Financial directions - Directors expect big rise in shares

New surveys from Merrill Lynch and PwC reveal that directors on both sides of the Atlantic are bullish about their own share prices. In the UK, directors’ buy-to-sell ratio rose to 7:1 in July 2001, while 70% of US executives believe their company’s share price will rise over the next 12 months.

As the market continues to debate whether share prices have reached a nadir, UK directors seem confident enough to buy shares in their own companies. There are currently seven buys to every sell, up from three-to-four for the year to July, according to Merrill Lynch’s European Economics & Strategy Weekly for 3 August. The last time the UK buy-to-sell ratio for company directors was this high was 1998.

The directors buying the most shares in their companies were in TMT and support services; the biggest sellers were in sectors including transport, oil and leisure.

In the past, UK directors have generally had a good track record for buying low and selling high. ML cites the Asian crisis of 1997-98 where directors were buying nearly 20 times the amount they sold. In the subsequent 12 months the market appreciated 29%.

Across the pond, PwC interviewed 101 CFOs and MDs of large multinationals in Q2 2001 and found that seven-out-of-ten believed that their company’s share price will rise, by an average 28%, over the next 12 months. Two-thirds of respondents expected double-digit growth. Only 8% expected share prices to remain the same, and a mere 1% expected a decrease.

Executives in TMT echoed the sentiments of their UK counterparts, with 72% expecting their share prices to rise an average of 33% in the coming year.

These results, which were based on expectations of improved revenues, earnings and cash flow, also revealed that 63% of company directors think their stock is undervalued. Primary causes include analysts’ overly pessimistic growth expectations and insufficient recognition of non-financial indicators of future financial growth, said respondents.

The US directors are considering several strategies to boost share prices including: spending more time with sell-side analysts (58%), spending more time with major investors (56%), new acquisitions (50%) and strategic alliances (48%). Notably more TMT companies plan new acquisitions and alliances compared to their peers in other sectors.

This is all good news, but PwC points out that companies with good track records as investments are most confident. Businesses that anticipate a jump in share price are typically those that have increased revenues by 205% over the past five years, better than twice the rate of others surveyed.

Confident company executives also expect their businesses to outpace the economy, regardless of what it does, and are projecting 6.1% revenue growth this year, compared to 3.1% for others surveyed.

For information about Merrill Lynch’s European Economics & Strategy Weekly contact Khuram Chaudhry at [email protected]