Forum Archive Index - January 2002

["Peter" <pmaiden@today.com.au>]

If Cramer thinks that investors might be turning to companies whose 
balance sheets they can understand (refer Ben's post) will investors 
also turn to analysts they can understand (trust).

I am sure we all have our own views of the quality of what comes out 
of stockbrokers offices but many do believe them. Like company 
balance sheets that Cramer mentioned how much of analyst reports is 
understood (or believed)?  

This article in last weeks BRW is a bit of a worry. Very brave piece 
of journalism.

http://www.brw.com.au/stories/20020117/13079.asp

Excerpt (but do read the whole article)-

To justify the lofty stock prices, analysts add subjective 
assumptions to their valuation models. Computershare is a good 
example. Most brokers valued it between $5 and $6 on a discounted 
cashflow basis. In October last year, the stockbroker JBWere valued 
Computershare at $5.70, when its share price was $5.09. To justify a 
buy recommendation, the broker threw a few extra projections into the 
base discounted cashflow model to lift the value to $7.70. These 
included estimates of how much the company would earn if it "extended 
its competitive position" and integrated its United States and 
Canadian businesses.

Another example is the green energy group Energy Developments, which 
has a buy recommendation. In October, JBWere valued the stock at $4. 
At the time, the share price was $5.55. To justify the buy 
recommendation, JBWere created a risk-weighted valuation of between 
$13 and $14 based on the company's "solid waste to energy recycling 
facility" (Swerf) being a success. Other analysts, including ABN 
Amro, had similarly heady valuations. But the Swerf technology is 
behind schedule, it has not been proved, and it has no operating 
history.


Cheers

Peter

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