Making Sense Of Broker Research, Danielle’s Way

This story features VENTIA SERVICES GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: VNT

The company is included in ASX200, ASX300 and ALL-ORDS

FNArena's Danielle Ecuyer is sharing some insights on how to use stockbroker insights for investing research and decision making.

-Modeling by stockbrokers only as good as the assumptions made
-Price targets can be one handy tool
-Consensus data for broader context
-Case studies: Ventia Services, Pro Medicus, and AGL Energy

By Danielle Ecuyer

Factors underpinning earnings and target prices

In a recent interview, our editor was asked, “How do you interpret broker research?”

That question had me thinking about how FNArena’s readers absorb and use the wealth of information on offer.

As a former institutional equities analyst and salesperson, I have some insight into the process of researching companies and interpreting the information, with one caveat: the level of analysis has improved dramatically since my early career.

While the lines of excel sheet earnings models are often more detailed and complex, and companies are expected to be more forthright in trading updates and conditions, brokers’ models are only ever as robust as the assumptions that go into them. Equally, target prices —often the sole focus of investors— are derived from these models and assumptions, and even a minor adjustment can materially alter the outcome.

According to ChatGPT, “in a technical or analytical context, the word assumptions refers to the conditions, premises, or inputs that are taken as true without direct proof to build a model, theory, or analysis.”

That seems both reasonable and accurate. Thus, if an analyst’s assumption is wrong, the model can generate misleading answers or a target price that, over time, proves either too optimistic or too conservative.

This is why analysts spend so much time trying to glean insights from companies about major financial metrics such as revenue growth, margins, and non-cash items like depreciation and amortisation.

The goal is to input the most up to date and accurate assumptions based on available data. Resource analysts covering gold stocks, for example, have been updating their models for higher gold prices as the precious metal has marched higher.

Investing, as much as one tries to make it a process of perfection, inevitably involves imperfections. We are never in full receipt of all the information, and the market itself is not always right (in the short term).

Brokers’ research can be perceived as sometimes flawed, but limitations do not mean it cannot be useful, particularly when viewed collectively.

Example #1 – Ventia Services

When I worked at an institutional stockbroker covering Emerging Markets (EM) in London, even though I was employed by the joint number one rated bank for EMs, Barings, we still sought outside research from competitors to obtain a fuller perspective.

That lesson remains central to how I use FNArena’s service input. Diversity of views offers insights into the pros and cons of a company allowing the investor to filter the information around their own investing parameters and needs.

First example is Ventia Services Group ((VNT)),  a stock I currently do not own but might consider.

Consensus forecasts combine three daily monitored brokers and one broker under extra coverage. A quick overview reveals the stock is trading at a discount to its consensus target price of $5.417, offering circa 7% capital upside from current pricing around $5.07.

Consensus also points to a dividend yield of 4.5% for FY25 and 4.7% for FY27, with the latest franking at 80%. Historical data from FactSet add context by tracking the company’s financial metrics over time.

Analysts’ ratings are generally positive, and one of the handiest snapshots is the FNArena price chart, which tracks the share price against consensus targets.

It shows when the stock trades at a discount to target, it often re-rates to a premium. While not foolproof, history suggests buying at such a discount has delivered above-average capital gains.

A simple checklist when reviewing broker research includes:

-Historical growth in sales/revenue, EPS and DPS. Is the business generating consistent improvements? If cyclical, I consider the reasons for earnings volatility and the company’s current position in the cycle.

-Expected upside in the share price and the forecast dividend yield. Together, these offer a reasonable estimate of the potential total return over the next 12 months. In Ventia’s case, consensus suggests an average return of at least 11%.

-Timing. The stock recently sold off post-August earnings and is now trading at a discount to consensus — historically a favourable entry point.

Example #2 & #3 – Pro Medicus & AGL Energy

Ventia highlights how consensus research can identify value. Pro Medicus ((PME)) shows the other side, a stock where opinions are sharply divided. I own the shares, but the company remains controversial due to its lofty valuation.

Ratings across brokers range from Buy to Hold to Sell, yet the shares have climbed from $120 a year ago to nearly $320. While volatile, the stock has tended to trade at a premium to consensus target price, and pullbacks to a discount, much like Ventia, have proven to be opportunistic entry points.

What caught my eye recently is three analysts now share the highest target price of $350. If I were looking to add to my position, I would examine closely why these analysts are more upbeat than their peers.

For many analysts and investors, valuation remains a bridge too far. But for those willing to accept a higher multiple, the key is understanding why the share price premium might be justified.

In Pro Medicus’s case, the justification possibly rests on factors like the reliability and durability of compounding earnings, the total addressable market and the successful track record of management steering the company.

While past performance is never a predictor of the future, history does reveal whether management has consistently delivered.

Shares in AGL Energy ((AGL)) are currently trading at a considerable discount to its consensus price target. Analysts have recently upgraded the stock to Buy.

AGL disappointed the market during the August reporting season: FY25 EPS went negative, and DPS growth fell by -21.3%, not the type of results investors like to see. As the results came in below expectations, the share price fell accordingly, but it has recently begun to recover.

This contrasts with peer Origin Energy ((ORG)), which has been a robust performer since April. The key question is whether AGL represents a viable turnaround or recovery story, and whether one can be confident in the analysts’ assumptions behind the expected earnings improvement.

On paper, the appeal seems obvious: more than 23% potential share price upside combined with a 5.4% dividend yield. The real decision for investors seeking a beaten-down turnaround play is whether they are comfortable taking on the risks, knowing that forecasts are imperfect but also that consensus has shifted to a more supportive stance.

In summary: this trio of case studies shows some of the various ways in which broker research can be used and interpreted. Consensus can highlight value opportunities (Ventia), divergent views can reveal both risks and rewards (Pro Medicus), and a beaten-down stock can present a turnaround test (AGL) with an eye on the medium-term outlook.

For investors, the lesson is not to treat broker research as a blueprint but as a tool, one that requires judgment, context, and a willingness to challenge the assumptions behind the numbers.

The author owns shares in Pro Medicus.

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