Archive for the 'The Sell Side' Category

Wait, But You’re The One Doing the Ratings

From a Bloomberg piece on the risk of another off-balance sheet (in this case, a VIE) potential problem for financial companies:

Predictions for losses vary widely because banks aren’t required to specify the type of assets being held in the VIEs or how much they are worth, said Tanya Azarchs, managing director for financial institutions at S&P.

“The disclosure on VIEs is hopeless,” Azarchs said. “You have no idea of the structure or how that structure works. Until you know that you don’t know anything. It’s like every day you come into the office and another alphabet soup has run off the rails.”

Tanya baby, I’m not gonna say you’re not doing your job, but uhh, you’re not doing your job! How can you rate companies and then admit you don’t know, and haven’t known, anything? And she is the HEAD for ratings of financial institutions.

From her bio at S&P

A managing director at Standard & Poor’s Financial Services Ratings Group, Tanya Azarchs is responsible for coordinating research on issues affecting financial institutions worldwide. She frequently authors research on special topics. Tanya is responsible for the ratings of large, complex banks and securities firms in the U.S. and Canada, and is involved in the analytical effort on Eastern European banks. She is also a member of the global financial institutions ratings criteria board, which develops ratings criteria and reviews ratings across the globe for consistency.

Why would someone like that think it’s ok to put out ratings when they lack knowledge?

She is a Chartered Financial Analyst.

Ahh, so knowledge IS a problem.

Recommendation: Short the balance sheet for any entity that has a lot off-balance sheet.

The Sell Side: Joe Herrick, Gutterman Research

Over the weekend, the WSJ had this article on earnings calls being crashed by faux-analyst Joe Herrick.

At least seven times just the past three weeks, a mystery caller has cleverly insinuated himself into the normally well-manicured ritual of the quarterly calls. As top executives of publicly traded companies respond to securities analysts’ questions about their balance sheets, he impersonates a well-known analyst to get called upon. Then, usually declaring himself to be “Joe Herrick of Gutterman Research,” he launches into his own version of analyst-speak.

“Congratulations on the solid numbers — you always seem to come through in challenging times,” he said to Leo Kiely, president and chief executive officer of Molson Coors Brewing Co., on Feb. 12, convincingly parroting the obsequious banter common to the calls. “Can you provide some more color as to what you are doing for your supply chain initiatives to reduce manufacturing costs per hectoliter, as you originally promised $150 million in synergy or savings to decrease working capital?”

Analysts say the caller’s questions, though credibly phrased, are too off-target for a real analyst. It’s more like “consultant-speak,” says a disdainful Bryan Spillane, a Banc of America Securities analyst, a victim of one of Mr. Herrick’s impersonations. Analysts deal with often-wonky financial details, but “savings per hectoliter” rarely comes up.

Mr. Schmitz[, a sell-side analyst,] speculates that Mr. Herrick is “some minion” at a consulting firm trying to do clandestine research on companies’ use of Six Sigma techniques.

Coke’s caution was evident when Banc of America’s Mr. Spillane, the earlier impersonation victim, posed a detailed question about how much of the company’s currency-neutral operating profit growth was organic rather than coming from acquisitions or cost savings. “We hesitated on you for a minute because as we take these questions we are just trying to make sure that in fact you are who you say you are,” Coke’s chief financial officer, Gary Fayard, said before launching into an answer. “I am the real deal,” Mr. Spillane replied.

Recommendation: Beside multiple digs at consultants by sell-side analysts (Spanish Editor’s Note: che absurdo¿!), the best part is that Joe Herrick asked questions that many companies tried to answer because, well, they were the same kind of inane crap questions that they EXPECT from your typical sell-side analyst. Short the sell-side. Additionally, we are initiating coverage on Gutterman Research at a solid “Do Not Buy“.

HT to Terry

CIBC Downgrades…CIBC

CIBC May Take $4.1 Billion Writedown, CIBC Analyst Says (headline has changed but the original was as we laid out). This just speaks to credibility of CIBC’s (NYSE: CM) equity research department!! ….or the fact that their equity research department just got laid off.

Recommendation: Short the employment status of anyone who downgrades their own firm’s stock; double short any company who puts their employees in a position where they would have to do so.

How To Destroy An Analyst by POT

Bill Doyle the baller CEO of Potash Corp (NYSE: POT) recently crushed the spirit of an analyst on a conference call in a swift and brutal way that made even all of us here at LoS (who hate bad sell side research) cringe. The unfortunate recipient of this de-pantsing was Charles Naberg who had recently initiated on the fertilizer industry. He asked an innocent enough question about some capacity expansion on the 3Q call and got a terd-filled sock shoved in his mouth as a reply:

Charles: “Hi guys. Nice quarter. Had a quick question on Lanigan. How is that progressing? Is it still on time for the middle of this year — or this coming year, excuse me, middle of 08? And can you remind me about what the size of that addition is going to be?”

