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 ...
Today I want you to take a look at one of the strangest analyst opinions I've seen expressed in a while, and tell me -- is this an upgrade or a downgrade? Writing yesterday morning, Janney Montgomery Scott had this to say about media magnate Walt Disney (NYSE:DIS): "[Disney] should benefit from emerging digital initiatives, DVR advertising, new market opportunities ... and changes in distribution windows that will help to negate new technology threats. Marvel should unlock strategic value in all [Disney] business lines for years to come."

And so ...
And what was Janney's conclusion? You guessed it: They downgraded the stock to "neutral."

According to Janney, all of the above argues in favor of the company continuing to prosper. And "positive news flow of higher industry ad rates and modest box office strength" is certainly good news for Disney -- but it's all been priced into the shares already, says Janney, leaving only "incremental opportunities for improvements" going forward. Now, they declare, is no time to enter the shares. If anything, it's a time to take profits.

Is Janney right? Quite possibly so. After all, these are the folks who brought you such strong stock picks as Green Mountain Coffee (NASDAQ:GMCR) and Clean Energy (NASDAQ:CLNE) in years past -- both three-baggers. They've also picked a lot of winners, both in and out of the entertainment sector:

And in fact, while Janney's no slouch of a stock-picker generally, it's the particular sector of media stocks like Disney where Janney really shines. Literally every single recommendation this analyst has made in the sector over the past three years that we've tracked has beaten the market. 100%. (Feel free to check.)

What's more, I Fool-y expect to see Janney proven right again as it exits, stage left, on Disney.

Why? Because valuation matters, and Disney's price just plain looks overblown. Given that it's expected to grow its profits at just 7% per year over the next half-decade, I do not see how this stock can support its present earnings multiple of 17.8 (or its price-to-free cash flow ratio to match).

And while it's true that investors have tolerated much higher P/Es at Disney in years past (the P/E verged on 200 at one point back in 2001!), 17 times earnings is almost precisely the average amount that this stock has held over the past five years.

On top of all this, Disney's carrying nearly $10 billion in net debt -- debt that, if factored into the equation, would yield an enterprise value-to-free cash flow ratio significantly higher than the P/FCF number we're looking at today. (The dividend, yielding a paltry 1.1%, isn't priced to entice either.)

Foolish takeaway
Put it all together, folks, and I think the best thing you can say about Disney's stock today is that it looks fairly priced relative to its recent valuations. And indeed, that's what Janney seems to be saying with its "neutral" rating on the stock.

Personally, though, I think even that rating is generous. I expect the House of Mouse, just like the housing market, is due for a downturn.