Well, I went out and had a few beers with some friends to discuss our "tragedy". They all gave a rather interesting perspective. I tried to explain that the company in which I had heavily invested (and convinced friends to buy) had come in with only 33% growth for the year, when everyone was expecting 50%.
Their response was that stocks like that fall badly after such news because of their high P/Es. A company with a 50 P/E could easily fall to a P/E of 30, from this disappointment - a full 40%. When I explained that the P/E was currently under 10, they just started laughing at me - didn't think I had anything to worry about.
- It had been argued when a "Big 6" auditor is first brought in, that institutions would want to stay away until they saw the numbers. Too many companies come to realize that their loopholes, are not as real as they thought. McGinnis and Norris mentioned two ways in which they "miscalculated". One was with debentures, and the other was with taxes. I assume that the debenture problem was due to how Eco calculated dilution. There are complicated equations as to how one adds diluted shares against your earnings. A decent CFO would understand these, but it appears the current CFO did not. Also the tax situation follows Canadian GAAP. Coopers and Lybrand would have their own specialists on Canadian tax laws. It appears that whatever assumptions that Eco/Norris were making with regards to taxes (e.g., the use of NOLs), were wrong. The miss may have been relatively large, because they had to refigure earlier quarters.
- My take on this is that Eco's financial people messed up. They need some solid established professionals to handle finances. They need the sort of people that can handle a $1 billion company (Yes $1 billion in 1998 is still quite possible). I suspect that McGinnis had been guided towards $1.20 by his own financial people until quite late in the game. I suspect that Eco did not get their financials to Coopers and Lybrand until much too late for them to allow McGinnis to provide guidance towards lower numbers.
- It has been argued that Eco's numbers have just been too good and that the real numbers will be clear once Coopers and Lybrand get hold of the finances. Well, we found out the REAL numbers. And after all is said and done.
1. Eco has the highest 5 year growth rate in the industry - somewhere around 70% after these earnings. Even the 33% growth this year has been beat by only a handful - all with much higher P/Es. The average growth is 13% with P/E around 19.
2. Before tomorrow - whatever it does - they already have the lowest P/E in the industry.
This is a company that has never been given any respect on the street. Although many of us small timers have great expectations, the major institutions and funds have stayed away (except for a handful that bought in during the last quarter). Many of the majors may have had serious doubts about Eco's earnings and incredible growth. What will they think now that Coopers and Lybrand says that growth was only 33%? For those on the sidelines waiting for the Coopers report (Oppenheimer etc) is that worse than they expected or better? Whatever disappointment we have now, I think that 33% will be trusted as real growth. Furthermore, that is on a higher tax rate than 1996, so the growth is actually higher than that.
My friends over the beers (yeah, ok, I had a few pints) went on about the stocks where they lost money - companies making no money but moving up on potential of what they might earn - when the 'faith' in their potential faded, the stocks took hard falls. They argued that real money was to be made on companies that made and grew earnings year after year. American Eco has done it for five years straight. Coopers has humbled us a bit it seems - although the growth remains intact. We are still the top of the pack in 5 year earnings growth - just not as far ahead as we all expected. In 1995, before I owned any Eco, the CFO resigned and the stock fell from around 11 as people suspected the 81 cents that Eco said it earned might be suspect. Well, now Coopers tells us Eco only earned $1.08. What is the fair value? It is certainly fairly valued higher than $11/share - although not everyone may be rational enough to see that in the short term. Could be interesting tomorrow as those disappointed sell to those thinking this is a good buy. I am not sure where it will go. For those that follow Zachs, we just beat estimates by 2% ($1.06 was the estimate). Will the institutions sell? I don't know. Although I know one that will be buying.
Will we close above 10 tomorrow? Quite possibly. It could be that the smart money got out a lot earlier than the rest of us which is why we are sitting at a P/E of 10 - and they will be buying back the sellers shares tomorrow. We are already the most undervalued company in the industry.
Geez - enough rambling - good luck tomorrow. Usually the bottom is where it opens. I'm holding on and will see where we are when the dust clears.
David |
