Monday, October 25, 2004

Broker sanity check - would you buy a used car from this man?

A couple of years back, I used to publish a weekly update on the PTTs, called "Weekly PTT Pulse," and the one thing I really liked about it was that every week I tracked the mismatch between analyst sentiment and sector performance, in something I affectionately named the "analyst whipsaw index." Sadly I have let the data points lapse, because I have more important things to do, but I thought it might be interesting, particularly for those without access to Bloomberg data, to examine this issue.

Firstly, a few macro points:

  • Of the 18 DJ STOXX industry groups in the STOXX 600 index, the benchmark we follow, Telecom has performed best over one month (+6.8% absolute, +3.7% relative) and second-best over three months (+2.6% absolute, +5.3% relative). It is important to point out that over that period we have seen some pretty savage underperformance from the Food, Media, Health, and Auto sectors.
  • Telecom is the third worst performing sector (after Tech and Insurance) over five years, down 27.6% relative. A five-year long position established in October '99 in Basic Materials, Construction, Banks, Energy, Food or even Chemicals (!) would have generated excess returns over an equivalent investment in Telecom by a margin of between 39% and 72%.

Virtually everything I have written over the past two years has focused on an impending shift in the nature and economics of telecom service provision, and the immense challenges telcos will face in keeping an even keel through the transformation. Almost every client meeting I have had over the past two years has revealed that investors largely share my concerns. I would assume any short-term outperformance in the sector is being driven to some small extent by company de-leveraging, increased dividends and share buybacks, but mainly by technical considerations and the poor fundamentals of other sectors. In other words, beware of sustained long positions in the sector into the new year, because I expect January could be the start of another trough.

Then again, I am only one voice, and a relatively minor one at that. I've never appeared on Kudlow & Cramer, and I don't even like Ferraris. What do the other brokers say? I took some time this morning and tabulated Bloomberg broker ratings on 18 stocks in Europe, comprising 14 integrated operators and four mobile pure-plays. All-in-all there are 510 current broker ratings on these 18 names, equating to an average of 30 analysts per stock (that's a lot of maintenance research, and a lot of deforestation). Of the 510 ratings, on average 82% were either positive or neutral. The least-loved stock, TeliaSonera (48% negative ratings) has performed second-best over the past three months (I have an UNDERPERFORM rating too, because I don't buy the buyback story), following Telenor (94.7% positive rating and my preferred name in the sector).

The data is here, but Blogger doesn't handle tabular data well AT ALL, so apologies for the layout:

Belgacom Buys – 6,Holds – 9,Sells – 2,Total – 17
BT Group Buys – 5,Holds –14,Sells – 11,Total – 30
Deutsche Telekom Buys – 33,Holds –9,Sells – 2,Total – 44
France Telecom Buys – 29,Holds –9,Sells – 4,Total – 42
KPN Buys – 19,Holds –14,Sells – 11,Total – 44
mmO2 Buys – 9,Holds –11,Sells – 7,Total – 27
OTE Buys – 9,Holds – 8,Sells – 3,Total – 20
Portugal Telecom Buys – 15, Holds – 9, Sells – 4,Total – 28
Swisscom Buys – 5,Holds – 15,Sells – 5,Total – 25
TDC Buys – 8,Holds - 7, Sells – 6,Total – 21
Telecom Italia Buys – 21,Holds –12,Sells – 2,Total – 35
Telecom Italia Mobile Buys – 20,Holds –8,Sells – 7,Total – 35
Telefonica Buys – 28,Holds –13,Sells – 3,Total – 44
Telefonica Moviles Buys – 10,Holds –17,Sells – 11,Total – 38
Telekom Austria Buys – 6,Holds –9,Sells – 3,Total – 18
Telenor Buys – 13,Holds – 5,Sells – 1,Total – 19
TeliaSonera Buys – 7,Holds – 5,Sells – 11,Total – 23
Vodafone Buys – 34,Holds – 7,Sells – 2,Total – 43

Total Buys – 243,Holds –174,Sells- 93, Total – 510, Neutral/Positive - 81.8%

Beyond the apparent reluctance to be negative, it is also interesting to see some of the price targets out there. Take a company like BT Group (Daiwa rating UNDERPERFORM, price target 179p), where sentiment is relatively bearish: the average of disclosed price targets according to Bloomberg is 192p, or still 5.4% above today's open. At the other end of the spectrum, the three most bullishly-rated large caps (Vodafone, Deutsche Telekom, France Telecom) have average price targets giving upside of 12.9%, 17.8% and 19.4% upside, respectively. After such a strong run over three months, and with a wide range of secular challenges and uncertainties facing the sector and the individual operators, what in the name of Juan Villalonga do the analysts think is going to happen to support this sort of rise?

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