When Terry Smith Growls, the Markets Listen
His firm once labeled one of Europe's biggest media companies "Eurotrash." He estimates that Rupert Murdoch's British Sky Broadcasting PLC (BSY ) is really worth only a third of its market cap. And he says corporate executives aren't worth an analyst's time. Meet Terry Smith, one of Europe's brashest and most irreverent stockbrokers. During the long bull market of the 1990s, Smith, an inveterate bear, was frequently dismissed as "mad." Yet in these dark, bearish days, Smith--now chief executive of a small, independent London brokerage firm Collins Stewart Holdings PLC--is taken very seriously indeed.
Smith's calls have gotten so much attention that he has attracted a big following among U.S. hedge-fund managers looking for stocks to short. "We have all known Terry for a very long time and have a high regard for his objectivity," says John R. Hickling, a partner at Liberty Square Asset Management LLC in Boston. "He approaches everything with a healthy skepticism."
That's an understatement. Smith was among the first analysts to conclude that former Vivendi Universal (V ) CEO Jean-Marie Messier was wasting tens of billions in capital by setting himself up as a transatlantic media mogul. "The economics of the movie industry seems to represent the ultimate triumph of hope over experience," he said in a report in June, 2000, commenting on Vivendi's purchase of Seagram and its Universal Studios. A year later, Collins Stewart skewered Vivendi again with a commentary headlined: "Vivendi: Dangerous Eurotrash."
Vodafone Group (VOD ) has also come under the Smith lash. In January, 2000, Collins Stewart calculated that the cell-phone operator would get a far better return investing in high-grade corporate bonds than spending $157 billion taking over German rival Mannesmann. And it was right, judging by the 75% fall in Vodafone's share price since then. Politicians and regulators, Smith says, will never succeed in protecting investors. Instead, companies "need to be judged by an adversarial system--they need someone like me to poke them with a stick."
And poke he does. Smith scrutinizes company reports for telltale accounting tricks and crunches the numbers to produce what he calls "cash-flow return on investment." He says this is useful in judging whether a company is spending capital wisely. Smith also figures what a company is worth from a present-value analysis of cash flow from existing assets and future investments. Right now, this is telling him that Ericsson, the big Swedish phone-equipment maker, should be valued at about a fifth of its already bombed-out share price. And he pegs the value of BSkyB at $3.65 billion--a quarter of its current market capitalization. Smith's explanation: BSkyB isn't a growth company anymore but a mature business.
Companies sometimes lash back. He had a bitter public feud with Vivendi after he said it was destroying value. And execs criticize Collins Stewart for not letting them preview its research, as most investment banks do. But Smith sees little point in debating his views with CEOs. "They often don't know what is going on in the business," he says, "and, as we have found out, they lie."
A 49-year-old product of London's rough East End, Smith has long courted controversy. He once shocked the City by publishing a caustic note on the prospects of Barclays PLC while he was working for its investment-banking subsidiary, BZW. And he was fired by the securities arm of the old Union Bank of Switzerland in 1992 when he refused to halt publication of a book he wrote called Accounting for Growth that used some of UBS's clients as examples of how companies manipulate their numbers. He started at Collins Stewart in 1992 and became CEO in 2000. Last year, Collins Stewart made $53 million in operating profits on revenues of $154 million.
Smith remains pessimistic about the markets, saying they remind him of the early 1970s. He thinks the Standard & Poor's 500-stock index may fall 30% more, while London's benchmark FTSE 100 index may have 10% to 15% further to drop. He does have buy ratings on some stocks, but he thinks most small investors should stay out of equities unless they have a very long-term view. "We had excesses in the boom, so we will have excesses on the downside as well," he says. But as someone running a City of London firm, he admits he wouldn't mind being wrong.
By Stanley Reed in London