The way things are, the only numbers of use to an investor from a Balance Sheet relate to debt. The expensing of investments in intangibles of lasting value creates a distortion that completely undermines the use of the Income Statement. Reported earnings are not only useless for investors but also misleading for the unwary.
The question then becomes whether the market is simply slow to recognize the value in the company or whether the analyst was too optimistic in their estimate of fair value.
Declining free cash flow may be a sign the company is investing for the future! Or it may be a very bad sign. Increasing free cash flow may be a good sign or a bad sign. It’s all in the interpretation of the financials.
On this basis it could be argued that, at that time, since expected returns were well below historic norms, prices were too high.
Things are almost never clear on Wall Street, or when they are, then it’s too late to profit from them.
The sell side analyst’s target prices do not estimate fair value. DCF estimates do just that. Investors should not confuse the two.
Even with overly optimistic earnings estimates companies regularly ‘beat’ the estimates. What gives?
Since analysts’ reports are so important in our work of identifying and studying companies to invest in, we need to look at the strengths and weaknesses of these reports.
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