Do we focus on the long term?

We often hear CEOs complain about the short-termism of Wall Street, but a commentary by value investor Francois Ticart in this week’s Barron’s questions whether most companies really focus on long-term value. Let’s include investor relations in that question. Ticart, founder & chairman of Tocqueville Asset Management, says:

Listed companies, the analysts who follow them, and the executives who run them have become increasingly short-term minded in recent years. Stocks now routinely respond to whether they “beat” or “miss” quarterly consensus estimates of sales and earnings, and much of the stock trading takes place on that basis. Needless to say, quarterly earnings have very little to do with long-term strategies or other fundamental factors. By focusing on them, financial analysis has become nearly useless to long-term, fundamental investors.

So think about IR: We say we want long-term investors, but how much energy do we focus on quarterly results and short-term fluctuations, and how much effort do we devote to communicating strategic drivers of our business over a 3-year to 5-year time horizon like the one Ticart favors? Are our own IR efforts part of the problem?

© 2014 Johnson Strategic Communications Inc.

Is ‘guidance’ all there is?

Providing financial guidance has become so common – NIRI says 76% of public companies offer forward-looking financial guidance – that investor relations professionals don’t stop to think much about it. But an investment banker in the pharmaceutical industry notes increasing frustration with investors and analysts who obsess on guidance.

In a piece called “The Tyranny of ‘Guidance’,” Michael Martorelli of Fairmount Partners tells readers of Contract Pharma that he’s hearing more questions on conference calls seeking clarification or expansion specifically on management’s guidance for near-term financial results – as opposed to penetrating questions seeking insight into fundamentals or trends:

If you thought all analysts developed their own estimates for the revenue and earnings paths of the companies they follow, welcome to the post Sarbanes-Oxley world of Wall Street research.

Before Sarbanes-Oxley, Martorelli notes, sell-side analysts were committed to building in-depth knowledge of  companies and industries. Investors and corporate managements came to respect the best analysts, and the work of analysis was highly valued.

Post-Sarbanes, of course, the mandate to give the same information to everyone at the same time often takes the form of guidance. And market participants, Martorelli says, can put too much value in near-term numbers. They’ll ask, “Why didn’t you raise your guidance this quarter? Why is the range of your guidance so wide? Why did you lower (or raise) only the top (or bottom) end of your guidance?”

When evaluating the future financial results of a company … too many investors rely more on management’s guidance than on their own independent analysis of the company, the industry, and the trends.

The legal structure is what it is, but companies can perhaps affect the tone of the conversation by focusing what we talk about on the fundamentals … what is really changing in our businesses, growth drivers, challenges and the strategies our companies are executing. After all, we really outperform not so much by beating “guidance” as by beating the competition to create real value for shareholders. It’s the big picture, not the pennies for next quarter.

What’s your take on guidance? Has it taken over the conversation?

© 2013 Johnson Strategic Communications Inc.

Investors, this is your day!

If you’re not already doing an “analyst day” every year or two, maybe you should be. That’s my takeaway from “NIRI Survey Reveals Current Analyst/Investor Day Practices” – a benchmarking study released Monday by NIRI.

Key finding: 71% of the 431 investor relations professionals responding to NIRI’s survey hold a periodic analyst/investor day. It’s a chance to show off management and tell the company’s story in-depth. After all, you’re locking investors in a room for a half day or full day, so this is “quality time.”

Of course, the larger a company is, the more likely it is to host a regular analyst day. But even among small caps ($250 million-$2 billion), 63% offer a “day.”

Some 70% hold their analyst days in New York or another major investment center, while 40% invite investors in to meetings at a corporate facility, NIRI found.

