ANALYST WATCH: Thanks for nothing

6 min read

Engage and 24/7 Media both delivered some devastating news this week, sending both stocks into a predictable plunge. While a flock of analysts cut the stock Thursday, only a handful bothered to warn investors ahead of the bad news.

This happens all the time, begging the question of just how much value these guys are providing to clients and, for that matter, the companies they follow.

This pattern of analysts lowering estimates and downgrading stocks after these companies issue press releases is disconcerting because these men and women are supposed to know the financial health of the companies they follow long before everyone else does.

Again, as I've been complaining throughout the three years I've been doing this column, we have clear-cut examples of analysts reacting to the news rather than helping their clients proactively buy or sell the stocks they follow.

I'm not suggesting that every analyst should or could know every detail about every company he or she follows well in advance of a company press release.

The signs were there

But in the cases of Engage (Nasdaq: ENGA) and 24/7 Media (Nasdaq: TFSM), the stink was in the air long before anything hit the fan.

On Wednesday, Engage warned that it now expects to lose around 25 cents a share in the quarter on sales of between $40 million to $42 million.

Analysts were expecting it to lose 20 cents a share in the quarter.

It also named Anthony Nuzzo as its new CEO, replacing the outgoing Paul Schaut.

Worse, it now expects to lose around 25 cents a share in its first quarter on sales of between $40 million to $42 million, down from the $66.7 million it recorded in the fourth quarter

First Call Corp. consensus expected it to lose 20 cents a share in the quarter.

Now here's the interesting part:

When Engage topped analysts' estimates by 14 cents a share in its fourth quarter back in September, the stock gained ground even though it said it was laying off 175 employees and consolidating its five business divisions into two.

On Sept. 21, one day after the earnings and layoffs were reported, Chase H&Q analyst James Pettit said that greater-than-expected software sales with higher margins "more than offset" the slowdown in online advertising sales.

"Conclusion: Mixed results yield positive bias," he wrote in a research report. "We believe near-term uncertainties on financing & P2P are now reduced and Engage remains well positioned with an attractive growth profile. Maintain BUY rating."

On Thursday, Pettit cut the stock from a "buy" rating to "market perform" and lowered his revenue estimates for 2000 and 2001 by 10 percent and 25 percent, respectively.

"Given the difficult media sales environment and poor visibility, we are adopting a 'wait and see' approach and moving to the sidelines with a Market Perform recommendation," he wrote.

Do the research

Compare that analysis to what Banc of America Securities analyst Chris Hansen said back on Oct. 31 after the company filed its 10-K report with the SEC and before it issued Wednesday's warning.

"As disclosed in Engage’s 10-K filing, we believe the company is experiencing significant softness in its media and media management businesses, with both likely trending well below our current estimates," he wrote in a research note. "Based on our recent discussions with numerous private and public Internet ad networks, advertising agencies, and online media companies, we continue to believe that the online advertising environment remains very challenging, with the most significant weakness prevalent in the low-end ad inventory, which accounts for the bulk of Engage's media revenues."

Folks, that's what an analyst is supposed to do.

Hansen actually read the 10-K, recognized the obvious problems Engage was facing and maintained his "market performer" rating.

Every single Engage analyst had the opportunity to make a similar report or advisement to its clients between that fourth-quarter earnings report in late September and Wednesday's unsavory warning.

Only two other analysts bothered to issue research reports in this period.

  • On Nov. 3, Goldman Sachs' Vik Mehta cut his fiscal 2001 estimate to a loss of 40 cents a share from 28 cents a share and reiterated his "market outperformer" (essentially a moderate "buy" recommendation) rating.

  • On Oct. 17, Pacific Crest Securities' Steve Weinstein started the stock with a "market perform" rating.

    So only three of the 10 analysts officially following Engage bothered to publicly comment on a company that's screaming "We've got problems."

    But they piped up Thursday, as the stock fell to around $2.31 a share, as Adams Harkness, Bear Stearns, Chase H&Q and Goldman Sachs all downgraded the stock because of its online advertising woes.

    Mehta cut it from the "market outperformer" he was comfortable with one week ago to "market performer."

    Bear Stearns' Robert Fagin cut it to "neutral" from "buy" while Adams Harkness' Kevin Wagner and Chase H&Q's James Pettit both downgraded it from "buy" recommendations to "market perform."

    Of course none of these analysts are going to advise clients to sell the stock now, even though it's warning of dramatically lower sales, lost its CEO and is in the process of trimming 175 employees.

    Who's minding the store?

    24/7 Media's debacle was even more damning.

    On Wednesday, it missed analysts' estimates by 12 cents a share when it posted a loss of $22.5 million, or 59 cents a share, on sales of $48.1 million.

    Its stock fell to around $3 a share on the news, off its 52-week high of $65.25 established in January.

    Not to be outdone by Engage, 24/7 Media said it will be laying off 200 workers and it too will miss estimates next quarter.

    By the way, 24/7 Media officials said they exited the quarter with a paltry $23.1 million in cash.


    Sequential revenue declines, management turmoil, wider losses and slowing online ad sales all sound like pretty good reasons to get out of a stock.

    Between 24/7's second-quarter earnings report on Aug. 9 and Wednesday's meltdown, very few analysts commented on the stock.

    In the interim, 24/7 Media spent $95 million for Website Results for $95 million, a significant deal that would seem to call for analyst comment.

    But it never came.

  • On Aug. 10, one day after 24/7's second-quarter earnings report, First Analysis Securities cut the stock from a "strong buy" to "accumulate" when it was trading at $10.

  • On Oct. 2, Pacific Crest Securities started the stock with a "strong buy" rating when it was at $9.44.

  • On Oct. 13, First Analysis Securities cut the stock again, dropping it from "accumulate" to "neutral."

    But after Wednesday's horrendous results and outlook, everyone suddenly had something to say as the stock fell to $3 a share.

    CS First Boston's Richard Petersen, Deutsche Banc Alex. Brown's Vivian Kuan, Pacific Crest's Steve Weinstein, UBS Warburg's Christopher Dixon, J.P. Morgan's Sue White, Adams Harkness' Kevn Wagner and Wit SoundView all downgraded the stock from either "buy" or "strong buy" recommendations to "hold" or "market perform."

    If it took all these analysts this long to figure out that either Engage or 24/7 Media are shaky calls in this market, they better start cleaning house.

    Apparently, if the majority of analysts are wrong at the same time it's somehow acceptable.

    Let's see what happens with DoubleClick (Nasdaq: DCLK), another struggling online advertising and marketing company, which is currently rated either a "buy" or "strong buy" by 18 of the 24 analysts following it.

    Or, I should say, let's see what doesn't happen.