OT: O analyst, analyst! wherefore art thou analyst?
Analyst Action on Intel, Others Behind the Curve: Taking Stock
By Scarlet Fu
New York, Oct. 22 (Bloomberg) -- TXU Corp.'s shares plunged 70 percent in the four weeks before five Wall Street analysts cut their ratings on the stock, citing the utility owner's plan to reduce its dividend and sell a U.K. unit.
When Intel Corp. reduced its sales forecast a week ago, four analysts, including those at Banc of America Securities and Salomon Smith Barney Ltd., lowered their ratings the next day.
Two years after analysts lost much of their access to companies because of rules limiting disclosure by corporate executives, some institutional investors say downgrades such as those on TXU and Intel are coming too late to do them much good.
``Analysts are followers, not leaders,'' said Jon Burnham, who manages $800 million at Burnham Asset Management Corp. ``They have to go on what they're told publicly unless they're willing to do a lot of private homework, which they don't seem to be.''
Of the 26 companies in the Standard & Poor's 500 Index that reported third-quarter earnings fell short of forecasts, 12 had their ratings cut by at least one analyst following the news, according to Bloomberg data.
``A lot of analysts are gun shy,'' said Kevin Carey, who helps manage $2 billion in assets at 1st Source Bank in South Bend, Indiana. ``They're a little sensitive and they want to be careful.''
Disclosure Rules
In October 2000, the Securities and Exchange Commission enacted a requirement barring companies from disclosing market- sensitive to favored analysts or investors first. Some investors said they'd expected the rule, Regulation FD -- for fair disclosure -- to push analysts to dig deeper for information on their industries.
For their part, analysts said they are erring on the side of caution. Investigations into whether firms' investment banking interests tainted research and questions following the collapse of Enron Corp. that companies' accounting may overstate earnings have curbed analysts' willingness to change their views, said Kurt Walters, U.S. equity strategist at Bear, Stearns & Co.
``You don't want to wait around in an environment where we've had major accounting problems, and wonder, `hmmm, what's going on here?' You're thinking, `let's be careful, let's change our recommendation accordingly,'' said Walters. ``Analysts would have to do much more independent research than in the past.''
In March 2000, when the S&P 500 climbed to a record high, ``buys'' made up 72.6 percent of all analysts' recommendations, 25.3 percent were ``hold'' and 1.9 percent were ``sell.''
While the number of ``buy'' ratings has decreased to 55.8 percent of all recommendations and ``sell'' ratings have increased to 7.6 percent, investors said the change comes too late.
Getting it `Backwards'
``To me, a sell recommendation should come at the top, not the bottom. And a buy recommendation should come at the bottom, not the top,'' said Steve Frantz, chief investment officer at First National Bank of Omaha, which manages $4 billion in assets. ``Everyone seems to have gotten it backwards.''
Take TXU.
The Dallas-based utility announced on Oct. 14 that it would cut its quarterly dividend by 80 percent and sell its U.K. unit to shore up its finances.
Of the 10 analysts who published reports after TXU's announcement, half downgraded the fifth-biggest U.S. utility owner to a ``sell'' or its equivalent, Bloomberg data shows. The remaining five maintained their ``hold'' rating.
Twelve analysts now rate TXU a ``hold,'' seven consider it a ``sell,'' while only Legg Mason Wood Walker's Ronald Tanner recommends a ``buy.''
Yesterday, the stock surged 16 percent when it agreed to sell the U.K. business to E.On AG of Germany for $2.9 billion.
Intel Downgrades
Then there's Intel. In August, its Chief Executive Officer Craig Barrett said personal computer and chip demand may not rebound in the holiday season.
On Oct. 15, the world's biggest chipmaker said sales will fall more than forecast this quarter. The following day, analysts at Banc of America Securities, Salomon Smith Barney, Prudential Securities and CIBC World Markets cut their ratings.
The number of ``buy'' and ``hold'' recommendations on the company are now even at 17; CIBC World Markets' Quinn Bolton has the lone ``sell'' rating.
``I didn't need them to tell me Intel is going to have a bad fourth quarter,'' said Burnham. If anything, he noted, the downgrades make him ``more inclined to be a buyer.''
What Burnham and other investors say they want to see is more analysts sticking their necks out and publishing views before the companies release their numbers.
Niles Call
Lehman Brothers Inc. analyst Dan Niles did just that with International Business Machines Corp. Niles raised his IBM rating to ``overweight'' from ``equal-weight'' five days before the company's quarterly results. He said spending on computers and associated services ``should improve slightly in 2003.''
Burnham called Niles' recommendation ``courageous'' and bought IBM shares. IBM, which had lost more than half its value this year, rallied 11 percent the day of Niles' upgrade.
It's extended those gains and has now climbed 31 percent following Niles' call. IBM on Oct. 16 reported higher-than- forecast profits and said sales this quarter will rise, leading three analysts to upgrade their ratings on the stock.
``The proper utilization of a sellside analyst is for insights and evaluation,'' said Carl Domino, chairman of Northern Trust Value Investors, which manages about $2 billion. ``It's going to be more difficult for them to hit the numbers all the time.'' |