A few thoughts based on analyst days I’ve been involved with:

• The CEO and CFO play host and give the strategic overview, but having a half day or more is a great opportunity to demonstrate management’s bench strength by bringing division heads, R&D leaders or operating executives forward for investors to meet them in a fairly controlled environment.
• It’s also a chance to put on display the chemistry of the management team – showing investors how the top execs relate to each other. Not a bad idea to do this some months after a big merger, to present a unified, compatible team.
• How often you hold an analyst day is up to you. How fast is the story evolving? If there’s progress every year, annual is great. If this year looks a lot like last, maybe not. (NIRI found 49% of companies who hold “days” do so annually, 35% less often, 12% on an ad hoc basis, 3% more than once a year.)
• The name “analyst day” doesn’t quite capture the fact that institutional investors are the primary audience. Sure, the sell side attends – but real shareholders and potential investors are the main point of the effort.
• I personally like the on-site analyst day, giving investors a feeling of seeing the business and kicking the tires, even though they’re carefully shepherded on any tours of the plant or laboratories. But a lot depends on your location. Call up a few analysts or investors and get their input before scheduling your day.
• Schedule enough breaks to let investors check email, used the phone and visit the restroom. It’s hard to limit your speakers – but, hey, give people a break.

What’s your experience with analyst days? Love ’em? Hate ’em? Any tips?

© 2011 Johnson Strategic Communications Inc.

Sell side: regionals on the rise

Institutional investors are relying a bit more for equity research on mid-sized firms, regional brokers and industry-sector specialists as the bulge-bracket investment banks continue to reel from the effects of the financial crisis, Greenwich Associates reports in its 2010 U.S. Equity Analysts Study. Investor relations people reaching out to analysts might consider the changing sell side mix in targeting sell side firms.

In its survey of 1,007 buy side professionals, Greenwich tabulated “research votes” based on the sources of equity research used, weighted by commission dollars paid out by the institutional investors. So this is more than a popularity contest – it’s a look at who the buy side is paying for equity research.

To be sure, large investment banks still speak with the loudest voice, winning 64.1% of the buy side “research votes” in early 2010. But that’s down from 73.1% in 2008. Regional and more specialized i-banks gained share, from 23.9% two years ago to 32.4%. Independent research firms also gained, from 2.7% to 3.4%, but they remain a drop in the overall research bucket.

Integrity Research Associates notes that the financial crisis has contributed to an exodus of analysts from Wall Street, as some research stars have left troubled big brokerage houses to join regional or boutique firms or set up their own shops.

Greenwich says the bulge-bracket firms saw a pronounced drop in their share of research dollars in 2008, when giants like Lehman Brothers and Bear Stearns disappeared. But the shift continues into 2010.

What shape Wall Street research will take in the future is an open question, but the big i-banks may regain share of voice (and commissions) as the financial crisis continues to ease. “I think the worst is over from the bulge-bracket perspective,” Greenwich MD Jay Bennett tells Pensions & Investments.

IROs tend to seek out analyst coverage where they can get it. Large cap companies or hot stocks almost fight an excess of sell side interest, while small cap IROs work hard to cultivate regional brokers, industry boutiques and independent researchers.

But watching the changing landscape of the sell side – and particularly the shifts in institutional investors’ use of that research – may help IROs allocate their time.

© 2010 Johnson Strategic Communications Inc.

Body language & tone are back

In a spirit of renewed regulatory machismo, the SEC is reportedly investigating whether generic drug company Mylan violated Regulation FD by “sounding excited” and dropping positive hints about upcoming earnings in a 2009 meeting with a analysts and investors, according to today’s Wall Street Journal (page C1).

The incident is a reminder of the risks of what should be normal investor relations activities – meetings and phone calls with the Street. Exactly what happened in the Mylan meeting isn’t clear from the WSJ or a similar Reuters article – but this story is going to be worth following.

According to the WSJ, the SEC has asked Mylan and some analysts who attended the meeting last September – three weeks before the end of the third quarter – what the company said regarding earnings for the quarter. The day after the meeting, the paper said, Mylan shares jumped 7% – and the stock rose further when earnings were reported in late October.

Mylan told the WSJ the company is “confident the communications made during the conference were entirely appropriate.” The meeting wasn’t webcast, and Mylan didn’t issue a news release or file anything with the SEC disclosing information from the meeting – as Reg FD would require if something material was said.

