Thursday, January 31, 2008

An Analyst Scorned



Wall Street’s Finest—the men and women who toil in the “equity research” vineyards of the major brokerage firms attempting to make sense of thousands of public companies for their clients—are nothing if not eternal optimists.

Just this morning, for example, one of that peculiar tribe—of which yours truly used to belong—downgraded his opinion of luxury goods proprietor Ralph Lauren months after that particular horse had broken down.

Not that there’s anything wrong with that: we all do make mistakes. It's the nature of this business.

No, it’s simply the analyst’s old “price target” that demonstrates the infallible optimism of sell-side research. Yesterday, that price target was a fancifully ebullient $90 a share for a stock that currently changes hands at $60.73. Today it is a more hittable $63.

Not that investors should pay any attention to price targets in the first place, subject as they are to a peculiar magnetic effect that causes them to eerily parallel the actual price of the stock in question, such as Ralph Lauren, which peaked at $103 during the bucolic “what happens in sub-prime stays in sub-prime” era of this particular cycle, a mere two bucks away from the analyst’s peak price target of $105.

Optimists though their Wall Street cheerleaders may be, woe be the management team that shakes an analyst's faith by failing to do the only thing Wall Street’s Finest particularly want from a company: hit the numbers.

And just last night, a company called Accuray, which makes the CyberKnife—a whiz-bang radiosurgery device used to treat solid tumors with accurately aimed doses of radiation—failed to hit its numbers.

In a guide-down worthy of Sears Holdings, Accuray missed not just revenues and earnings, but also lowered its all-important backlog number (the CyberKnife is a large, expensive piece of equipment requiring radiation-proof bunkers to be installed before the machine itself).

None of this should have surprised anybody: Accuray hasn’t hit too many numbers in its brief span as a public company. But the CyberKnife is a great product, and medical products analysts can’t fathom why it is not taking off like the iPod.

Of course, iPod’s don’t cost $4 million to get up-and-running.

Be that as it may, the conference call got quite ugly, and included this one-for-the-ages exchange, courtesy of the indispensible StreetEvents:



Amit Hazan – Oppenheimer & Co, Analyst

Okay. Just moving to, I guess, new orders. Even if we assume your $100 million in new orders, that's flat year-over-year, and if we think about the $40 million you just removed and with some of your comments, get a sense that that $40 million in backlog that you just removed was new orders over the last six months or so, I've got two out of the last three quarters that were flat in terms of new orders. I've got $40 million that are coming out of new orders. I'm not seeing much growth here at all, but you're painting a picture as if there's some robust growth going on in terms of interest in your product. What am I missing?


Dr. Euan Thompson – Accurary Incorporated – President and CEO

I'm not really sure where you're coming from, Amit, which is not unusual….


But this morning, Hazan is returning the favor with the following—one of the most unusually blunt assessments of a company by one of Wall Street’s Finest ever to make it into print:

For those expecting some clarity into the most unnecessarily complicated one-product company in our sector, forget it. ARAY has just put up what we consider the weakest, most confusing and most concerning quarterly results since its IPO one year ago….

Naturally, Hazan cut his price target on the shares—from $15 to $10.

The stock went out at $14.98 last night. And while we never comment on, express an opinion of, or predict stock prices in these virtual pages, we suspect the new price target will prove more accurate than the old one would have this morning.



Jeff Matthews

I Am Not Making This Up

© 2008 Jeff Matthews

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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

5 comments:

David said...

As of about 10 a.m., he appears to be spookily accurate - $9.92.

Brent said...

Wow, that was some payback. He might have to move the price target to $9!

Phillip Charles said...

"What happens in sub-prime, stays in sub-prime". so condescending, yet so true. That has been the LOL highlight of my day...I can take a nap a now.

Michael said...

Speaking of SHLD and analysts...my favorite price target revision/capitulation so far this year has got to be from a Deutsche Bank note after SHLD gave 08 guidance: "We are slashing our price target (to $53) on SHLD based on our new FY08 EBITDA ests." Just a cool $108/share or $14bn in mkt cap lower than their previous pt. Whats even better...there was no revision to their top-line estimates.

As Yoda probably would have put it: Short-term voting machine, indeed Wall Street is.

ssouthflorida said...

But the CyberKnife is a great product, and medical products analysts can’t fathom why it is not taking off like the iPod.