Tuesday, August 30, 2005
They Get Paid For This, Part I
Teradyne upgraded to Neutral at BofA; tgt raised to $15.16 (16.62)
Thus reads a headline coming across my “Briefing.com” this morning.
“Briefing.com” is an excellent, subscription-based online service providing news behind stock movements, and during the pre-market hours it is chock-full of these types of upgrades and downgrades from Wall Street’s Finest.
What that headline means is this: the semiconductor equipment analyst at Bank of America has upgraded his rating on Teradyne, a solid, old-line company specializing in high-end test equipment, probably from “Sell” or “Underweight,” to “Neutral.”
Furthermore, the analyst has raised his target on the stock price to $15.16 a share, compared with last night’s closing price of $16.62.
For those of you rubbing your eyes at this, let me assure you of two things:
1. The “target price” is precisely $15.16. Not $15.15 or $15.14. It’s $15.16.
2. The “target price” on the stock is in fact 10% below last night’s closing price, and yet the stock is rated “Neutral.”
Now let me assure you that nobody I know pays any attention to either the price target or the “Neutral” rating. And, yet, they exist. So how could a Wall Street analyst come up with a “$15.16” price target, anyway?
Well, first the analyst finds some artificial multiple, such as the S&P price-to-earnings ratio or the average semiconductor price-to-book ratio or a peak-cycle-price-to-sales ratio.
Then his assistant plugs a bunch of numbers into their Teradyne model, runs them out five years, and starts multiplying earnings or book values or peak sales ratios times the various outcomes, and blends these into a meaningless “price target.”
As for why the analyst is “Neutral” towards a stock he expects will decline 10%, a quick look at the Teradyne chart reveals the stock is up about 50% from its May lows, and the analyst is probably getting tired of having a “Sell” or “Underweight” rating on a stock that keeps going up.
Merely by going to “Neutral” the analyst has reduced the number of hostile, “why are you so negative?” calls from any number of influential Teradyne shareholders—not only to himself and his assistant, but to his sales people, traders and investment bankers.
Plus, it is almost September, and in just a couple of weeks Bank of America will have its growth conference, and it will be much more comfortable for the analyst to introduce the company’s speakers at the conference if he is able to say “Teradyne is a Neutral-rated stock” as opposed to “Teradyne is a Sell-rated stock” in front of 500 clients who own Teradyne.
Don’t get me wrong: I am not being harsh or critical of the Bank of America analyst, whoever he is. Being an “analyst” on the sell-side is more of a marketing gig than a stock-picking gig, and has been since I was there in 1980. What I described here is simply how it really works, when you cut through all the spreadsheets and disclaimers.
But tomorrow we will look at a more egregious type of behavior from Wall Street’s Finest—the kind that results in a well-paid analyst being off by almost 100% on his “free cash flow” analysis of a money-losing company that has experienced a reduction in its cash balance, net of debt, from $170 million to almost zero in the space of nine months.
Analysts really do get paid for this kind of thing.
I Am Not Making This Up
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.
Posted by Jeff Matthews at 8:55 AM