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The Anglo File: Telecom Analysts Missing Some Calls

A research report shows that some U.K. analysts are scoring low on the accuracy of their forecasts.

LONDON -- For those who find it hard keeping up with the brave new world of telecommunications, it may be cold comfort to learn the professional analysts in the U.K. are finding it difficult as well.

Research from

AQ Publications

, a London-based independent newsletter that concentrates on "analyzing the analysts," found the most inaccurate earnings forecasts for companies in the

FTSE 100

share index are those for the telecom sector.

"The telecoms industry is changing day by day and it is making some of these forecasts pretty useless, to be honest," says Graham Field, the editor of

AQ Publications


Trial by Error

So it would seem. The telecom analysts in second and third place --

Dresdner Kleinwort Benson


Credit Lyonnais

-- scored below 40 in the report's

Accuracy Quotient

, or AQ, a weighted formula that measures the accuracy of the forecasts, the number of revisions analysts make and the size of their changes.

A score between 20 and 40 in the AQ shows 5% to 10% deviations in EPS forecasts from the actual number as well as significant and numerous revisions to forecasts. The top score in the AQ is 100, and a score above 80 "indicates minimal deviations in

earnings per share forecasts and a very small number of revisions to forecasts."

The analysts at

Williams de Broe

topped the telecom list, but only squeaking past the 40 mark with a score of 41.82, which indicates either deviations of actual vs. forecast EPS of up to 5% or significant revisions to forecasts.

Compare this with the scores for the top three analysts covering the pharmaceuticals sector, who all scored above 70, and it becomes clear that analysts are experiencing some technical difficulties.

Pinning the Tail on the Donkey

AQ Publications

places much of the blame for the inaccurate forecasts on the increasing number of telecom companies arriving in the FTSE 100, making it hard for the analysts to keep abreast of the dynamic changes occurring in each. A wave of listings this decade has pushed the number of fixed and mobile phone companies listed on the

London Stock Exchange

to 13.

Nigel Hawkins, a telecom analyst at

Williams de Broe

, says while his team has been more successful than the larger houses, he admits their forecasts need constant updating, resulting in a less-than-convincing score on the AQ.

"As with other sectors, telecom has some peculiar characteristics," Hawkins says. "You have to make various judgements and keep in close touch with developments."

For example, the new telcos such as



are growing so fast that their earnings continue to outpace analysts' projections.

And the mobile phone business is rapidly evolving with new services, such as pre-paid calling, the effects of which nobody seems quite sure. Furthermore, fierce competition causes periodic price wars to break out. As if to illustrate this point,

AQ Publications

notes that not one of the analysts even managed to register a score on the AQ with



, the U.K.'s third-largest mobile phone operator.

There is also the wider charge that research departments at the larger investment banks are not as independent as they would have us believe because of the close investment banking relationships with the telecommunications companies. It is perhaps instructive that none of the top three firms in the


report is noted for its investment banking work with the telcos.

One former analyst, who wished to remain anonymous, complains the research departments of larger institutions are "counted as part of the marketing departments."

Merrill Lynch

, however, could point to the fact that the


report shows that it offers the best coverage of the FTSE 100 as a whole.

So where does all this leave the individual investor? None the wiser unfortunately. William de Broe's Hawkins says that while his institutional clients are happy to get their head around EBITDA and enterprise value, the retail investor would do as well just to keep in touch as best he or she can with the earnings results as opposed to looking at the predictions.

The results of the


report would seem to show that a telecom analyst is not so different from an economist, a person who will tell you tomorrow why his forecasts for yesterday didn't come true today.