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 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 ...
The Second Decade of the Third Millennium is just a little way off now, but one analyst at least is making the most of the few minutes remaining. Before the ball falls, Wedbush Morgan managed to slip in one last upgrade for the Old Year -- but it's a doozy: Interpublic Group (NYSE:IPG), an advertisement and marketing company.

Arguing that the rest of Wall Street is underestimating "Mediabrands growth and McCann shaking its Microsoft [ (NASDAQ:MSFT)] malaise," Wedbush upped Interpublic to a "buy" rating ... and lifted its price target on the stock by nearly two-thirds. Microsoft has been steadily and progressively shifting ad work away from McCann for at least two years now.

On the other hand, Interpublic had already blasted right past Wedbush's previous, pessimistic price target of $5.50 per share. While Wedbush sat on the sidelines with its "neutral" rating, the stock exceeded that target by a hefty 32%. Seeing as Wedbush fumbled the ball on Interpublic last time around, a Fool can be forgiven for asking: Why should we listen to Wedbush this time?

Answer: You shouldn't
Wedbush's record really doesn't justify your placing faith in its opinion of Interpublic today. Overall, it's wrong just a smidge more often than it's right. And while it's true that the banker has made some good calls in its day ...

... its record in the Media space is a bit less encouraging:

In the Media space, CAPS scores Wedbush at just 43% accurate. It's simply not a record that encourages confidence in another Media rec out of Wedbush. The more so given the "iffy" nature of Interpublic's valuation today.

Buy the numbers?
Consider: Right now Interpublic trades for at forward P/E of 22, versus five-year growth estimates that analysts peg at less than 9% per year. And while it is true that Interpublic generates significantly more free cash flow than it reports as "net income" under GAAP ($421 million versus $202 million over the last 12 months), this still leaves the firm trading at an enterprise value-to-free cash flow ratio of nearly 11.

Now don't get me wrong -- that's a fair price to pay for the stock, but it's not a bargain. In fact, even if Wedbush is right about Interpublic halting the slide in its revenue and resuming "peer organic revenue growth in 2010-11," the projected growth rate for this industry as a whole is still less than 10%. In other words, still no bargain.

What's a Fool to do?
In the most limited sense, the answer therefore is to do nothing. If you own Interpublic already, stand pat. The valuation's not that bad. No reason to dump the shares.

On the other hand, if you're contemplating following Wedbush's advice and actually buying Interpublic shares -- don't. If you absolutely, positively must own an advertising company, I think you'll find better value in something like Interpublic's rival, and much larger marketing giant, Omnicom Group (NYSE:OMC). There you've got a similar situation of low GAAP earnings hiding whitewater streams of gushing free cash flow -- $1.46 billion in the last 12 months. You get a similar EV/FCF ratio (about 9.7) -- and a higher projected growth rate to justify it (11.5%.)

I say this with the usual disclaimers, of course. FWIW. YMMV. And of course, HNYAFO.

(Happy New Year, and Fool On!)