Accountancy shares: to buy or not to buy…

Shares are getting a rough ride at the moment, both through the economic slowdown and as a knock-on effect of the Enron scandal. So as an investor you may wonder, are accountancy-related stocks still a good buy? The answer, according to analysts, is yes.

Analysts remain upbeat about stocks, saying they have had a raw deal as investors nervously sell shares at the mention of any risk or rumour of unconventional accounting.

But accountants say investors’ fears over accounts reported in ways perceived as unconventional, is unfounded, as there is no one set way of accounting.

According to Ken Wild, senior technical partner at Deloitte & Touche, accountancy and auditing are in the media in ways unheard of until today.

This has raised people’s awareness of the field but it has also raised fears in peoples’ minds because many do not really understand accounting.

‘Accounts are inherently complicated and people have lost some confidence in the way accounts are reported. There is a general concern over accounting,’ he says.

No matter how hard accountants have tried, accountancy and audit are not exact sciences, there is always a degree of judgement and subjectivity in how a company’s reports are presented.

‘People arrange their affairs in different ways in different organisations and a lot of (investors) are not fully aware of these differences,’ says Wild, adding there are quite legitimate reasons for reporting accounts in different ways because companies are different as their products are different.

Analyst Michael Briest from investment bank UBS Warburg says the way software stocks like Sage and Logica have been sold recently has been unjustified if investors concerns were accounting related.

He says that the 6% fall taken by Sage when it was revealed the company was not amortising its goodwill was unfair to the company. The news made investors nervous, afraid that this ‘contentious’ accounting was hiding something. But market watchers also say that if Sage moved towards a more standard accounting technique it could lose out on its bottom line.

‘Sage’s decision not to amortise goodwill is unusual but not unheard of. The fact that Sage doesn’t report goodwill doesn’t make a difference to its bottom-line cashflow,’ says Briest.

The Enron collapse has also given a boost to companies selling accounting software because managers and directors are now more worried than ever about the accuracy of the data used in their accounts. Sage, however, may struggle to take advantage of this benefit because most of its clients are small businesses.

‘If there is going to be a new wave of investment in accounting software, sales into larger businesses will probably be affected the most – benefiting companies like SAP and Oracle, more so than Sage,’ says Briest.

Analysts at UBS Warburg have an overall upbeat view on the sector. Briest says: ‘We think the sector is probably undervalued. Demand has been held back by the economy but when the economy recovers, demand will come back quickly in “high return on investment” areas of the sector. Profits will improve sharply as operational leverage in the businesses is generally high.’

But there are factors other than Enron dragging down stocks. Investors are concerned about the recovery from the economic downturn, which is affecting stock markets as a whole.

Misys was recently affected by the Allied Irish Bank scandal, as the company sells software to banks. Although Morgan Stanley remains neutral on the stock, it said the software company’s earnings, which were ahead of estimates, show no alarms.

But they did say: ‘One thing that caught our attention was the exceptionally efficient tax structure that the company now has in place, resulting in an effective tax rate for 2002 of only 16%.’

Analysts at Morgan Stanley have reiterated their support of accountancy-related recruitment stocks. Stocks in this sector were recently hit by fears of an EU directive which would force employers to pay temporary staff the same as its permanent staff.

The sector also took a hit as the slowdown in the economy meant companies were laying off people and putting in place recruitment freezes.

Morgan Stanley, however, reiterated its ‘buy’ recommendation for Hays, saying recent performance from the sector suggested the UK recruitment market was holding up. They also backed Michael Page, saying that, although they were worried about the stock in the short-term due to the weakness of the UK economy, its results were better than expected.

The broker was also upbeat about support services firm Capita, saying its results were better than they had expected. ‘Management demonstrated the strong momentum within the business by outlining forecast sales for 2001 of #875m.’ As a result, it revised its forecasts for the firm upwards and retained their ‘outperform’.

Surprisingly, Morgan Stanley was not so positive about Logica, remaining neutral on the company because of the slowdown in the mobile phone market and the resignation of its finance director in October. A new FD was appointed just two weeks ago.

‘The company provided no insight into reasons for the management resignations’ it says. Tenon is another company suffering from investor jitters. Brokers say Tenon’s drop in December was largely due to a warning saying the costs of its sixteen acquisitions were higher than expected and will mostly be borne in the second half of the 2002 financial year.

So are accountancy-related stocks still a good buy? Analysts suggest treading carefully, but the consensus seems to be that the Enron scandal and the economic climate have given them a raw deal and that in the long-term they could be a good investment.

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