This Just In: Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Yesterday was a tough one for housing investors, as a double downgrade to "sell" sent shares of Toll Brothers (NYSE: TOL) and D.R. Horton (NYSE: DHI) tumbling. Notwithstanding less-bad-than-feared earnings news out of Home Depot (NYSE: HD) Tuesday, it seems the housing market's recovery is still a-ways away.

But that's not stopping one analyst from making a bullish bet on one particular property. Even as its peers were shorting the heck out of Toll and D.R., Janney Montgomery Scott put in an offer on the House of Mouse.

Disney (NYSE: DIS), that is.

The Philadelphian investment banker thinks investors are being too hard on the entertainment conglomerate, worrying that "new technology threats" have Disney boxed in. But Janney argues that Disney isn't caught in quite the mousetrap that everyone else seems to think. Citing "emerging digital initiatives, DVR advertising, new market opportunities (e.g. parks, cruise, video games, etc.), and changes in distribution windows," Janney believes Disney's worth $30 a share. And if the analyst is correct, this offers investors today a shot at a clean 20% profit.

But is Janney right?

Let's go to the tape
Getting a read on Janney's skill at picking entertainment plays is difficult; the analyst lacks much of a track record in the space. But scanning the banker's past picks in related entertainment sectors, it appears that Janney does have some skill that could carry over to its latest pick:

Stock	Janney Says:	CAPS says:	Janney's Picks Beating (Lagging) S&P By:
Marvel Entertainment (NYSE: MVL)	Outperform	****	25 points
International Game Technology (NYSE: IGT)	Outperform	****	10 points
MGM Mirage (NYSE: MGM)	Underperform	**	(45 points)

A good start
Across the related sectors of Hotels, Restaurants and Leisure and Media, Janney has gotten four out of five recommendations right. But maintaining the winning streak with this week's Disney pick is going to be a neat trick.

Why? Well, consider: Right now, Disney is selling for a 15.1 P/E based on $1.69 in trailing earnings. Now, if we assume Janney's right that Disney can earn $1.91 per share next year, and apply the current multiple-to-earnings to that number, it suggests a share price of perhaps $28.84.

To get to $30 per share, Janney argues that Disney's multiple will expand to 15.5. You see, for Disney to reach $1.91 next year (which is more than the consensus estimate on Wall Street), this Mouse would have to make like a racehorse, and push earnings growth about 13% from its present level. If Disney manages that neat feat, I guarantee you that analysts would up their growth estimates and the multiple they'd pay for its earnings.

But that's the thing...
For Janney to win with this week's recommendation, it has to be right twice. First, it must have correctly predicted that Disney will grow nearly 75% faster than anyone else thinks it will next year. (Most analysts put next year's growth at less than 8%.) Second, it has to be right that Disney's growth will wow Wall Street enough to increase analysts' five-year growth estimates from the current 6.9% consensus, to something big enough to justify a multiple of 15.5 on the stock.

Foolish takeaway
Maybe Janney's right. It is one of the better analysts out there, after all...  But it's loading a rather Herculean task on the shoulders of a Little Mouse. I personally doubt that Disney is up to the task -- and so I have to nix Janney's advice today.

(What should you buy instead? Find out here.)