Tuesday, February 03, 2004
Last week's profit warning from Tate forced me to rethink my hypothetical entry price for the stock. After some to and fro, I have plumped for nine times previous years' earnings. This should be making you think:
"Why nine times?"
and
"Why previous years earnings?"
second things first. Without the illegal benefit of inside information we cannot know what next years full earnings from Tate might be. The directors should at least have a very good idea as to what earnings might be and indeed recently informed the market in their trading statement they expect something similar to market expectations. There's some more directorese at play here, wrapped up in the term 'market expectations'. This be first translated to 'City expectations', meaning the expectations of professionals (actually, 'tradesmen' might be better) in London's financial services industry. This mob are the stockbrokers, fund managers and analysts at the myriad institutions in the EC2 area of our capital. Note that amongst that list there were no clairvoyants, shaman or soothsayers. Analysts don't know the intimate details of Tate's accounts or the sector Tate operate in so well they can predict full year earnings. They don't read the runes or goats entrails for information on future weather conditions the progress of carbohydrate price negotiations in the US. How do the market pros arrive at an approximate figure? The directors tell them, usually one at their (private) meetings. So 'market expectations' can really be read as 'the conclusions of City analysts since we last spoke'.
I digress but I'll continue.
Without access to these City expectations claims such as 'we will meet market expectations' are of no use to the private investor without access to the equivalent of the stable lad. What is the shareholder or prospective investor to divine from such elliptical communication? In the spirit of fair play the trading statements are broadcast to all market players via the stock exchange's news service but 'market expectations' are not. That's not a level playing field. The brokers and their cohorts don't disseminate their 'expectations' to all market participants. Brokers' earnings estimates and associated tittle-tattle are compiled into broker reports which are kept on file for clients perusal, and used as the basis for buy/sell recommendations. I'm not against this. Any information analysts may have been able to piece together should naturally be used for maximum commercial gain. What I am opposed to is directors' use of the term 'market expectations' in an address to all those playing the market. This statement requires qualifying with just what those market expectations are. The wordplay undermines the very purpose of the trading statement, which should update shareholders on the health of their investment and also inform the market. Instead, directors choose to keep individual shareholders and market watchers in the dark, pandering to brokers' commercial interests by withholding this vital information. A simple and fair resolution would require companies divulge just what earnings per share 'market expectations' are in precise figures. This could be an average of broker forecasts from those that have been briefed that year, or the range of expectations. If a broker refuses to report his earnings forecast, they could simply have the privilege of direct access to management removed. On further consideration I don't see why a company should not be able to do just this. If a company you own shares in refuses to divulge just what 'market expectations' are I suggest a call to your broker and investor services at the company and if that fails, follow it up with stern letter to a non-executive director, whose responsibility is to represent shareholder's interests at board level.
My new price target for Tate is around 250p. I'm delaying my justification of my Tate price target for another day. With Tate shares currently trading at 280p and a trading statement having already been produced, short of thermonuclear war, that gap won't be narrowing in the time before you hear from me again.
The Artful Dodger
"Why nine times?"
and
"Why previous years earnings?"
second things first. Without the illegal benefit of inside information we cannot know what next years full earnings from Tate might be. The directors should at least have a very good idea as to what earnings might be and indeed recently informed the market in their trading statement they expect something similar to market expectations. There's some more directorese at play here, wrapped up in the term 'market expectations'. This be first translated to 'City expectations', meaning the expectations of professionals (actually, 'tradesmen' might be better) in London's financial services industry. This mob are the stockbrokers, fund managers and analysts at the myriad institutions in the EC2 area of our capital. Note that amongst that list there were no clairvoyants, shaman or soothsayers. Analysts don't know the intimate details of Tate's accounts or the sector Tate operate in so well they can predict full year earnings. They don't read the runes or goats entrails for information on future weather conditions the progress of carbohydrate price negotiations in the US. How do the market pros arrive at an approximate figure? The directors tell them, usually one at their (private) meetings. So 'market expectations' can really be read as 'the conclusions of City analysts since we last spoke'.
I digress but I'll continue.
Without access to these City expectations claims such as 'we will meet market expectations' are of no use to the private investor without access to the equivalent of the stable lad. What is the shareholder or prospective investor to divine from such elliptical communication? In the spirit of fair play the trading statements are broadcast to all market players via the stock exchange's news service but 'market expectations' are not. That's not a level playing field. The brokers and their cohorts don't disseminate their 'expectations' to all market participants. Brokers' earnings estimates and associated tittle-tattle are compiled into broker reports which are kept on file for clients perusal, and used as the basis for buy/sell recommendations. I'm not against this. Any information analysts may have been able to piece together should naturally be used for maximum commercial gain. What I am opposed to is directors' use of the term 'market expectations' in an address to all those playing the market. This statement requires qualifying with just what those market expectations are. The wordplay undermines the very purpose of the trading statement, which should update shareholders on the health of their investment and also inform the market. Instead, directors choose to keep individual shareholders and market watchers in the dark, pandering to brokers' commercial interests by withholding this vital information. A simple and fair resolution would require companies divulge just what earnings per share 'market expectations' are in precise figures. This could be an average of broker forecasts from those that have been briefed that year, or the range of expectations. If a broker refuses to report his earnings forecast, they could simply have the privilege of direct access to management removed. On further consideration I don't see why a company should not be able to do just this. If a company you own shares in refuses to divulge just what 'market expectations' are I suggest a call to your broker and investor services at the company and if that fails, follow it up with stern letter to a non-executive director, whose responsibility is to represent shareholder's interests at board level.
My new price target for Tate is around 250p. I'm delaying my justification of my Tate price target for another day. With Tate shares currently trading at 280p and a trading statement having already been produced, short of thermonuclear war, that gap won't be narrowing in the time before you hear from me again.
The Artful Dodger
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