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." 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 ...
In the cartoon world, whenever a mouse enters the scene, chaos ensues. Cartoon cat smiles, hatching cartoon plots. Cartoon mom, hair up in rollers, clambers atop the kitchen table, screeching, "Mouse in the house!" Cartoon children engage in cartoon antics, while cartoon dad reaches for cartoon shotgun -- "BLAM! BLAM!"

Yesterday's earnings report from Disney (NYSE: DIS) inspired similar bedlam. Disney's mouse practically roared as revenue rose 10% in the fiscal first quarter. Profits, up 55%, roughly doubled what Wall Street analysts had told us to expect. In response, Goldman Sachs (already on record in support of the stock) rushed to up its earnings estimates. Wunderlich Securities followed suit, increasing its rating on the stock to buy, to boot.

In contrast, both Needham and UBS played the part of panicky hausfraus. While praising Disney's "stronger than our expectations" performance in "cable nets, broadcast and parks" (UBS), and gushing about how they "adore the management and assets at DIS" (Needham), both analysts left their actual ratings unchanged at "neutral." In each of these latter cases, valuation seems to be the concern. Needham worries that the House of Mouse is overspending on renovations, as capex literally quadrupled. UBS says it would love to buy the stock, but wants to wait till all the spending is over before it antes up.

But which of these analysts is right? At nearly 19 times earnings, with only 11% long-term growth expected of it, Disney is clearly one pricey stock -- but it's also a company that's performing ahead of expectations. Will the mouse continue to roar, or is it time to call the exterminator on the House of Mouse?

Let's go to the tape
At first glance, it's hard to say which banker has the better feel for Disney. Each of the analysts named above belongs to that elite group we call the CAPS All-Stars -- analysts who have, by their performance, shown an ability to consistently outperform 80% or more of the investors on the planet.

They're also particularly good (by and large, meaning with the exception of UBS) media analysts. Within this industry, Goldman has the clear lead, with a startlingly effective accuracy rating of 89% on its Media picks, which include:

But Needham or Wunderlich aren't looking too shabby in this regard, either. They boast accuracy ratings of 71% and 59%, respectively in the industry. And while the widely diversified holdings at Disney make it hard to pigeonhole the company as exclusively a "media" concern, it's certainly a standout in the industry.

Disney was one of the first "big three" networks to adopt a web presence for distribution of its programming (and in my Foolish opinion, still has the most elegant web offering out there.) It's taken the lead, alongside News Corp (NYSE: NWSA), Comcast (Nasdaq: CMCSA), and General Electric (NYSE: GE), in making the transition to easy-access content through its Hulu partnership as well. Clearly, a standout operation.

There is, however, still the question of cost to consider.

Valuation matters
I mean, it's bad enough that Disney is selling for 18.7 times earnings today. Even with a 1% dividend to cushion the sticker shock, that seems a high price to pay for Wall Street's expected 11.5% long-term growth at the stock. But the real price is more worrisome still.

Consider: On top of its market cap $82.3 billion market cap, Disney also carts around roughly $10 billion in net debt -- for a combined enterprise value of $92.3 billion. Meanwhile, the capex spending that UBS and Needham were complaining about yesterday has helped depress the company's free cash flow to $3.8 billion for the past 12 months -- 15% less than the $4.4 billion in "net income" that Disney claims under GAAP.

As a result, I think anyone who calls Disney "expensive" at 19 times earnings is actually being optimistic. What we're really looking at here is a company priced at more than 24 times free cash flow, but expected to grow at less than half that number -- slower than 12% per year over the next five years.

Foolish takeaway
Based on these numbers, I'm actually going to go UBS and Needham one better today, and say that not only is Disney too expensive to buy; it's too expensive to hold onto if you already own it. My advice: This is the classic "great company, lousy stock price" situation. Unless and until the price gets more reasonable, it's time to call the exterminator on the House of Mouse.