Blue-Chip Blues

By Fortson, Danny | The Independent (London, England), April 1, 2008 | Go to article overview
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Blue-Chip Blues


Fortson, Danny, The Independent (London, England)


Analysts are belatedly downgrading stocks such as BA, Vodafone and ITV, says Danny Fortson

Business Analysis

It was a blinding flurry of activity. In rapid succession yesterday, analysts following British Airways, Vodafone and ITV told investors what they already knew. It seems that, faced with a looming recession, increased job insecurity and sky-rocketing prices for basics such as food and fuel, people are going to use the services these companies proffer less. The trio will, as a result, have a harder time making money.

The downgrades meted out yesterday to these most visible members of the UK's corporate community are part of a time-honoured pattern. Analysts, economists and, yes, journalists, professionals paid to predict what's around the corner or at least give a reasonable appraisal of the risks that could lay us low, usually fail quite spectacularly at the task. Since the market's peak last summer, just before the credit crisis bit and sent Northern Rock tumbling toward oblivion, the FTSE 100 has shed 15 per cent. Each week seems to bring another batch of bad news: companies running aground, bleak economic figures, failed deals ending in lawsuits and recriminations.

Yet it wasn't until yesterday that Goldman Sachs slashed its target price for BA from 330p to 200p. The Terminal Five debacle was, of course, a factor. But the main reasons for Goldman's new- found pessimism were by no means novel. The soaring price of jet fuel and the carrier's heavy dependence on a rapidly slowing America have been weighing on investors' minds for months, leading them to lop off more than half of BA's market value in the last year

It is fair to say that investors in the airline, and almost every other European airline stock for that matter, had long since formed their own opinions about the outlook for the carrier. Its already- beaten-down shares barely reacted to the Goldman note - ending the day down 2 per cent at 234.25p - lending yesterday's action the air of a warning of an event long-since passed. "One would like it to be different but as a general rule, forecasts tend to lag bad news rather than to lead it," said Kevin Gardiner, equity strategist at HSBC. "Global market analysts have yet to cut their earnings to levels that look plausible."

Indeed, investors seem to be well ahead of the analysts they so generously remunerate to tell them where to put their money. According to Mr Gardiner's research, investors have already priced in a 40 per cent drop in returns on equity for "a sustained period", meaning for the rest of this year and well beyond. In other words, they expect returns to come in at around 11 or 12 per cent, rather than the record high teens of the most recent bull-run and the mid- teen average return over the last decade. "The market has already priced in material declines from current levels, not just slower rates of growth. The only issue is whether [future downgrades] will be above or below what the market is pricing in."

The lag-time has been exacerbated by of the nature of the crisis, beginning as it did in the murky depths of the global credit market.

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Blue-Chip Blues
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