CBS Analysts Aren’t Clueless—They’re Feckless

In Business

“How can analysts be so clueless?”

That was the question being asked by investors after CBS unveiled its quarterly earnings on Thursday afternoon. The main attraction wasn’t the media company’s financial results themselves but how its chief executive, Les Moonves, would address sexual harassment allegations.

The conference call to discuss the earnings attracted attention far beyond anything most companies experience. Financial news channel CNBC, which had spent most of the day discussing Apple Inc.’s crossing the trillion dollar mark, carried live audio. That is unusual for any company, much less one a fiftieth of the size of the one they had just been breathlessly covering.

The attention wasn’t merely puerile. For anyone who owns shares of CBS or

Viacom
,

both controlled by Shari Redstone’s National Amusements Inc., Mr. Moonves’s fate and that of the board many suspect of shielding him matter a lot. Mr. Moonves has strongly resisted Ms. Redstone’s efforts to merge CBS with Viacom.

The main reaction after the call was outrage that analysts didn’t raise the matter. But doing so would have been an act of grandstanding after the company said it wouldn’t address such questions. The furor shows a fundamental misunderstanding of what analysts actually do.

Yes, analysts do analyze a company. But as their granular questions on conference calls show, they are often more focused on updating their financial models than asking broader strategic questions.

The value of those spreadsheets is questionable. Projections for coming quarters are often wildly off and the stock picks generated by those spreadsheets have been shown to have zero predictive value. CBS, for example, had 35 ratings before its recent tumble, all “buy” or “hold,” according to FactSet.

And what about the grating way analysts greet management—the “great quarter guys” syndrome? Being chummy with executives serves two purposes. First, those executives decide which broker will get the next banking mandate, so manners count. Second, being on a first-name basis shows the investors on the call who might have the inside scoop from management on what is really going on at the company.

The basic truth here is that analysts are a cost center for the brokers who employ them. While their hard work of dissecting a company’s business is of use to fund managers, analysts are primarily marketing machines for other departments. Occasionally it serves their image well to come out swinging against a company or to say something controversial. It is a great way to stand out from the crowd. But analysts have every incentive not to aggravate the companies they cover.

Questioning why they don’t ask uncomfortable questions shows that the investing public is clueless about what analysts actually do for a living.

Write to Spencer Jakab at [email protected]

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