Do you simply accept what is said in Company Analyst Reports, or do you challenge Analyst assumptions and conclusions pursuant to your own research?

Company Analyst Reports are useful tools to assist in understanding value parameters adopted by analysts for specific industry sectors or companies. They can be particularly useful as sources of both knowledge and ‘thought provoking ideas’, and may provide insightful observations on market conditions and company share target prices. However, opinions expressed in Analyst Reports should be recognized for what they are, opinions, and should be weighed accordingly.

We believe investors should read and draw conclusions from Analyst Reports with a cynical eye, keeping in mind:

• whether the company has paid the analyst firm directly to generate the Report;

• whether the firm that employs the analyst generates financing or other fees from the company – or otherwise has relationships with the company that might be construed as a conflict of interest or might promote bias;

• that such Reports are written by persons of differing knowledge and experience, which experience may or may not reflect industry or company specific operations knowledge – and that as a result the opinions expressed may not always be sound;

• the definition of ‘Strong Buy’, ‘Speculative Buy’, ‘Buy’, ‘Hold’, ‘Wait’, ‘Sell’ or other ‘recommendation terms’ adopted by the firm that employs the analyst. Definitions of such terms typically are found in the fine print and disclaimers on the last page of such Reports;

• analysts can not be assumed to have access to the same complete corporate information that would be available to Corporate Acquirers and their advisors who have signed Confidentiality and Non-Disclosure Agreements;

• Analysts typically do not set out the theoretical and practical strengths and weaknesses inherent in the valuation methodologies they adopt;

• Analysts often do not clearly set out the specific reasons companies have been selected as ‘peer group’ companies; and,

• Analysts may not adjust ‘peer group’ multiples for comparability issues, which they typically should do.

We believe Analyst Reports broadly to be useful investor tools. However, we also believe:

• they should be read with a critical eye as to the merits of the analysis they contain;

• investors should not simply adopt stated ‘target prices’ as being reliable without understanding the fundamental assumptions underlying them, where investors themselves conclude those assumptions make sense; and,

• investors should not act on Analyst Reports in isolation. Rather, Analyst Reports should be studied as a supplement to each investor’s own research and due diligence.

The views expressed in this Post are those of the author. They are offered to readers for information and general guidance only. They are neither intended to, nor should be taken to, constitute economic or investment advice. See Legal Disclaimer.

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