Bill Doyle: “Yes Charlie [ed note: he was introduced as “Charles” and the this is the first time they have ever spoken to each other], to answer your question, what I would tell you is that Lanigan is 1.5 million tons. It’s on budget and on time for next year. You know, essentially the big piece there is the mill. So we see that progressing according to plans.

You know, I read your first entree this week into the potash world. First I would say welcome to the fertilizer world and I did have just a couple comments, Charlie, just because I never have a problem with anyone’s call, you make whatever call you want, but some of the factual information in your report was a little bit suspect and I would say the — you know, the comment about Potash Corporation abandoning our discipline and I don’t know what the line was, something about us being out for pizza or doughnuts — it was cute, but if you follow the history of the company, you’ve got the same management team for the last 20 years and if you check back and do a little research on us, you’ll find that we have always matched supply to demand and it’s not how much capacity you have, it’s how you operate that capacity, Charlie. And the other thing I would say is that you know, you referred to Potash mining as being high fixed cost business. Potash mining is not a high fixed cost business. You know, we can lay people off and shut down the operations. We’ve done that for years and years when the time required it.
Unlike our phosphate business, which is a high fixed cost business, because you’ve got to keep that operation hot, so-to-speak. You’ve got sulfuric acid plans, you’ve got to keep your water pumping capability in the mine site. You just really can’t shut that down. So, there is a difference there that we would be happy to try and explain to you in the future.

[On] Our earnings being highly dependent on biofuels – three quarters of the new demand growth in our business is food demand. We’ve tried to talk about that at every stage and what I would really suggest to you, I think you know, you covered a little bit on the supply side, you didn’t talk at all about the demand end. And I would say go out, visit India, pick any five cities, China, any five cities, and you’ll see the demand for food and it’s a very, very real issue.

You know, the other comment about consumers banking inventory before the Spring season of 2008, that’s just impossible. Just isn’t inventory out there and everybody is hand to mouth at this time. So I would say you know, overall less than a distinguished effort but the good news is that there is nothing but up side for you for the next go round.

Now we have a website question here that I would like to answer.”

Recommendation: Don’t eff with Bill Doyle and don’t eff with POT.

Sometimes the sell-side sucks, other times they’re just annoying.

The sell-side is full of hard working people and this isn’t meant to offend any of them, they usually have valuable information.  My gripe with them is that they are flippant, fickle, waffley, double-talkers.  The examples of this are countless, but today I’ll focus on two recent research report titles that have shown up in my inbox:

“Alstom: Full Steam Ahead – NEUTRAL”

Alstom’s earnings are going “Full Steam Ahead” just like the choo-choo trains they manufacture, but this analyst would prefer to wait for PROOF that margins are still going up before recommending buying it.  Good idea analyst, chances are the stock will stay at a full-steam standstill in the meantime and will only go up AFTER they prove margins are going higher.

“El Paso Corp. (EP.N): Initiation of Coverage:When Opportunity Knocks, It’s Time to Listen; Equal-weight”

Well done again analyst, after months of research and a lengthy initiation report he has determined that opportunity is knocking on his door in the form of El Paso.  Upon hearing this knock he recommends jumping out of bed, putting on your holdneutral robe, answering the door, and saying “Hi El Paso, I know you want to give me free money but these equalweight panties im wearing are all in a bunch, so you’ll have to come back later after you’ve appreciated 30%”.

Recommendation:  Short sell-side analysts, long analrapists.

If you have any good sell-side report headlines send them to us with our new submit form or by email at

The European Market Standard

I just called [unnamed European I-Bank] with questions pertaining to a deal they are banking and in which my firm is participating. [European I-Bank] had sent my office a document, requesting my reply on a certain issue in the aforementioned deal. They listed two contacts at the bottom of the memo, numbers for London capital markets types who wanted to get feedback on the issue and answer any potential questions or problems we had. Bear in mind, this issue needs to be resolved today and they sent us the memo yesterday afternoon.

So I contacted the first number.

“You have reached the line of [Guy No.1]. I am on Holiday until Octobey 9th, please refer any questions you may have to [Guy No.2] at extension [5555].”

I call [Guy No.2] at extension [5555].

“Sorry, this is [Guy No.2] and I am out of the office until October 16th. Leave me a voicemail and I will get back to you when I get back.”

I then look back to the document and dial the 2nd listed contact’s number.

“You’ve reached [Girl No.1] and I unavailable to answer your call. I will be back in the office on October 4th.”

Recommendation: Short Europe and their non-stop Holiday-taking investment banks. You can’t get it done or make it happen, if your team is never at work.

Mr. Market

Every investor loves to believe that he is the second coming of Warren Buffet so I’m never surprised to hear allusions to Buffet’s methods and sayings. At least that was true until I met Richard Ji, a nice, well-intentioned equity analyst at Morgan Stanley. Ji, however, frequently refers to Buffet concepts in his writings covering the CHINESE INTERNET sector. There are many places in which it makes sense to apply ideas like margin of safety but I promise you that the Chinese internet is not one of them. Last time I checked, Buffet didn’t buy tech companies let alone those trading at 4-8x book value.

