Prophets of profits
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March 18, 1999: 11:21 p.m. ET
Stock analyst studies company, financial models and sometimes, runway
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NEW YORK (CNNfn) - It's the hottest ticket in New York, the fashion event of the winter. Models are primping, the media's swarming, and the place is packed.
But it's not Calvin Klein or Versace. It's the Victoria's Secret fashion show and everyone who's anyone is there -- Donald Trump, Puff Daddy and Steve Kernkraut.
You may not know him, but for investors, Kernkraut may be one of the most important people in the room, because Kernkraut, a veteran retail analyst at Bear Stearns, follows Intimate Brands (IBI), parent company of Victoria's Secret..
While he likes studying runway models, Kernkraut spends most of his day looking at financial models in his office at Bear Stearns. He is a stock analyst.
"A stock analyst is a misnomer in terms of title. I mean, a stock analyst you have this image of somebody with green eye-shades that's studying, you know, ledger sheets and a computer sheet," he said. "A stock analyst's job is really to go out there and try to figure out what stock is gonna go up, and what stock is gonna go down."
But to make those calls, Kernkraut has to sort through reams of financial data -- information that might make an ordinary investor cringe.
"There are a lot of financial measures," he said. "You look at price-earnings ratio of the company. You look at the earnings of the company. You look at the earnings growth rate of the company. The debt-to-capital ratio. The book value. The SG&A rate."
But there's more than math in an analyst's job.
To get a better feel for Intimate Brands, Kernkraut makes regular visits to company headquarters to meet with management.
"You can't figure things out by sitting in your office or sitting on your easy chair at home or sitting at your computer," he said. "And you really want to kick the tires. You want to look managements in the face. Ask them a question. You know? Are they shaky? Are they nervous?"
A trip to the mall to eyeball company stores is another part of Kernkraut's routine.
"I follow Victoria's Secret, I follow a lot of retailers," he said. "But you really have to go to the store, see what merchandise is selling, what customers are looking for, whether or not customers are happy, whether or not they're shopping, whether or not merchandise is on sale, you wanna see what kind of prices they're selling it for, you want to see how busy this store is vs. other stores that compete with it."
When sizing up a stock like IBI, Kernkraut also looks for intangibles -- things like the company's ability to market itself to investors and consumers.
And with a recent print campaign in top business publications and an eye-popping television ad during the Super Bowl, Intimate Brands has certainly managed to grab plenty of attention on both Wall Street and Main Street.
There's also the company Web site over which they broadcast the fashion show.
"Any business they do on the Internet is going to be very profitable for them," Kernkraut said. "They have the infrastructure. They don't have to create it. And additionally, the profit margins on their bras and underwear and lingerie are spectacular, while the other e-commerce companies have very narrow margins."
After weighing everything from profits to pantyhose, Kernkraut gives shares of Intimate Brands a "buy" recommendation.
But according to some industry watchers.. analysts recommendations can sometimes be optimistic.
"I think they tend to be overly generous with their recommendations and with their earnings estimates," said Chuck Hill, research director at Boston-based First Call, a firm that studies almost every analyst report on Wall Street.
"There's about 27,000 individual recommendations. I mean, one analyst on one stock. And if we look at that data, why, less than one percent are 4's and 5's - 'sells' or 'strong sells'."
Part of the reason for that imbalance, according to Hill, is that analysts are concerned about angering company executives who might cut off access to crucial financial data.
And that data is key, because the rewards for a correct call are more than just a good seat at a lingerie show.
In fact, salaries for top analysts can reach $2 million or more -- just the ticket for stock pickers who can predict whether their companies have the "legs" for the long haul.
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