This Just In: 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." 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 did

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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

What's that, up in the sky?
As trading drew to a close last week, UBS opened its eyes to the cable and satellite TV industries, when it initiated coverage on a quintet of TV purveyors: Time Warner Cable (NYSE: TWC), Cablevision (NYSE: CVC), and Comcast (Nasdaq: CMCSA) on the ground, and Dish Network (Nasdaq: DISH) and DIRECTV (NYSE: DTV) up in the sky. Sadly, UBS was decidedly unimpressed by what it saw and rated most of these companies "neutral," the sole exception being DirecTV, which UBS says is a "buy."

Citing depleted consumer pocketbooks, saturation in broadband adoption, and increased TV competition from "telephone companies" AT&T (NYSE: T) and Verizon (NYSE: VZ), UBS predicts that we will hear a giant sucking sound over the next two years as cable and satellite lose subscribers to the twin titans of telecom. Despite falling as much as 35% over the past several months, the "low valuations" of companies in this industry are not yet low enough. According to the analyst: "Consensus estimates need to come down."

Don't look up
Should investors be nervous? After all, UBS only just began covering these companies. It can't possibly know more about them than do the analysts who've developed experience here -- the people who set the estimates that UBS says "need to come down."

Or can it? After reviewing UBS's record on the two companies that it sees threatening the cable and satellite TV industries (AT&T and Verizon), and running the valuations on the threatened companies as well, I wouldn't be quick to discount UBS's concerns.

The record
On CAPS, UBS has built up a record of 54% accuracy, which is actually pretty good among major investment banks. In fact, that's good enough to rank it in the top 10% of CAPS investors. The firm has recommended buying Verizon twice in the past 18 months, and both picks are basically pacing the market -- specifically, they're underperforming by less than 2 percentage points each. Meanwhile, UBS's September 2006 recommendation that investors buy AT&T is walloping the S&P 500 by 17 points. So UBS's track record, while not perfect, is pretty good.

The valuations
As for the stocks themselves, here's how they stack up, in valuation terms.

As you can see, only one stock on this list scores the value investor's dream number of a 1.0-or-less PEG: Dish Network. To me, that makes Dish the more likely "buy" recommendation than UBS-endorsed DIRECTV.

Dish may have more debt than DIRECTV does, but it's cheaper on a P/E basis, has superior growth prospects, and sports higher-quality earnings -- in the form of more free cash flow than it gets to report as profit under GAAP. Incidentally, Dish's ratio of price-to-free cash flow mimics those of UBS's two fave telcos, AT&T and Verizon:

Foolish takeaway
In short, I agree with UBS's major premise -- that the cable companies look too expensive to buy, especially if UBS turns out to be right that growth rates in general are overly optimistic. But on the minor premise, choosing one stock to place at the top of the heap, it looks to me as though Dish Network is a better value than DIRECTV.

Disagree? Feel free. Come on over to CAPS, and tell us what companies you would buy.