out why...

Scorpio Tankers just got torpedoed
Shares of fuel tanker ship operator Scorpio Tankers (STNG) are -- what else? -- tanking today in response to yesterday's warning that the company expects to lose as much as $0.04 per share in its upcoming Q2 earnings report. Worse, this loss includes the effect of a one-time $0.06 gain related to Scorpio's acquisition of 7.5 million of its own shares. Without this one-time item, the company would have had to report a loss of as much as $0.10 per share.

Adding insult to financial injury, analysts at DNB Markets are taking Scorpio's announcement as an excuse to downgrade the shares -- all the way to "sell."

Probably best known for its history of multiple, repeated purchases of new tankers for its fleet, Scorpio has an exceedingly spotty record of profitability -- and no record whatsoever of generating consistent free cash flow for its shareholders. Gas tankers may not be the most expensive ships on the ocean, but bought in sufficient quantities, their costs still add up. Scorpio has burned cash in three of the past five financial years, with last year's cash-burn-rate being especially egregious, as Scorpio spent $850 million on capital expenditures -- without generating operating cash flow with which to pay for it all.

Long-term debt at the company has been kept in check, with Scorpio financing its ship purchases primarily through the raising of cash from multiple share offerings. Yet even so, debt levels today exceed Scorpio's cash on hand. Unless and until Scorpio begins generating real cash from its business, continued share issuances -- and stock dilution -- are all that investors can expect from Scorpio. DNB is right to downgrade it.

Hope for MannKind
Returning to land, MannKind shareholders got some good news today, when RBC Capital announced it is initiating coverage of the company with an "outperform" rating in response to reports that MannKind is only six to eight weeks away from announcing a partnership to market its breakthrough Afrezza insulin inhaler.

"Multiple potential partners" are said to be courting MannKind on this deal, despite the FDA not having yet given final approval for the product. And RBC thinks this news could help drive MannKind shares up as much as 60%, to a new target price of $16 a share within a year.

Is that achievable? Sure. Anything's possible. The prospect of bringing to market an insulin therapy that doesn't involve multiple daily needle jabs is certain to be popular with patients. But at this point in time, it's really all speculation.

In short, RBC could be exactly right about MannKind being set to outperform the market. Or it could be entirely wrong. The first step is for MannKind to pass the FDA -- its advisory committee meeting went very well -- and then commercialization is a big question mark. Stay tuned.

Should you have faith in Athena?
In contrast, medical IT company athenahealth has a quite the business behind it already. Unprofitable from a GAAP perspective, the company has nonetheless produced cash from operations in each of the past five years.

Topeka Capital has just initiated coverage of the stock with a buy, arguing that athenahealth is "the most disruptive name in the health care IT space," with "the highest growth story in the sector." The stock's fallen back 35% from its peak, what's more, and while even Topeka admits that athenahealth is not cheap, the analyst says "investors with a long-term view will reap rewards by buying the stock at current levels."

Me, I'm not so sure. According to S&P Capital IQ data, the consensus forecast is for revenue to grow a little over 20% annually over the next five years. Even so, the stock looks overpriced to me.

Long story short, it looks to me like even the best-case scenario for athenahealth still leaves the shares looking overpriced. Given this, you're probably best advised to ignore Topeka's advice today, and wait for athenahealth to fall even further before considering buying in.

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