J.C. Penney Company, Inc. (JCP), Electronic Arts Inc. (EA), ValueClick Inc (VCLK): Wednesday’s Top Upgrades & Downgrades

I couldn’t disagree more. Unprofitable today, and expected to keep losing money for the foreseeable future, J.C. Penney Company, Inc. (NYSE:JCP) is a company traveling the road to ruin. Even if this quarter’s bad news is now out of the way, that still leaves next quarter’s bad news to deal with. And the quarter after that, and the one after that, and — well, you get the picture. Analysts polled on Yahoo! Finance see Penney’s earnings actually declining, and by an average of 28% annually, for the next five straight years.

As a result, I see no good reason for Maxim deciding to remove its sell rating from the stock. If it were I making the ratings, I’d have let that one stand pat.

The Force is with Electronic Arts
Lastly, we come to Electronic Arts Inc. (NASDAQ:EA), which earlier this week announced a big deal to cooperate with The Walt Disney Company (NYSE:DIS) on designing Star Wars video games for the latter’s new Lucasfilm subsidiary. At least one analyst likes the idea, because this morning, Monness, Crespi, Hardt announced it’s removing its sell rating from EA, and upgrading the stock to neutral.

Why not “buy,” you may ask? Well, to be blunt, the reason to not upgrade Electronic Arts Inc. (NASDAQ:EA) any further than Monness did is simple: The stock costs too much to justify a “buy.”

Consider: Right now, Electronic Arts Inc. (NASDAQ:EA) shares cost 38 times annual earnings. True, the company generates strong free cash flow — strong enough to drop its price-to-FCF ratio down to 29. But even so, both of these numbers are simply too high to justify, given that even after the announcement of the Disney deal, analysts still think Electronic Arts Inc. (NASDAQ:EA) is stuck at about a 14% annual growth rate.

Don’t get me wrong: 14% growth is entirely respectable. It’s just not fast enough to justify upper 20s and 30s multiples to free cash flow and earnings. It’s not enough to win Electronic Arts Inc. (NASDAQ:EA) a “buy.”

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Google and Walt Disney. The Motley Fool owns shares of Google and Walt Disney.

The article Wednesday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.