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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the best ...
What do you do when one of the best stockpickers on the planet recommends buying the biggest entertainment company in the world? The professional stockpickers at Stifel Nicolaus just sprinkled a pinch of pixie dust on Disney (NYSE: DIS).

Hands-down one of the best stock shops around, Stifel ranks in the top 2% of investors we track on CAPS. It's also a pretty darn good media analyst, boasting a record of 56% accuracy on its active picks in the industry, including such moviemakers as:


Stifel Rating

CAPS Rating
(out of 5)

Stifel's Picks Beating S&P by

Time Warner (NYSE: TWX) Outperform ** 10 points
DreamWorks (NYSE: DWA) Underperform **** 12 points
Viacom (NYSE: VIA-B) Outperform *** 35 points

Clearly, Stifel's got a good feel for the movie business. Here's why the analyst loves Disney:

  • The company's parks and entertainment business is recovering.
  • Its recent release of Pirates of the Caribbean: On Stranger Tides took in a combined $346 million in domestic and international box office receipts over the weekend.
  • The rest of the firm's summer film slate looks similarly "promising."
  • Best of all, Disney's stock looks cheap after exhibiting relative weakness compared with other large-cap media companies year-to-date.

However, I take issue with that last point.

Relatively underperforming pirates
Oh, sure. I get that Stranger Tides did "relatively" well over the weekend. Its $346 million haul puts this movie, with its production budget of $250 million, well on the way to earning blockbuster profits for Disney. That said, the film's U.S. gross underperformed the openings of both of Disney's last two Pirates paeans, which suggests that the franchise may be getting a bit long in the tooth. ($346 million also pales in significance to the numbers being put up by certain other pirates I could mention.)

Still, Stifel's right that the stock has underperformed names like News Corp. (Nasdaq: NWSA), Time Warner, and Viacom over the past six months. But does such relative cheapness really make for a convincing buy argument? I mean, the stock's gotten more expensive relative to DreamWorks Animation (NYSE: DWA) and Lions Gate (NYSE: LGF). To me, it also looks a bit more expensive in its own right than Stifel seems to think.

At 18 times earnings, Disney's valuation already rides well above the waterline of analysts' 15% long-term growth estimate. And if you peer belowdecks, the situation's even worse. Disney's 18 P/E is based on the $4.4 billion the company reported earning over the last 12 months. But in fact, Disney generated only $4 billion in actual free cash flow during this period -- 9% less than its reported earnings. Factor Disney's heavy debt load into the equation, and this stock's enterprise value-to-free cash flow ratio swells to a whopping 22.

Foolish takeaway
To me, this looks like too high a price to pay for Disney. Add the risk of declining domestic interest in the Pirates franchise, and the further risk that high gas prices could deter families from driving to Disney resorts this summer, and I see rough seas ahead for the maker of Stranger Tides.