Tech-S.Sugawara, The Post:Intel:"Experts Say 'Sorry' For Missing Signs"
Another fine piece, Sandy. Many thanks ;-).
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washingtonpost.com
>>>Experts Say 'Sorry' For Missing Signs
By Sandra Sugawara
Washington Post Staff Writer
Saturday , September 23, 2000 ; E01
At some of Wall Street's most influential brokerage houses, analysts who follow Intel Corp. had some explaining to do yesterday.
"We apologize," said a note to clients from Dan Niles of Lehman Brothers Inc., one of many analysts who had to acknowledge he didn't foresee Intel's sales problems in Europe.
It was a costly mistake for those holding Intel stock. The chipmaker lost about $91 billion in market value, when its stock dropped from $61.49 to close at $47.94 yesterday.
What went wrong? Analysts had a variety of explanations yesterday.
"It's the nature of the beast," said Sudeep Balain, an analyst with Chase H&Q. He said it is difficult to spot weakening sales in global companies until the company compiles quarterly sales figures from overseas.
"One key reason we were blindsided by yesterday's announcement" is that European shipments and orders appeared to be good, said Charlie Glavin, Credit Suisse First Boston analyst.
Terry Ragsdale of J.P. Morgan Securities Inc. complained that "Intel's guidance in general has been pretty lousy for the past couple of years."
But Dave Nadig, a columnist for MetaMarkets.com, a financial Web site, blames "spineless analysts," noting that Banc of America Securities analyst Rick Whittington on Sept. 13 downgraded Intel from a "strong buy" to a "market perform," but then four trading days later upgraded Intel, calling it a "friendly neutral."
Thomas K. Brown, a former analyst with Donaldson, Lufkin & Jenrette, who last spring founded Second Curve Capital, a New York-based money management firm, said the analysts' screw-up is not unusual, and such blowups may increase in coming months.
Even yesterday, as semiconductor analysts were scrambling to recover, Wall Street's banking analysts were hit unexpectedly by warnings from AmSouth Bancorp, a southeast regional bank, that its earnings would not meet expectations. AmSouth's shares plunged, costing investors.
"But it's a situation we've been predicting here for weeks," said Brown, who said analysts who closely studied the company should have picked up the problems.
The feeble forecasts, Brown said, stem from the fact that many Wall Street analysts have little time for their main job--researching companies so they can provide knowledgeable investment advice to clients. Instead, many spend much of their time marketing their firms' services to institutional investors and companies that want to raise money in the stock market. Such investment banking work brings in lucrative fees, and analysts' compensation is sometimes tied to their ability to help bring in deals.
All this "means they don't have the time and haven't developed the skills to identify" looming problems, such as those Intel suffered, he said. "The analysts have gotten used to being spoon-fed [information] by the companies."
Federal regulators have worried that means investors can't get the kind of research they need. Securities and Exchange Commission Chairman Arthur Levitt Jr., in a speech last fall, criticized the "web of dysfunctional relationships" between analysts and the companies they cover, which prevents analysts from criticizing a company too harshly, for fear of cutting off the spoon-feeding or the investment banking business.
However, last month the SEC passed a rule attempting to sever those relationships by prohibiting company executives from selectively disclosing information to analysts before making it public.
As a result, said Brown, "analysts are going to have to start reading the 10Qs [SEC filing documents], talking to competitors and using their own judgment. That is the way it used to be done." But Brown predicted that will take a while, and thus he expects more embarrassing bombshells as in the Intel case.
Not every analyst was caught flatfooted. Last summer, Salomon Smith Barney Inc. analyst Jonathan Joseph downgraded the semiconductor industry, citing signs of a slowdown in the chip market. His warnings caused Intel and other tech stocks to fall temporarily, generating an angry barrage of e-mail and even a death threat, according to published reports.
On Sept. 5, Ashok Kumar, analyst for U.S. Bancorp Piper Jaffray, warned that Intel's sales growth would fall short of forecasts. When Kumar, who used to work at Intel, issued his warning--days after Intel had hit a high of $74.87 1/2--its stock tumbled by more than 6 percent. Nearly every other brokerage rallied around the stock, though, leaving Kumar out on a limb.
Last week, Whittington joined Kumar and downgraded Intel. But then he had second thoughts and earlier this week upgraded it, telling Bloomberg that he "regretted" his earlier action.
On Wednesday, Credit Suisse First Boston reiterated its "strong buy" position on Intel, saying the stock was stronger than its price indicated, and Niles issued a positive note on Intel on Thursday.
Even Kumar, deciding that Intel's price had fallen sufficiently, told Piper Jaffray's salespeople that the stock was cheap enough to buy again on Wednesday, a day before the earnings warnings that sent Intel plunging another 22 percent.
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