Australia | May 15 2007
By Greg Peel
Is it the case of the one that got away? Or is it a case of traditional stock valuations losing their relevance in a raging bull market. Certainly private equity buyouts make a mockery of valuation.
Construction giant Leighton Holdings (LEI) has proved itself to be an enigma. Analysts were calling the stock overvalued when it was trading around $20.00 six months ago. Yes – there was a solid pipeline of new projects. Yes – the construction market (outside residential) was looking extremely healthy. But the stock was trading at a premium that, for most brokers, was too much.
Enigmatic? Soon the earnings upgrades began to roll in. Results continued to surprise on the upside. Analysts then began the chasing game, ratcheting up target prices to accommodate the bonanza. But still they warned about the premium implicit in the share price, and still they maintained Hold or even Sell ratings.
In February, ABN Amro and Citi relented, upgrading to Buy. The stock had crept up to $25.00, but was only just about to hit the accelerator. For these two brokers, the story became just too compelling. For others, the story was compelling but that price was just too high.
And then it got higher. It has just crossed the $40.00 mark this morning. Suddenly there have been some rather substantial upgrades in analyst target prices. And some interesting moves in rating. Citi rode the wave for three months, but yesterday said that’ll do, downgrading to Hold. Macquarie, on the other hand, has capitulated. This morning Macquarie upgraded its target by a whopping 43%, from $29.42 to $42.01. After six months of share price surge, now Mac Bank says Outperform, despite there only being another 5% to go to the target.
UBS joined the ranks of the crimson-faced, also upping its target by 40%. But this only takes it from $26.50 to $37.00, and thus the analysts have maintained a Reduce rating. There may still be short term upside, says UBS, but the analysts remain “cautious”.
Sparking today’s substantial moves were the latest set of figures coming out of the “overpriced” builder. Profit for the nine months to March were up 62% on the previous corresponding period. Revenues were up 20%. Management expects 55% profit growth after tax for FY07. It expects a further 17% growth in FY08.
Bit hard to argue with those numbers.
Thus analysts upgraded their earnings forecasts yet again – a process which has become almost as regular as metal price upgrades. The average target price in the FNArena database has lifted from $28.00 two day’s ago to $34.96 today. This is still some 12% below the trading price, but then it is dragged down by those analysts remaining stubborn. JP Morgan holds the low marker at $22.06. Deutsche Bank is a bit better at $27.01. These compare to the high marker – ABN Amro – at $43.15. That’s a 60% spread around the average.
What does this tell us? That a lot of stock analysis is a waste of effort? That when the market’s running, it’s best just to run with it? Or that there could be a rather substantial crunch around the corner as Leighton continues to defy gravity?
The B/H/S ratio now stands at 2/5/2. One way or another, someone is going to look foolish.