It seems like analysts can’t agree on what Singapore Exchange Limited (SGX: S68)
In late April, DBS Research set the stock’s target price at a neat S$10 per share.
But that changed over the past week.
SGX’s value was revised sharply downwards to a mere S$7.40 by the same research house after the bourse operator announced a reduction in its license agreement with MSCI.
To be sure, the turnabout in target price was not unwarranted.
After all, SGX management had guided for a profit impact of between 10% and 15% for the fiscal year 2021.
Yet, the twists and turns in target pricing do not end there.
On the same day, RHB tagged SGX shares at a target price of S$8.60 after the MSCI news. CGS-CIMB, on the other hand, felt that shares were worth S$8.00.
To the casual observer, these target prices may be confusing.
How is it that one research house has SGX’s price target at $7.60 while another thinks that its shares are worth over a dollar more?
Eeny, meeny, miny, moe
The difference in target prices arise from different assumptions being made by each research house.
For CGS-CIMB, the research house decided to use a price-to-earnings multiple that was slightly below the stock’s historical mean of 20.7, in its calculation of a $8.00 target price.
But RHB had a different take.
They decided that a better ratio to use was 24 times earnings and got an $8.60 target price instead.
When you compare the different outcomes, it becomes clear that SGX’s target price will change depending on the assumptions being made by the individual research houses.
And when the assumptions change, so will the stock’s target price.
And the right target price is…
Some investors are fond of price targets.
For them, the target price represents the “magic number”, telling you whether you should buy a stock, or not.
Unfortunately, once the number is established, some will tend to assume that the stock will not fall much further than the chosen target price.
If only it was so easy.
The reality is, no analyst or investor will know what will happen in the future.
The ratios being used above by each research are simply a guess of what the market will award the stock the next fiscal year. No one can be certain that the stock market will award the stock with their chosen ratio.
As you can see from the SGX example above, different ratios used can lead to very, very different target prices.
The game of target prices is not over just yet.
The CGS-CIMB team also notes that there could be possible upside in the form of future M&As, higher than expected dividend payouts by the company and new products from SGX’s latest acquisition, Scientific Beta.
And if positive news is announced, you can be sure that research houses will be lining up to upgrade SGX’s stock price again.
This cycle repeats itself ad nauseum as more news is reported in the future.
At some point, you have to ask how useful target prices are when they are subject to changes based on positive or negative occurrences in the near future.
Get Smart: The final answer
At The Smart Investor, our view is always orientated towards the long term rather than what will happen next year.
Instead of fiddling with the numbers in our spreadsheet, I would rather focus on whether SGX has the financial means to change the downward trajectory where it finds itself today.
Instead of assigning specific target prices to a stock, I would rather assess whether the management team has the experience and competence to make use of its resources to turn the situation around.
The answer to both questions, for me, is a clear yes.
The quality of the company is more important to me than target prices.
After all, what we want, as investors, is not to be doing new math every time there is a new development.
What we want, as investors, are favourable outcomes that will deliver positive results for our stocks.
Investing with good companies with good management teams will tilt those odds to our favour. And that is, in a nutshell, why we do what we do.
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Disclaimer: Chin Hui Leong owns shares in Singapore Exchange Limited.