DJN: WSJ(8/7) Heard On The Street: First Call Filters Estimates
(Dow Jones 08/06 23:00:08)
By Christopher Oster and Jonathan Weil
DOES THOMSON FIRST CALL really want an analyst's best call?
The Boston research firm is one of the primary conduits of information from
stock-research analysts to institutional and individual investors, providing
one-stop shopping for research reports and earnings-estimate numbers. But at
a time when analysts are under fire for meekly accepting the guidance of the
companies they follow, a little-known First Call practice is discouraging
analysts from warning investors about unpleasant trends.
Last week, Alice Schroeder, a property-casualty insurance analyst at Morgan
Stanley, issued a report on Warren, N.J., insurer Chubb Corp., with an
estimate for the company's full-year earnings that was well below Chubb's
own forecast. Ms. Schroeder's $2.60-a-share forecast was a full $2 below the
company's estimate of $4.60 because, she reasoned in her report, Chubb
appeared likely to take charges later this year to boost asbestos-claims
reserves and potentially uncollectible reinsurance.
But when Ms. Schroeder submitted her number to First Call, she was told to
get in line with the rest of Wall Street or face having her estimates thrown
out. "The majority of analysts covering Chubb Corp. have updated their
estimates for the guidance to exclude any charges in 4q02," according to a
note from First Call to Ms. Schroeder. "Please update your estimates on this
basis." The consensus estimate: $4.57.
When Ms. Schroeder refused to budge, First Call first changed her numbers to
exclude the charges and later dropped her estimates entirely.
For its part, First Call contends it is merely trying to provide earnings
estimates that are consistent in terms of what items are included. Without
such uniformity, the consensus numbers published by the company "are
meaningless," says Chuck Hill, director of research at First Call.
But critics say that First Call, in its quest for statistical relevance,
isn't giving its subscribers what they need: the often unpleasant reality
about a company's prospects. For all the Sturm und Drang in congressional
hearings and elsewhere over the need for improved corporate financial
reporting and more-objective Wall Street research of companies, the dilemma
over how Chubb's earnings forecasts should be reported serves as a reminder
of how little has changed in many quarters in response to collapsing
investor confidence.
For corporate earnings reports -- both by the companies themselves and the
Wall Street analysts who follow them -- the practice of excluding whole
hosts of recurring expenses to arrive at more attractive looking so-called
pro-forma earnings figures remains the prevailing one. Yet the practice was
coming under criticism even before last year's bankruptcy filings by Enron
and Global Crossing Ltd. among other companies that sported robust figures
under these alternative approaches even as they collapsed.
Such figures appear in supplemental income statements that companies put out
in news releases in addition to the ones they file with regulators based on
generally accepted accounting principles. For its part, Enron didn't miss a
single earnings estimate in the year before it imploded, raising obvious
questions about the usefulness of estimates with such exclusions.
To be sure, no one is saying 120-year-old Chubb, one of the nation's biggest
and most prominent insurers, belongs in the company of the Enrons of the
world. What is at issue here isn't Chubb's earnings presentation, but First
Call's handling of analysts' estimates over a range of industries. The
point: Some charges that are brushed off by analysts as "one-time,"
"special" or "unusual" can hold vital clues to companies' prospects. And
when a well-regarded industry analyst like Ms. Schroeder is warning that
such a charge is on the way, that is hardly something investors can afford
to ignore.
First Call, a unit of Toronto-based Thomson Corp., defends its
earnings-estimate gathering process by pointing out it doesn't set
accounting practices, but merely excludes the expenses and gains from its
earnings targets that a majority of the analysts who submit forecasts want
excluded. The end product, Mr. Hill says, is a measure that is broadly
accepted by a majority of the investment community.
But some critics say the First Call numbers merely reflect the methodology
preferred by a majority of analysts. "What investors want to know is what
the earnings are going to be," says Don Watson, a managing director in the
insurance-ratings group at Standard & Poor's, noting that items listed by
many insurance companies as "nonrecurring" often do recur. "The fault of
First Call is not taking into consideration the need for a diversity of
opinions."
A Morgan Stanley spokeswoman declined to comment on First Call's policies.
Ms. Schroeder says her estimate "represents our best thinking at this time
on what Chubb will actually earn," and the number includes charges that
should be considered operating items and not one-time events. As for Chubb
itself, a spokesman says that claims reserves are adjusted frequently and
that such adjustments would be included in operating income as reported in
the regulatory filings using GAAP. The company declined to comment on Ms.
Schroeder's estimate as well as First Call's approach to recording
estimates.
Chubb writes coverage for everything from homeowners insurance to liability
insurance for corporate directors and officers of the nation's largest
companies. In its second-quarter earnings release last week, Chubb said it
was conducting a study of its asbestos reserves and that "new developments
in asbestos litigation have added to the evidence that new exposures are
developing." Chubb also noted that, in connection with Sept. 11, some of its
reinsurers -- companies that take on some of the risks underwritten by
primary insurers -- "are questioning our interpretation and/or application
of some of the provisions" of its property reinsurance.
Partly based on those two uncertain areas, Ms. Schroeder, a trained
accountant who once worked for the accounting industry's Financial
Accounting Standards Board, ratcheted down her earnings estimates. The
likelihood that a charge for one or both of those areas may be taken this
year, she says, is increased by the fact that Chubb Chief Executive Dean
O'Hare is scheduled to retire before year's end. In the insurance industry,
new chiefs often quickly boost reserves, to keep such charges off their own
records.
Reserve boosting is a fact of life in the insurance industry. In the first
quarter, more than three dozen insurers reported more than $5 billion in
charges mostly related to either restructuring activity or boosts to claims
reserves. As for asbestos exposure in particular, insurance-ratings firm
A.M. Best last year estimated that insurers faced a shortfall in asbestos
reserves of $33 billion, despite already having paid $21 billion in claims.
Still, insurance analysts say these charges to boost reserves for big things
like asbestos exposure happen so irregularly that they can't be considered
part of the forecasting process for insurance-company earnings. Joe Cooper,
a research analyst at First Call, says the general consensus for Chubb's
prospects at this point was that "it's premature and not possible to
quantify" the amount of any charges, or whether they would occur this year.
He adds First Call is creating a few alternate pages for estimates prepared
differently than the consensus. He says, however, that Ms. Schroeder's
numbers won't be posted on any alternate page because she declined to
provide a number for the consensus page.
First Call's approach may make the reporting process more consistent, but it
does have the effect of creating estimates that "may not reflect what
[analysts] really think," acknowledges Alice Cornish, an analyst at
Prudential Securities. The system, she concedes, does help perpetuate the
earnings-target game played by companies and Wall Street analysts.
Ms. Cornish, who originally forecast that Chubb would earn $4.60 a share
this year, received a call from First Call yesterday asking about an
alternate forecast, to include any possible charges. She predicts Chubb will
earn $3.10 a share on that basis.
(END) DOW JONES NEWS 08-06-02 |
