This Just In: More Upgrades and Downgrades

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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Pour me another cup of joe
It's official. BMO Capital Markets is back in the Starbucks (Nasdaq: SBUX  ) camp. On Monday, the analyst started off the trading week with a double shot of investing optimism, arguing that investors are underestimating the coffee chain's earnings power. Joining a compelling majority of analysts who like the stock, BMO upped its rating on Starbucks to "outperform," upped its price target to $45 a share, and in effect predicted Starbucks shares will gain 25% in value over the next year to 18 months.

Could BMO be right? I'll give you a hint: No.

Let's go to the tape
Oh, I'll admit, at first glance, this upgrade seems to have a lot going for it. At 25.5 times earnings, Starbucks is a bit pricier than more diversified restaurateur McDonald's (NYSE: MCD  ) . But it's a bona fide bargain relative to pure-play coffee stocks like Peet's (Nasdaq: PEET  ) and Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , at 35 times and 100 times earnings, respectively. And Starbucks certainly has momentum on its side. The stock's been on a tear this past year, rising 37% in value and outperforming the S&P 500 by a wide margin. Meanwhile, BMO is no slouch itself. Ranked in the top 5% of investors we track on CAPS, BMO gets better than 55% of its stock picks right, and outperforms the S&P 500 by an average of six percentage points per pick.

There's just one problem: BMO doesn't have much of a record in restaurants. Review its public track record, which we keep on file for your viewing pleasure on CAPS, and you'll find that BMO has only once publicly endorsed a restaurateur in the past four years. On the plus side, that pick went to Tim Hortons (NYSE: THI  ) , a coffee purveyor and Canada's answer to Dunkin' Donuts. On the minus side, that's still just one pick. It does not a track record make.

Valuation matters
And that's not all. Buying Tim Hortons was a bit of a no-brainer, you see. Even today, after a 42%, year-long run-up, the stock costs only 12 times earnings and pays its shareholders a 1.5% dividend. Plus, its 15% long-term growth projection is nearly as fast as most analysts expect Starbucks to grow, and at less than half the P/E!

In contrast, buying Starbucks at today's levels looks like a much iffier bet to me. Consider: The stock sells for 25.5 times earnings. It's expected to grow at 18% per year over the next five years. So right there, you've got a not-so-cheap 1.4 PEG ratio to contend with -- and it gets worse.

Dig into Starbucks' cash flow statement and you'll find that while the company claims $1.1 billion in profit over the past year, in fact Starbucks generated only $922 million in actual free cash flow. Set that against the company's $26.3 billion market cap, and you're looking at a stock priced at 30 times its level of free cash flow.

Foolish takeaway
For just 18% growth, that's one pricey cup of joe. Starbucks is a great company, but I'd still counsel laying off the caffeine for now. At least until Mr. Market's blood pressure drops, and prices fall back to something approaching a reasonable level. Once that happens, feel free to drink up again.

Which stock do you think is the better bargain: Tim Hortons or Starbucks? Don't guess. Add 'em both to your Fool Watchlist and find out for sure.