Forum Archive Index - October 2003

["Cristine Kerr" <criskerr@optusnet.com.au>]

Hi all,

The following is a direct extract from the BT Financial Group (part of Westpac Banking) website. I thought it might be of interest to novice FA traders within the group.

Regards,

Cris

---

' ... BT Australian equities analyst Misha Collins, has just returned from visiting a company in the UK. Sounds strange for an Australian share analyst to be 17,000 kilometres from home? Well, not really, when your job is to delve into what makes a business tick, and that may have a lot to do with its overseas operations.

Freshly back from one trip, Collins will also be out on the road several more times this week. He will see each company that he analyses at least four times per year and maintain a constant dialogue with management over the phone in between visits.

Collins says it is the job of the analyst to size management up, and try to determine whether they have a superior understanding not only of the operation of their business, but the broader environment in which the business operates. That is, does management truly understand how their business is changing and evolving? And, are they aware of the underlying trends that are driving the company's profit?

The company visit helps the analyst to gauge the underlying business conditions and get a feel for the way the company works. Following meetings with the company's management, Collins will also meet with industry consultants and competitors to see what the people who have the closest contact with the company think of it.

Company visits

The purpose of the recent trip overseas was to visit an Australian company's offshore operations. Collins says talking to customers and competitors of the company while he was over there proved to be invaluable to his understanding of the business as a whole.

The meetings uncovered a number of customers who were truly scathing of the company's use of pricing power in its market to demand what they believe to be high and inconsistent prices. This is important information to Collins, for while this type of business practice may be working to the short-term benefit of higher cashflows, it is potentially damaging in the longer term (as damage is being done to the company's customer base).

Also, from meetings with some of the company's main competitors, it became clear that many were adopting more conservative accounting approaches, while this company continued to practice a more aggressive style. This is another of those findings that sends a warning signal to the analyst as a risk associated with investing in this company.

As a result of the visit, Collins confirmed his negative views on the business. Together with further modeling and valuation work, this led him to conclude that further share price weakness was likely. He subsequently downgraded his investment recommendations on the stock. These recommendations, however, are subject to change and Collins will continue to monitor the stock and adjust his ranking accordingly as the business or the environment changes.

What does it take to be a good analyst?

While much of the information that is uncovered during visits to companies may already be well known to the broader market, it is the context in which it is received which makes all the difference.

"The job of a good analyst is to take a vast collection of insignificant and individually meaningless information and combine this in such a way as to produce commercial research that is useful to make investment recommendations", Collins says.

The analyst is constantly looking at possible scenarios that can play out within a company. Changes bring risk, but just as importantly, may bring opportunity. What distinguishes a good analyst is the ability to determine which information is important and if it is either already factored into the current share price or unlikely to have any effect on the company's share price. ... '

http://www.btonline.com.au/market_updates/investment_spotlight.html

---