Inconsistent market analysis can upset your investment’s hopes

June 29, 2018

This week we caught up with Collins Foods post their FY18 profit results announcement and expressed a warning to them to be more vigilant when monitoring the analyst forecasts in the market. We don’t own Collins Foods but have followed it closely for a number of years and it is pretty clear a decent result got a negative share price response because a number of brokers were simply too bullish. Consensus was too high (by 8% - a pretty big error). The shares fell.

 

 

 

One broker was pretty much spot on, suggesting either better analysis or perhaps better communications with management. Probably a bit of both. The others have simply got ahead of themselves in what is a relatively complex story with new acquisitions disrupting the short term.

With the result the company announced improved same-store-sales growth in the final quarter of the year and a positive update on the progress of the newly absorbed assets in Australia and Europe. The share price rebounded from its initial slump.

 

However, when the broker that got it right produced its latest forecast numbers off the back of the result it appears there is once again a vast gap between its (probably conservative) numbers and that of its two most prominent competitors on the stock.

 

At the NPAT level the difference between the low and high of the three analysts is 13.7% in FY19 and 10.6% in FY20. That’s pretty large, especially in the context of the conservative analyst’s forecast profit growth of 8.5% in FY19. The bull-case guy is expecting 22.9% earnings growth. That’s a massive difference and has huge implications for the rating of the stock.

 

Analysts can cloud the true merit of a company’s strong performance, causing the market to ignore the absolute result in deference to the expected result.

 

Collins Foods has performed well now for six years, even if it is off the share price highs of late 2016. It is a long-term model and has invested in the next phase of its life, expanding its KFC franchisees into new Australian regions as well as moving into Germany and the Netherlands. But it’s a problem investing in companies when the market is confused. We might consider the short-term low-case an adequate reason to invest given the future potential but if the market is expecting too much, and the company fails to deliver on those unreasonable expectations, the share price will inevitably suffer.

Of course, it’s up to us to determine the likely earnings performance of the companies we are considering for investment. But even if we get it right, we can get it wrong if we are not alert to what everyone else is thinking. A good company will make sure it keeps the analysts in line but there’s not much they can do if they won’t listen.

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