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.

A bad day for booklovers
Investing in a once-dominant brand that's come on hard times, been called a candidate for bankruptcy, and is burning cash and racking up unpaid bills, is an exercise not for the faint of heart. It is, however, exactly what ace investor Stifel Nicolaus urged investors to do yesterday.

Within minutes of Barnes & Noble's (NYSE: BKS) announcement of a surprise fiscal Q2 loss, made worse by the admission that sales are falling and same-store sales are as well, Stifel rushed out an upgrade on the stock. Undeterred by the company's warning that full-year EBITDA earnings will be "at the low end" of its previously announced $210 million to $250 million range, or by the immediate 24% sell-off that ensued, Stifel dove in to rescue the stock with an upgrade to "buy" -- a sentiment echoed this morning when Maxim Group announced that it, too, sees a future for Barnes & Noble.

As StreetInsider.com describes the analysts' buy thesis, the logic here is pretty simple: "With an estimated 5M plus subscribers, NOOK is repositioning BKS as an online retailer with a subscriber-driven model winning a 27% share of eBooks vs. its historic physical book market share of 17%." Furthermore, Maxim argues "that BKS should add 6M/8M net eReaders in FY12/13 to create an installed base of 10M/18M."

It could happen. Early reviews of B&N's Nook tablet computer have been largely favorable. It's no iPad, granted, and it lacks many of the bells and whistles on Apple's (Nasdaq: AAPL) signature tablet. Fact is, the Nook doesn't even measure up to also-ran tablets from Dell (Nasdaq: DELL), Research In Motion (Nasdaq: RIMM), or Hewlett-Packard (NYSE: HPQ). But at just $249 a pop, it's cheaper than the tablets sold by the "real computer" makers, and it's really designed more to keep Amazon.com (Nasdaq: AMZN) at bay than to try to do the things that grown-up PCs can do.

It's a media-consumption device, in short. And since B&N's bread and butter is the business of selling media for people to consume, it's right up the retailer's alley. What's more, if analysts are right about the Nook's giving B&N a 27% share of the nation's e-book market, as opposed to the 17% share it used to control of the physical market, the Nook's introduction should be a good thing for Barnes & Noble. It should be a good reason to follow the analysts' advice and buy the stock.

But it may not be.

Sales? Where are the profits?
Here's the problem with that buy thesis, though, as I see it. The Nook Tablet is a new product, but B&N has had non-tablet Nooks on the market for a few years now already. By now, the numbers the company is putting out should be able to give us a good idea of how profitable this huge share of the e-book market is going to be for the company.

How's it doing? Well, from a GAAP perspective, it's been rather hit or miss for B&N. The company made money in 2010, but it lost more in 2011. (It's expected to lose money again this fiscal year, before turning a profit again in fiscal 2013 -- a profit 38 times less than the stock's current market cap.) From a free cash flow perspective, Barnes & Noble has averaged about $45 million in annual free cash generated since the Nook's introduction, valuing the stock at perhaps 21 times FCF.

Foolish takeaway
My hunch, therefore, is that if Barnes & Noble can continue turning itself around and achieve strong double-digit growth in the years to come -- say, something on the order of the 22% annual profits growth rate analysts predict for Amazon -- the stock is about fairly priced today. That's a pretty big "if," though, considering the competition it faces -- and unlike Barnes & Noble, that competition is generally unburdened by debt.

In short, yes, the analysts could be right about Barnes & Noble. It bet the house on a transition to e-books -- but at today's prices I wouldn't place any big bets on Barnes & Noble myself.

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