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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

And speaking of the best ...
2011 has not been kind to Disney (NYSE: DIS) shareholders. With the Dow Jones Industrial Average (INDEX: ^DJI) basically flat for the year, Disney shares are down about 12% -- but that's OK. In fact, according to the investment bankers at Caris & Co., it's downright glorious, because the cheaper Disney shares get, the more of them you can buy.

Which is just what Caris urged investors to do yesterday: buy Disney. Breaking Disney into pieces, valuing each piece, and then putting the company back together again, Caris theorizes that Disney's share price today reflects the fair value of its parks business, its cruise line, its cash in the bank, and ESPN. Buy all these for $33, says Caris, and you're basically getting the rest of Disney's cable operations, its consumer-products division, its online unit, its studio, and ABC, plus a bunch of unconsolidated assets -- all for free. And you know what?

Caris just might be right.

Let's go to the tape
After all, this is no poseur we're talking about today. This is Caris, an analyst that according to our CAPS stats ranks in the top 15% of the investors we track. It's also an analyst that sports one of the better records in the media sector -- scoring better than 60% for accuracy on the recommendations it's made over the past three years, and it's one that focuses intensively on the media industry, which is Caris' fourth-most-active area of coverage. Caris has been consistently right about Disney since recommending it three years ago ... and not just about Disney:

And there's every chance Caris is right about Disney again, today. I do, however, have a few reservations about Caris' recommendation. Let me lay them out for you.

At 14.4 times earnings and 14.8% projected long-term growth, Disney stock certainly looks attractive. Although the company's P/E ratio sits right in between those of America's other great global consumer brands -- Coca-Cola (NYSE: KO) and McDonald's (NYSE: MCD) -- Disney's price-to-sales ratio is about half the cost of either of those brands, so you can also call Disney attractively priced on a P/S basis.

On the other hand, if you compare Disney with its rivals in the media industry, the company doesn't really look like the steal of a deal that Caris describes. An earnings multiple of 14.3 is right in line with the valuations at CBS and Time Warner, albeit cheaper than Viacom. Disney also sports a higher P/S ratio than CBS and Time Warner -- but again, not more than Viacom.

My other concern, though, is that even if you agree with Caris that Disney looks cheap -- it may not be as cheap as it looks. Disney's free cash flow still doesn't back up its reported earnings entirely, you see. And valued on this free cash flow, Disney sells for about a 16.9 multiple -- a pretty premium to the 14.3 multiple to earnings that attracts Caris' attention.

Foolish takeaway
With P/E and P/S ratios that may or may not be cheap, and a price-to-free cash flow that still looks expensive, I'm not sure Disney is a buy today -- even after its 12% drop. Call me a pessimist, call me a Fool, but I think the House of Mouse still has farther to fall.

Looking for a better bargain in the world of entertainment? Look no farther. We have two great ideas for you right here -- and you can read about them for free!