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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the worst …
Focus Media (NASDAQ:FMCN) shares are tumbling this morning, Motley Fool Rule Breakers members are worried, and Global Gains subscribers are scratching their heads in confusion -- and all three events track to the same origin: a downgrade from venerable investment banker Piper Jaffray.

Here's why:

We are taking a more cautious view of the China online advertising market for 2009, and are reducing our estimates ... During the past week, we spoke with 7 online advertising companies, advertising agencies, and government officials. We believe a 10x ... multiple is warranted given the company's recent lack of visibility and the lower ad spending facing Focus Media...While we believe the Focus Media platform will remain a must buy for China advertisers, we are lowering our rating to Neutral from Buy to reflect the greater volatility the Focus Media story has relative to other China media companies.

Which in turn has me asking ...
Has Piper Jaffray flipped its lid? Listen, it's not like this analyst has a lot of credibility these days. Its record on CAPS lies in tatters at the moment, as a few relative outperformers ...

... try to balance out a longer list of underperforming picks:

Overall, the banker is losing out to the market on three out of every five picks it's made, with its average recommendation underperforming the S&P 500 by nearly two percentage points. And to be perfectly blunt, I don't expect this morning's recommendation to do much to help improve Piper's record.

Buy the numbers
As of this writing, Focus Media carries a moderate P/E of just 13, which compares favorably to consensus expectations of 18% long-term growth.

And while it's true that free cash flow looks less than ideal at just 90% of reported profits, it's not weak enough to undermine the P/E-based valuation. Especially when you consider that a simple P/E evaluation ignores the firm's immense cash hoard. Back out the cash, punish Focus for its relatively weak free cash flow ... and you still come up with a firm trading for less than 10 times its enterprise value.

Yet, according to Piper, this 10 times multiple is appropriate because Focus Media is looking at a rough fiscal 2009 (aren't we all?) and because the stock is volatile.

Foolish takeaway
Fools, that's crazy talk. From where I sit, Focus Media could grow as little as half as fast as most analysts expect it to over the next five years and still be worth owning. Piper's taking an unreasonably short-sighted view of Focus Media, ignoring the China growth story, and sacrificing long-term profits in the service of short-term fear.