Market Expectations

[ozambersand]

Recently three ASX200 companies (Caltex, Metcash and Brambles) have posted record profits showing growth, usually on par with their predictions but the share price has plummeted because some analysts said the results were below "market expectations"

I am confused by something here. By "market" are they referring to the share-holders/buyers or the analysts?

If it is the former, how do they know what figures share-holders expect?

If it is the analysts, where are they getting the figures on which they base their expectations?

Roger Collison, an analyst at Tyndall Investment Management, said the market had been expecting European CHEP growth of up to 6 percent.

(Associated Press)

I emailed Brambles and asked them about it:

Me: "The analysts were expecting (apparently) a 5% constant currency increase (in Europe's sales). Has the company ever intimated that this was achievable? If not, where did they get this figure from?"

Their Investor Relations spokesperson responded: "We have indicated to the market by June 2008, we should be exiting the year at volume growth of around 4-6%, up from the 1H07 figure of 2%. Unfortunately, we have no control on what analysts use in their forecasts.

So are analysts unrealistic in their expectations?

Have brokers/analysts been talking the shares up with their clients?

Could it be a sign that the economy generally is slowing and these are the first indicators?

On a related but different note...

What is there to stop analysts making statements like this knowing/hoping that the price will go down, hence making it easier for their clients/mates to buy in for a future take-over? This latter comment is not saying that this is what the above analyst is doing, but many analysts work for companies (eg Credit Suisse, Deutsche Bank) that have divisions that either invest in these companies themselves or bankroll people that do?

In this scenario, what is there to stop an investment bank having one of their analysts making a negative statement (whether it is really justified or not), then another division of the same company selling off large amounts of shares, watching the price go down and then buying in lower down?

Particularly given that a sudden drop in price will result in many shares automatically being sold as their stop point is reached.

I would be grateful if I could get some insight into this as I am trying to understand the way the market (share-holders/buyers) react to these announcements (by the companies and the analysts) as they have such a huge impact on the share price.

 

[reece55]

In my opinion, this is typical of where our market is at the moment.

That is that expectations are high, especially in the non-resource based stocks, where falling short of a target, regardless of how good the relative performance is, can prove to be devastating. Take a look at Caltex today - classic example.

With BXB though, personally I could see that in the chart fairly early on however.....

Inevitably, in any bull market, analysts eventually bank on all upside in stocks, i.e. remove risk premium, and eventually companies fall short of the targets. We are just beginning to see this and the further extended the market gets, the worse it will become.

If you think the established companies are being hit, what about those that are yet to really present proper profits yet i.e. FMG, PDN, etc. Now, I'm not saying for a second these aren't great stocks, with great potential for good cash flow, etc., but the hurdle is being set very high. Inevitably, some are going to let us down, it's not that they are not good companies, but things happen.

This is the market cycle however, and whilst I don't say cash your chips out and go home, my ethos at the moment is take profits quickly and set stops tight. But when in doubt, stay out - tomorrow is another day, the market will always be there...

All the best trading to all....

Cheers
Reece

 

[dhukka]

Recently three ASX200 companies (Caltex, Metcash and Brambles) have posted record profits showing growth, usually on par with their predictions but the share price has plummeted because some analysts said the results were below "market expectations"

I am confused by something here. By "market" are they referring to the share-holders/buyers or the analysts?

If it is the former, how do they know what figures share-holders expect?

If it is the analysts, where are they getting the figures on which they base their expectations?

The market in this case is what analysts are expecting. With large companies such as Brambles there will be more than a dozen domestic brokers covering the stock with earnings estimates out there on services such as Reuters, Bloomberg First Call etc. The 'market' will be the 'consensus' or average of these estimates.

I'm not intimately familiar with BXB but by the sounds of the reply you got Brambles is giving guidance to the market. Reasons why analysts may over estimate earnings could be that the company has a habit of over-delivering on it's guidance. For obvious reasons companies prefer to over-deliver than under-deliver and therefore may give out conservative estimates. Analysts who have covered the stock for some time know this and may adjust the estimates upwards.

Other times analysts just get it plain wrong. Take CPU back in 2001. CPU held up well in the tech wreck because they had a built a solid reputation for over-delivering. Most analysts over-estimated CPU's 2001 result. The result wasn't bad but it came in under market expectations and the stock was slammed. They disappointed again in 2002 and took the next 4 and half years to regain their 2001 highs.