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 ...
Would you travel to China for good pizza? Is your first thought upon landing in Shanghai ... now, where can I get some tasty fried chicken?

If your answer is "no," then chances are, you're not an analyst for Janney Montgomery Scott. Ask Janney what it likes best about China, and it can answer in two words: Yum! Brands (NYSE: YUM). Janney initiated coverage on Yum! with a "buy" rating yesterday, you see, arguing the stock "offers investors meaningful growth opportunities outside of the United States, most notably so in mainland China. We look for 40% or more of the company's operating profits to be generated in the fast-growing market by 2013."

And while Yum! isn't the tastiest morsel on Janney's plate (Janney actually named Burger King (NYSE: BKC) its "top pick" in the sector), it does prefer Yum! over such brand names as burgermeister McDonald's (NYSE: MCD), the always-delicious Cheesecake Factory (Nasdaq: CAKE), and yes -- even a Chinese joint, P.F. Chang's. But should you make a run for the border at Yum!?

Let's go to the tape
It's hard to say. This being Janney's first foray into the restaurant sector, the analyst doesn't yet have a record here against which we can measure this week's eatery recommendations. Elsewhere in the stock market, of course, Janney does have a record. Problem is, with an accuracy rating of only 50%, Janney's recs are split almost precisely down the middle, with winners ...

Stock	JMS Says:	CAPS Says:	JMS's Picks Beating S&P By:
McCormick & Co. (NYSE: MKC)	Outperform	****	18 points
Green Mountain Coffee (Nasdaq: GMCR)	Outperform	*	230 points

... just barely outnumbering losers:

Stock	JMS Says:	CAPS Says:	JMS's Picks Lagging S&P By:
MGM Mirage (NYSE: MGM)	Underperform	**	59 points
Ralcorp	Outperform	****	33 points

Not a horrible record, I'll grant you. But hardly outstanding. And while I'll admit that there's some merit to Janney's latest restaurant review, I've got a queasy feeling in the pit of my stomach ... and it tells me that Janney's inexperience in this sector may have led it astray.

Consider: Janney seems particularly enthused about Yum! because of:

• Its "enviable track record of at least 10% EPS growth in each of the last several years."
• Its relative valuation, with Janney arguing that Yum! sells for the "same P/E (on 2010E EPS and 2011E EPS) as its quick-service restaurant peers on average."

Problem is, neither assertion holds up to even cursory examination.

Growth
Right now, Yum! sells for about 15 times trailing earnings, and 24 times free cash flow. Not exactly "cheap" -- and especially not cheap if all we're to expect out of the company is "enviable" 10% growth. Indeed, even if Yum! can satisfy the 11.5% annualized five-year growth path that Wall Street analysts have mapped out for it, I'd argue the shares look a mite pricey.

Value
Janney argues that Yum!'s peers sell for similar P/Es based on what they're expected to earn in 2010 and 2011. Again, Yum!'s trailing P/E stands at 15. That's close to the valuation on Mickey D's, but more than 20% higher than the P/E ratio for either Burger King or Darden Restaurants, and a whopping 23% premium to the average P/E in the restaurant industry. Oh, and did I mention that each of Burger King, Darden, and the whole industry are expected to grow faster than Yum! over the next five years?

OK, I'm not sure what any restaurant chain will earn one to two years out -- and I'm not at all sure how Janney, so new to the sector, can feel so certain. Maybe the analyst has some special insight and will be proven right over time. However, as things stand today, Yum! looks to be selling for anything but the "same P/E ... as its peers" based on the trailing earnings we actually know to be true.

Foolish takeaway
Make no mistake -- even in the depths of a recession, there are bargains to be found in the restaurant industry. Yum! just isn't one of them.

My advice: Eat elsewhere.