Wednesday, December 15, 2010

Analyst Advice

Every quarter, public companies are required to release their latest financial results. Along with their results, they hold conference calls and accept questions from the public. As we've discussed before, it's important for investors to listen to these calls to understand the challenges the company faces. Usually, analysts ask management about revenue outlooks for various products, margin expectations, overall strategy and other pertinent questions. Sometimes, however, analysts will feel the need to offer some "free" advice to management.

On a conference call for Build-A-Bear (BBW) two years ago when the stock price was near its lowest, here's what Mike Smith of Kansas City Capital had to say when prompted for his question:

"Well, one comment first before I ask a question. I would suggest you don’t buy any stock back because [insert fearful outlook here]"

His opinion is one which was rampant throughout a finance industry that was gripped with fear. At a time when value investors were buying, stock analysts were against buying back shares at the cheapest prices in over a decade. (Of course, the value of analysts is not so clear when you consider their ratings of Lehman Brothers the day before it went down).

Of course, when valuations are already high is when companies tend to buy back their stock, with wholehearted support from analysts. Consider the magnitude of the buybacks that took place three years ago when the market was at its peak. Needless to say, that was not the best use of shareholder capital. On the other hand, Build-A-Bear's stock price has doubled from when this analyst gave his unsolicited advice.

I don't necessarily know that BBW should have been buying back stock at that particular point in time, but that option should most certainly not be automatically discarded; if management sees a certain level of cash flow that more than covers the company's fixed obligations, buybacks at cheap prices may very well be in order, particularly for a company with a lot of cash on hand. Here's what BBW's founder, chairman and CEO had to say on the matter:

"We have to look at it week by week and we do. And I think that if there’s opportunities that present themselves because we can see that the cash is in excess of what we thought would need to operate our business in a normal basis. And we’re also trying to look and forecast into 2009 and how the economic issues will affect us there."

Free advice is worth its price!

Disclosure: None


Doug said...

Most of the time I hate listening to the Q&A sessions of the conference call because all the questions from the so-called analysts deal with getting more "color" and improving their model for next quarter's earnings. It's insanely frustrating for a value investor or anyone who thinks like an owner of the business.

Ankit Gupta said...

Oh man... when the analysts start talking about "color" or "reading between the lines"... that's a complete sign to run away, they're usually trying to pump something at that point. I fully agree with you Doug - it's dumb.

A good analyst is hard to come by, so it's definitely worth listening when they ask good questions.