Do analysts actually get paid for this?

Discussion in 'Stocks' started by NoDoji, Feb 11, 2011.

  1. NoDoji


    After seeing TKLC hitting the low ticker with a vengeance yesterday afternoon, I decided to take a peek at the news.

    I notice that the news on 2/9 (the day before earnings) we have the following news:


    We reduce our '10 EPS estimate to $0.49 from $0.64, to reflect recently lowered company sales guidance. While we forecast a continued decline for legacy signaling products, we believe Q4 sales will act as a bottom for TKLC, as next generation products ramp up, and as order delays related to security restrictions in India abate. We are also optimistic about an expansion into the emerging policy and subscriber management sectors. We see higher adoption of data and video messaging acting as a solid underlying growth driver. We keep our 12-month target price of $14, 1.5X book value.

    Then on 2/10 (a few hours after the earnings call), we have this:


    TKLC posts Q4 loss per share of $0.06, vs. $0.25 EPS, wider than our $0.04 loss estimate, on 18% sales decline. We are disappointed with '11 sales guidance of $360M-$400M, below our $430M estimate. Legacy signaling products are declining faster than we expected and India-related revenue opportunities are being pushed our further than we thought. Owing to the lower sales volume, we reduce our '11 EPS estimate to $0.14 EPS from $0.60. On revised relative analysis, to account for our view of a worsening operating environment, we lower our 12-month target price by $6.00 to $8.00.

    (I'm still trying to find out what it means when Goldman Sachs raises a stock from "conviction sell" to "sell" :p )
  2. Abstract:
    Typically, the literature evaluates the significance of analyst recommendation changes by their average stock-price impact. With such an approach, recommendation changes can have a significant impact even if no recommendation change has a stock-price impact large enough to be noticed at the stock level. We call a recommendation change that affects the stock price sufficiently to be detectable at the stock level an influential recommendation change and investigate the extent to which recommendation changes are influential.

    We show that roughly 12% of recommendation changes are influential. We find a similar fraction of recommendation changes are influential using an alternative definition which looks at abnormal turnover at the stock level. Leader, star, and previously influential analysts are more likely to make influential recommendation changes.

    Recommendation changes away from consensus or accompanied by any sort of earnings forecast are more likely to be influential.

    Growth, small, high institutional ownership, and high analyst forecast dispersion firms are also more likely to have influential recommendation changes.

    Strikingly, the frequency of influential recommendation changes increases after Reg FD and the Global Analyst Settlement. Finally, we show that impactful sell-side research tends to be communicated through a recommendation change rather than an earnings forecast.