May 31, 2018

Lease Accounting: Analysts Say “Meh”. . .

While accounting departments throughout the nation may be pulling their hair out in an effort to get ready for FASB’s new lease accounting standard, this FEI article says that Wall Street analysts don’t seem to care very much about the new standard. Here’s an excerpt:

Despite the increasing drumbeat of concern regarding implementation of new lease accounting rules from financial preparers, there is palpable ambivalence from at least one major consumer of the new disclosures: Wall Street research analysts. Few, if any, analysts have questioned financial executives about their lease plans during the Q&A sessions of recent earning calls, where a majority of the accounting discussions revolved around revenue recognition issues.

And even once implementation begins in earnest as the 2019 deadline grows nearer, equity analysts admit they see fewer ramifications on their buy/sell decisions and models. “Revenue recognition affects all companies, while with leasing you may have some very specific industries and companies that are impacted significantly. From an equity analysis perspective we expect the lease accounting changes to be less complex,” says Zhen Deng, a senior analyst with CFR.”

This must be very encouraging news for those of you who just spent part of your holiday weekend dealing with some aspect of preparing for the new standard. As a colleague once said to me when a merger agreement I worked all weekend on got tossed into the garbage because the seller decided not to move forward, “Hey, at least it’s appreciated.”

Sell-Side Analysts: Still “Lake Wobegon U” Grads?

Speaking of securities analysts, remember former SEC Chair Arthur Levitt’s famous crack about them? “I worry that investors are being influenced too much by analysts whose evaluations read like they graduated from the Lake Woebegon [sic] School of Securities Analysis – the one that boasts that all its securities are above average.”

Levitt made those comments in a 1999 speech – and despite all of the water that’s gone under the bridge since then, this Marketwatch article says that Lake Wobegon U is still cranking out securities analysts:

There are no companies in the benchmark S&P 500 with majority “sell,” or equivalent, ratings among analysts. For the S&P 500, there are actually 505 stocks because five of the companies in the index have two classes of common stocks. Among the 505 stocks, analysts have majority buy ratings on 266.

For example, there are still 47 analysts who cover Inc. AMZN, -0.12% and 45 rate the stock “buy.”

There’s exactly one S&P 500 stock for which 50% of analysts rate the shares a sell: News Corp.’s class B shares NWS, +0.00% But it turns out that only two analysts cover the class B shares, while 13 analysts cover the class A shares NWSA, -0.06% For class A, four of the analysts rate the shares a buy, with eight neutral ratings and one sell rating.

The article says the same thing that many were saying back in the ’90s – read these reports for the valuable information they provide on companies & industries, but don’t rely on them for recommendations.

A member points out that it should be “Lake Wobegon,” and not – as Arthur Levitt & I originally spelled it – “Lake Woebegon.”  I’ve learned my lesson, and that’s the last time I’ll ever rely on a former SEC Chair for spelling advice!

Analysts: From Russia with Guts

So is there any place where analysts call ’em as they see ’em?  It turns out that the answer is yes, and it’s in the unlikeliest of places – Vladimir Putin’s Russia.  This “FT Alphaville” blog tells the story of a brave man named Alex Fak, who until recently served as the head of research at Russia’s Sberbank.  Here’s an excerpt:

Fak – who worked at the FT on a three-month fellowship in 2004 – was asked to resign after publishing a report that opined state gas monopoly Gazprom was ignoring its bottom line and benefiting its top contractors, including companies owned by Putin’s friends.

“Gazprom’s investment program,” which is seeing it spend $93.4bn on mega-projects like the Power of Siberia gas pipeline to China, Nord Stream-2 to Germany, and Turkish Stream, Fak and Anna Kotelkina wrote, “can best be understood as a way to employ the company’s entrenched contractors at the expense of shareholders.”

Fak went on to argue that Gazprom had abandoned other, cheaper capex projects that would have limited contractors’ ability to profit. If Gazprom were to be reformed after a recent government reshuffle and broken up into its components, Fak estimated, it would be worth $185bn – three times its current share price.

The blog says that Fak’s not the first analyst to be punished by a Russian bank for calling out inefficient state companies whose CEOs are “well connected.”  Would a U.S. bank do the same?  With all the Lake Wobegon U grads out there, it seems unlikely that we’ll ever know.

John Jenkins