Friday, March 25, 2011

Further to RW Baird's "outperform" rating on ARC stock

Completely irrelevant to the previous post we did about RW Baird’s upgrade on ARC shares to “outperform”, effective March 25, 2011, let’s take a look back in time.

On May 22, 2008, the “ratings staff” at “The” issued an upgrade on ARC shares to “outperform”. Below, you will find the “complete story” that The presented on May 26, 2008, about their upgrade action on May 22, 2008.

(After you read this, then skip below to my comments)

TSC Ratings’ upgrades, downgrades ….. by The Ratings Staff, May 26, 2008, 10:29 am EDT

Each business day, Ratings updates its ratings on the stocks it covers. The proprietary ratings model projects a stock's total return potential over a 12-month period, including both price appreciation and dividends. Buy, hold or sell ratings designate how the Ratings group expects these stocks to perform against a general benchmark of the equities market and interest rates.

While the ratings model is quantitative, it uses both subjective and objective elements. For instance, subjective elements include expected equities market returns, future interest rates, implied industry outlook and company earnings forecasts. Objective elements include volatility of past operating revenue, financial strength and company cash flows.

However, the rating does not incorporate all of the factors that can alter a stock's performance. For example, it doesn't always factor in recent corporate or industry events that could affect the stock price, nor does it include recent technology developments and competitive dynamics that may affect the company.

For those reasons, we believe a rating alone cannot tell the whole story, and that it should be part of an investor's overall research.

The following ratings changes were generated on May 22 (2008)

American Reprographics (ARC), which provides business-to-business document management services, has been upgraded to buy. For the first quarter, revenue grew 17% year over year to $187.4 million, and earnings per share climbed to 41 cents from 37 cents. For 2008, the market expects an improvement in full-year EPS to $1.55 from $1.52 in 2007.

Return on equity has improved slightly year over year. This can be construed as a modest strength in the organization. When compared with other companies in the commercial services and supplies industry and the overall market, return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500. With a price-to-earnings ratio of 11.86, the stock trades at a discount to others in its sector. American Reprographics had been rated hold since Feb. 5.

Joel’s comment:

When The issued this particular “outperform” rating on ARC stock, ARC’s price per share was around $18.00.

Personally, I think it’s kind of dumb for analysts, who don’t know a company well and who don’t know a particular industry well, to issue “sell, buy, and hold” ratings. I mean, what do they really know? In RW Baird’s case, they (meaning, the equities research analysts at RW Baird) have taken the time to study ARC’s business and have also taken the time to study the reprographics industry (quarterly IRga Surveys), including the challenges the industry faces and the opportunities it has to grow.

That does not mean that I agree with RW Baird’s outperform rating on ARC’s shares. Personally, I have no opinion on that, since I’m not an equities research analyst. But, given the fact that RW Baird’s equities research analysts have “invested the time” to understand ARC and the reprographics industry, I would think that investors, and prospective investors, should take RW Baird’s “homework” into consideration, when considering whether to act on, or not act on, RW Baird’s recommendations.

Okay, ARC shares closed yesterday (March 24, 2011) at $9.31 per share. “Today” is “day 1” of the RW Baird “outperform” rating on ARC shares. Let’s revisit this 3 months from now, 6 months from now and 12 months from now ….. to see if the recommendation was, from an investor’s perspective, a good one, or not a good one.

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