Monday's Top Upgrades (and Downgrades)

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we'll look at why analysts are finished with Facebook (NYS: FB) and dissing Disney (NYS: DIS) , but think Phillips 66 (NYS: PSX) could motor.

Zynga zaps Facebook
First up: Facebook. Zapped awake by Zynga's (NAS: ZNGA) earnings warning last week, investors are starting to wonder what the online gamer's ill fortunes portend for partner Facebook. According to The Wall Street Journal, revenues derived from Zynga's FarmVille, Poker, and other online games make up about 14% of Facebook's revenue stream, so what's bad for Zynga could be bad for Facebook as well.

Meanwhile, analysts at BTIG highlighted further concerns this morning. Warning of "growing tension between the Facebook user experience and monetization," BTIG says Facebook basically has only one "lever" that it can pull to accelerate revenue growth these days: advertising. The problem with pulling this lever, though, is that upping advertising on its main site could turn off Facebook users, slowing subscriber growth.

Result: BTIG sees Facebook growing revenues about 32% this year, but only 14% in 2013. Neither of these numbers is sufficient to justify the 70 times earnings multiple now hung on Facebook's stock price. BTIG says Facebook's a sell... and it just might be right.

Time to foreclose on the House of Mouse?
In comparison to Facebook's heady multiples, the 17 P/E ratio at Disney looks downright reasonable. Problem is, "reasonable" isn't quite the same thing as "cheap." This morning, Caris & Co. pulled its "above average" recommendation on Walt Disney stock, warning that the price might rise as little as $2 over the next 12 months (to $55).

In truth, even that might be a stretch.

Seventeen times earnings may not make Disney as expensive as Facebook, but with Disney pegged for only 12.4% long-term earnings growth, it's not exactly a bargain price, either. On the plus side, Disney does pay a dividend (unlike Facebook). On the minus side, it only pays 1.1%. Meanwhile, and also unlike Facebook, Disney operates with a sizable debt load -- well over $10 billion -- which means the stock is actually a bit more expensive than it looks.

In search of cheap
If it's a truly low-priced stock you're searching for, you may get a few kicks out of Phillips 66. Priced at just six times earnings, Phillips looks like quite a bargain based on long-term earnings growth rates of 6%.

The stock's not particularly expensive from other valuation perspectives, either. Free cash flow for the past year, for example, came to $3.4 billion. On Phillips' $28.9 billion market cap, that's about 8.5 times free cash flow. And even factoring debt into the equation, the stock sells for less than a 10 times multiple to enterprise value.

That said, try as I might, and even crediting Phillips for its 2.2% annual dividend yield, I can't see the stock as better than fairly priced today. Which is why it looks so strange to see Argus Research coming out and telling investors this stock is headed for $54 a share within a year's time.

From today's $46 share price, Argus's new price target implies a 17% gain by late 2013 -- which seems aggressive when you consider that Phillips is expected to show an earnings decline next year. Sure, it's possible that Argus is right about this one. And it's certainly in good company, now that we know that Warren Buffett has also been buying Phillips 66 shares. Still, as a general rule, investors aren't ordinarily inclined to bid a stock up as they're watching its earnings go down. If that's the route Phillips 66 starts to take, investors would be wise to "ride the brakes."

Fool contributorRich Smithholds no position in any company mentioned. The Motley Fool owns shares of Walt Disney and Facebook.Motley Fool newsletter serviceshave recommended buying shares of Facebook and Walt Disney.

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