Good morning everybody! I will keep this post very short. The objective is only to share an interesting aspect in the investment case for Atos. I am talking about bias among analysts covering the company. If it were not already a problem to have so few analysts interested in Atos, I come now with worse news.
Many of the Analysts covering Atos are strongly related to the Wirecard scandal. Atos previously owned Worldline, an electronic payment EU company, very similar to Wirecard. Atos already sold it, in fact it has been selling stake in Worldline since 2016, but many of the Analysts that were previously covering Atos because of Worldline did not leave. Most of them still cover Atos simultaneously with Worldline, which is now a public company. Here we find the first mistake by the bank's research branches, but it's only starting.
Because Worldline business shared so much in common with the supposed business of Wirecard, many Analysts specialized in the industry covered Wirecard, Atos and Worldline simultaneously. When Wirecard scandal became public, Analysts covering the company got their career destroyed. After that, banks revised their stakes on EU companies and researched for possibilities of a similar event happening again. One of those companies was Atos, but now, one year later, we know that nothing near to financial fraud was found by auditors.
However, many of the Analysts that covered Wirecard before, remained in charge of Atos and Worldline research. There we find the huge mistake.
Those Analysts are without a doubt biased and ultra suspicious of anything, because they are determined to not commit the same mistake again.
A research team should never be biased. In any way. In my opinion the fact that analysts involved in the Wirecard scandal remain in charge of the research of Atos, without any new layer of review to avoid past personal experience get involved in the valuation of a Company, is a huge mistake by the respective bank.
Without a doubt, that analyst who failed to flag a fraud before, will now take into account excessive "potential risks" in the valuations he realizes because he will be overly suspicious.
What's even more concerning, is that I am not even speculating about such a scenario. That scenario is already happening. I have taken a look into the analysts from UBS covering Atos stock to date. This is what I have found.
The rating provided by UBS for Atos, a 4 Billion Eur company part of the CAC40, is only covered by 3 analysts. Two of them, those who lead the team, got unfortunately (and with all due respect to them if they are reading this) their reputations destroyed during the Wirecard scandal. They covered Wirecard for years and failed to realize it was a fraud. Hannes Leitner even rated the stock positively 26 times before it went to zero. The last Analyst, Jad Younes, is in charge of the tech research but has only 2 years in the bank. One could expect that his opinion could easily be overshadowed by the opinions from his teammates in charge. In addition, Mr. Younes has no public track history. It appears he is just starting as an Analysts.
First of everything, I personally would not trust this team with my money, given that if I would have followed 2 years ago the rating of Wirecard from Hannes Leitner and Michael Briest, I would have lost nearly 96% of my entire investment.
The reason why these analysts covering Atos are linked to Wirecard could initially look suspicious and make us want to sell all of our Atos shares. But what's more probable is that they are linked because the industry connection between Atos and Wirecard back when Atos had Worldline. UBS probably forgot to remove them from covering Atos and appoint new, expert and appropriate Analysts for the type of operations Atos does right now, back when they moved to also covering Worldline. It's also understandable that UBS probably didn't want to fire them for not finding about Wirecard on time, since a team of a few people covering 4 companies usually lacks the resources to discover the financial scam of the decade. All the responsibility is here and in my opinion on UBS risk management team.
Having said that, let's take a look at the ratings each of them issued for Wirecard, Atos and Worldline.
Since Jad Younes has no public track record, I only managed to find the tracks from Michael Briest and Hannes Leitner. Remember Michael Briest is on charge here.
Michael Briest past ratings on Wirecard and Atos:
Hannes Leitner past ratings on Wirecard and Worldline:
After looking at the insights provided by ratings history, there is zero doubt that the analyst team covering Atos on behalf of the UBS has a huge bias problem. That bias could translate to many aspects of valuation like lower valuations with metrics such as future earnings, future revenue, future cashflow expectations and more. These would be lowered by implied risk considered "higher" for Atos because of financial accounting fraud doubts. In contrast, Atos' competitors would not trade as such lower multiples because "there is less risk", or so is believed. But what if the risk tolerance is not related to actual news or to the result of investigations on accounting, but instead of the team of Analysts covering Atos? What happens if the team of researchers have had such a particular and unlucky past experience, and lacking of any bias review by another team from the UBS, reflect their ultra low risk tolerance into their current Atos valuation? I personally think that's more than possible.
After reviewing the specific context of the analyst team from the UBS covering Atos, we could question if it's characteristics could explain to any extent, part of Atos' action price.
I have sketched a simple timeline of the price movement of Atos equity in the past 2 years and marked the most important events on it.
1st. 2020 stock market crash.
2nd. Wirecard scandal.
3rd. Panic of similar accounting frauds on european companies like Solutions30 or Atos.
4th. Atos tries to acquire DXC, a direct competitor, but Analysts panic thinking Atos' management wants to blur financial statements with the acquisition.
5th. Atos' auditors issue reserves on 13% of the group revenue due to "limitations of scope"
6th. Atos lowers mid term revenue targets, analysts become confident on their take that Atos committed accounting fraud.
7th. One year later, accounts get audited and investigations prove there were no financial misstatements.
As I see it, Analysts have been 2 years trying to find accounting fraud where there is none. In my past research article for Atos, I explained how the DXC acquisition was clearly strategic, but analysts at the time found it suspicious and the stock dropped 20% the day the possible acquisition was announced.
I think analysts are in panic mode of any financial misstatement and that fact has been lowering the valuation of the company for a long time. Before the 1H21 results, there was at least one red flag that helped panicked analysts to realize they were making a big mistake. It was the PER ratio, which was at 7x before and a sustainable dividend of 2%. However, after the last results, the PER skyrocketed to 50x, leaving no warning sign to analysts and short sellers, who short the stock as a vehicle to short the french economy.
Why did it skyrocket so much then? Is that a sign that the company is in a bad state and that it may be unprofitable? Nope, it's just that Atos bought 3 new companies on the second quarter of this year, just after buying three companies on Q1.
I personally like those acquisitions a ton, but I feel sorry for all the short sellers and analysts who will now be strongly misled if they don't perform a long and appropriate research.
I hope I can help them and anyone interested in an undervalued company.
Right now, Atos is shorted up to 6% but average trading volume is very low, sometimes even as low as 0.3% on a single day. In addition, rumors of an acquisition appeared a week ago or so. Shorts are in a very bad position to cover since 52% of the company is held by individual investors and free float is only 77%.
I hope you enjoyed reading!
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Have a nice day : )
18. August 2021
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