Mr. Ji helpfully provides a chart explaining the stunningly complex mood swings of Mr. Market.Mr Market Mood Swing

Ji also points out the wild variance in Mr. Market’s willingness to pay 30x at some times for Chinese Internet companies and only 25x at other times.
Mr Market Sentiment

You may want to read some of Mr. Ji’s other work. Here are the actual headlines from some of his most recent reports:

  • “ A 3-in-1 Gourmet Combo Offered by Mr. Market”
  • “Focus Media: ‘Blue Ocean’ Innovator in the Advertising Universe”
  • “ 1Q06: The Second Stress Test for Level 5 Leadership”
  • “Tencent: 1Q06: Firing Up All the Cylinders”
  • “ Inc: 1Q06: Gaining Content Edges in a Harmonious Society”

If you know what any of these titles mean, please email us and let us know.

GOOG, No Means Yes Baby Part 1

Analysts are apparently panting down the trail for some “hot Google action.” Our attention was piqued by reactions of leading sell-side analysts to Google (GOOG) CFO, George Reyes, at a recent Merrill Lynch investor conference.

Reyes initially commented that, Google is “getting to a point where the law of large numbers starts to take root…” He continued to say that “At the end of the day, growth will slow…” and that “We’re going to have to find other ways to monetize the business.”

The sell side responded with comments including:

“We don’t believe there is any new or faster slowdown in Google’s growth than what we have already modeled.”
-Safa Rashtchy at Piper Jaffray, who has an “outperform” on Google

“Our thesis, growth expectations, and implied value of $500 are unchanged.”
-Goldman Sachs’ Anthony Noto, who has an “outperform” rating on Google

“We believe comments made at a competitor’s conference this morning, by George Reyes, were likely not intended to reset investors’ expectations about growth prospects.”
-Oppenheimer’s Sasa Zorovic, who rates Google a “buy”

“I’d hit it.”
-Unnamed Analyst

Goldman Sachs’ Prescott R. Moncrief III upgraded Google to “Technically Legal” from “Legal.”

The general analyst sentiment abounds with Corporate Date Rape Logic:

GOOG, I know you want to take it slow, but I’ve had three shots of jagermeister, you look hot and I’m thinking that you and I have at least a couple more quarters of stellar growth. I’m talking 50-60% per quarter and a price target of $1400. I’ll tell you what — have a couple more sips of your Smirnoff Ice and we’ll try just the earnings tip — if it doesn’t feel right we’ll take your price target right back down.

Google responded to the above analysts with the following clarification in a written statement:

“…moreover, as we have stated in our SEC filings, our revenue growth rate has generally declined over time and we expect that it will continue to do so as a result of the difficulty of maintaining growth rates on a percentage basis as our revenues increase to higher levels.”

One Goldman Sachs analyst, who answered Pres’ phone insisted “He’s busy with Yahoo at the moment. Wait this isn’t his wife, is it?” but then replied:

“Off the record, it’s clear that Google’s revenue growth rate has not declined over time and I don’t think she will have any difficulty maintaining growth rates on a percentage basis even as their revenues increase. My target price of $950 stands.”

Stay Tuned: We interview Prescott R. Moncrief III in Part 3.

The Sell Side: A Case in Point

So I’m doing my job, analyzing a company that doesn’t make the widgets, but instead, supplies the engineered material which goes into making the products which protect the machines which make the widgets. They need millions of dollars to finance the widget-producing-protecting-producing procuess. The management and their bank presented the company to a meeting of potential investors with a combination of numbers, absurdist terms like “Syneries from A Vertical Roll-Up Strategy” and “Greenshoe MFN Language” and slides. They were trying to sell us on why we should invest tens or even hundreds of millions in their company. Then they whipped out this slide. Note that the original slide had an X axis which listed the company and its competitors and a Y axis which listed abritrary cherry picked categories; I have edited the slide to protect the parties involved:

Dots? That chart is the basis upon which I should direct our investors’ money? By dots? AND HALF DOTS? Some poor 4.0gpa-Ivy league grad sold his/her soul to the I-Banking Gods to spend 90 hours per week creating crap like this?

That’s the Sell Side, baby.

The Sell Side (A Continuing Series)

A colleague of mine was talking with the analyst of SellSide Bank who was syndicating a deal that we were taking a look at. The deal was brutal: It was a sub-$50mm EBITDA company that would have negative free cash flow in the short to intermediate term. We were being sold debt in their capital structure and the security would had limited exposure, at best, to any future upside of the company.

Faced with such a profile, poor ratings from S&P and Moody’s, and a meager coupon considering the risk profile, what is a poor sell side analyst to do?

“Yeah I know, it’s a tough profile. But let me tell you this. Give us 18 months, 18 months and we will take you home.”

That’s the sell side, baby.

We will take you home. I can just see an investor asking an analyst “Why did you buy that debt that traded down to 20 cents?” Well, SellSide Bank wouldn’t have underwritten the deal unless they thorougly vetted it right? And the analyst told me he would take me home. “What about all the cash burn?” SellSide Bank put me at ease. Home is safe, I like home.

That’s the sell side, baby.