It looks like analysts can?t agree on what Keppel Corporation Limited (SGX: BN4) is worth. A recent article by business newswire The Edge displayed the disparity in different research houses? target prices for the company?s stock.
Here?s a summary of the different target prices that the article had touched on:
RHB Research: $8.08
OCBC Investment Research: $5.07
To the casual observer, this may appear mind-boggling. How is it that one research house has Keppel Corporation?s price target at $8.08 while another thinks that the same company is worth nearly 40% less at $5.07?
Eeny, meeny, miny, moe
It turns out that each research house has a very different…
It looks like analysts can’t agree on what Keppel Corporation Limited (SGX: BN4) is worth. A recent article by business newswire The Edge displayed the disparity in different research houses’ target prices for the company’s stock.
Here’s a summary of the different target prices that the article had touched on:
- RHB Research: $8.08
- OCBC Investment Research: $5.07
- CIMB: $5.53
To the casual observer, this may appear mind-boggling. How is it that one research house has Keppel Corporation’s price target at $8.08 while another thinks that the same company is worth nearly 40% less at $5.07?
Eeny, meeny, miny, moe
It turns out that each research house has a very different idea of what Keppel Corporation’s Offshore and Marine (O&M) business segment is worth. For RHB Research, the O&M segment was worth 3.4 times its book value. OCBC Investment Research, on the other hand, thinks the O&M segment should be only at book value.
The disparity in their line of thinking highlights a key point about valuation that investors may want to keep in mind. This is summarised by financial advisor Josh Brown in a thoughtful tweet:
We’re all just guessing, but some of us have fancier math.
— Downtown Josh Brown (@ReformedBroker) August 10, 2014
When it comes to valuing a company, one of the most important things may be the assumptions that are fed into the valuation model. As you can see from the Keppel Corporation example, different assumptions can lead to very, very different conclusions.
Some stock market participants are fond of price targets. For some, the target price is a “magic number” for the perfect entry into a stock. The expectation could well be that the stock price will not fall past this magic target price.
If only it was that simple.
Thing is, investors may be better served by focusing on the quality of the assumptions made rather than the mechanics of the calculations. Brown’s tweet above speaks to that.
Regardless of whatever valuation approach we use, a set of assumptions are being made. It is these assumptions that we should spend more time on as it is these assumptions that may matter more in the end.
Looking into the future
So, what future do you believe is in store for Keppel Corporation? Do you think that its current troubles in the oil & gas sector are permanent? Or do you think that they are transient worries and that the company’s competitive position is intact?
Then, there is also the matter of expectations and risk-tolerance (and these can differ widely among individual investors). Do you think it’s better to be conservative in making your assumptions? Or are your assumptions too conservative?
Depending on your answers to the questions above, your “target price” would be a figure or a range of numbers based on your assumptions, rather than a figure someone else came up with. But if you follow Brown’s tweet, it could then lead back to a set of guesses.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.