Friday, November 17, 2006

Analyst Obsolescence

When two men in business always agree, one of them is unnecessary.

William Wrigley, Jr.

Somehow I feel validated as an analyst by Mr. Wrigley. Every analyst, me included, has had that occasion when he or she was entirely at odds with the rest of the Street on a particular stock or its earnings prospects. The pressure is on to conform, come toward the center as if that meant coming toward the light. Yet in agreement, the analyst becomes unnecessary.

There appears a myriad of commentary on one stock or another in columns, web logs and chat rooms, not to mention the multitudes of radio and television shows dedicated to investing. While some may consider this excessive, it is good to remember that the capital market is driven by the forces of supply and demand, two opposing sides. If they were in agreement, there would be no market. So it is a good thing that we have so much discussion, especially if there is disagreement in viewpoint.

Nowhere is there more disagreement among analysts and investors alike than when it comes to earnings estimates. Take for example, Crystal Equity Research coverage of Terra Industries, Inc. (TRA: NYSE). Following is an excerpt from the Crystal Weekly Comments on TRA published earlier this week:

The Zacks consensus estimate for Terra Industries has risen significantly in the last two weeks from $0.07 to $0.10 for the current quarter. This brings the consensus estimate for the year 2006 to a net loss of $0.02 per share from a loss of $0.08. Zacks consensus is composed of three contributions in a range of $0.05 to $0.17 per share for the quarter and a range of positive $0.05 per share to a net loss of $0.07 per share. Thus there continues to be a wide divergence of viewpoint on Terra Industries prospects. The First Call consensus estimate for 4Q06 is $0.12 is formed from five contributors, but the range is still between $0.05 and $0.17.

The Zacks consensus figure for 2007 EPS remains at $0.32. Likewise the view of the year is hardly a consensus since the range is from $0.12 to $0.50 per share. The First Call 2007 estimate is $0.55 composed of six contributions in a range of $0.12 to $0.82. Three of these contributors have published sales estimates, ranging from $1.7 billion to $2.1 billion.

We are looking for $0.09 on $480.0 million in the quarter and a net loss of $0.03 per share on $1.9 million in sales for the year 2006. In 2007, we have forecast $2.1 billion in sales providing $0.34 in earnings per share. Thus we appear to be stuck right in the middle of the swirl of opinion on Terra. What is even more surprising about this development is that we are also the only Hold rating on the stock. This means that those who are looking for $0.12 in 2007 are as prepared to buy TRA shares as the analyst with the $0.82 forecast.

Like I said, Wrigley's words give me validation.

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