Prada in Wonderland

Few things feel as good to a stock as beating forecasts. When the market has a negative expectations about the future of a company is not tasteful dish, of course, but when the company is able to overcome them the effect on the market price is often tremendous, whether news are good or not.

The last case we have seen is Prada. The company listed on the Hong Kong Stock Exchange said first-half net profit rose 23% to €188 million. This news, negative a priori, was greeted with euphoria by the stock market because experts expected a greater drop -of over 30%-. Never mind that the company got this relative improvement thanks to cost savings, not by an improvement in revenues (which increased a meager 4% after several quarters of decline).

Nor did it matter that there was not due to the improved profitability of its products, neither. Investors were not even aware that rival groups were able to raise their profit despite the China situation, unlike Prada. The stock rose as many as 11% after the announcement.

The company launched an emergency plan to try to change the course of its business. Two years’ continuous worsening of its results provoked a sharp decline in its market price, losing more than half of its market capitalization (from more than €75 per share at the end of 2013 to less than €30 per share this year, a decline of more than 60%). Within the plan included measures such as slowing its expansion, launch new products and an efficiency plan across the group globally, with the aim of reducing costs.

The plan has been successful, something that was already seen in the first fiscal quarter and has been now totally confirmed. To try to explain the market reaction, experts note the good progress in the second quarter, showing a clear acceleration compared to the first, indicating a positive trend for the second half of the year. That means the market would be anticipating what will come in the next two quarters. They also note that although the company has not been able to improve its profitability, it is true that margins are falling less than before, which would also be a positive leading indicator.

These commentaries would be in line with recent reports published about the company. The company has received less than five negative reviews of its earnings expectations in the last two months, something that had not happened since 2013. The average target price of 30 experts who follow the stock is HK$37.3, with an uprising potential of 9% (although only 1 of these 30 firms recommends to “buy” the stock with a majority recommending “hold”).

Disclosure: The author is not responsible for the views expressed in the article. The text was written freely expressing ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.