Details so far are scarce. The most color came from analysts cited by the WSJ:

A UBS analyst who attended the Sept. 9 meeting said in a report to clients the next day that Mylan’s “management sounded excited about the upcoming 3Q.” The report added: “although not saying it, management basically implied once again that it was confirming 2010 EPS guidance.” Other analyst notes also said the company was “excited” about reporting earnings.

SEC cases based on Reg FD have been rare. Reuters notes that the Mylan incident is reminiscent of an SEC action against Richard Kogan, former chief executive of another drugmaker, Schering-Plough. Reuters recalls:

The SEC investigated [Kogan’s] private meetings in September 2002 with four institutional investors in Boston, three of which were among the company’s largest investors.

“At each of these meetings, through a combination of spoken language, tone, emphasis and demeanor, Kogan disclosed negative and material, nonpublic information regarding Schering’s earnings prospects,” including that the company’s 2003 earnings would significantly decline, the SEC found.

In the Schering-Plough case, the stock price took a dive after the lunch meeting with investors. Publicly, the company remained silent. The CEO was gone a few months later, and Schering-Plough ultimately agreed to pay a $1 million civil penalty to the SEC. Kogan paid $50,000.

So … maybe body language and tone are back in the SEC’s sights. We’ll have to see. Today’s news is a reminder that IR professionals – and senior managers – need to be vigilant about even inadvertent guidance on earnings in private meetings.

One way to prevent this problem is to announce an analyst day in advance and webcast the presentations. That works for larger meetings.

I believe companies also should continue to meet personally with individual investors or small groups – this is how relationships are built. The executive team and IR should rehearse  beforehand what’s to be discussed – and not discussed – especially regarding upcoming earnings. If selective disclosure happens, Reg FD prescribes a pretty clear cure: broad disclosure of the information to the market.

What’s your approach to avoiding potential Reg FD problems?

© 2010 Johnson Strategic Communications Inc.

Analysts “still too bullish”

Most of us remember a decade ago, when the stock market bubble of the 1990s finished inflating and began to spring leaks. Nasty stories were everywhere of Wall Street analysts overselling the stocks they were paid to peddle to investors.

The bear market of 2000-02 led to legislative and regulatory efforts to “fix” equity research, separate the sell side from – well, selling – and bring trust back into the markets. Alas, that’s probably not something new laws can accomplish.

New evidence from McKinsey & Co. suggests the sell side is “still too bullish,” based on a study of earnings estimates for S&P 500 companies from 1985 to 2009. Somewhere in the DNA of the sell side, it seems, lurks a gene for salemanship.

Only two times over the 25-year period did actual earnings on the S&P 500 beat analyst estimates, three McKinsey consultants write in the Spring 2010 issue of The McKinsey Quarterly. Analysts have been “persistently overoptimistic,” typically forecasting S&P earnings growth of 10-12% a year, nearly twice the actual 6% growth. McKinsey concludes:

Exceptions to the long pattern of excessively optimistic forecasts are rare …. Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught  up with earlier predictions, do forecasts actually hit the mark.

There’s an obvious caveat emptor for investors in data like this. In fact, the market as a whole doesn’t believe the sell side: Actual price-earnings ratios on the S&P 500 are almost always lower than the implied P/E based on analysts’ forecasts, the consultants note.

McKinsey also sounds a cautionary note for corporate staffs: Don’t put too much confidence in the sell side when formulating your own company outlook. Base your outlook on what’s really happening in your business, not so much on Wall Street’s view from a distance:

Executives, as the evidence indicates, ought to base their strategic decisions on what they see happening in their industries rather than respond to the pressures of forecasts, since even the market doesn’t expect them to do so.

Easier said than done, of course. But investor relations professionals ought to keep this advice in mind when serving as a conduit for communications between Wall Street and senior management.

Analyze this … IR & indie research

Equity analysts have been shipping out from sell side firms on Wall Street and establishing their own independent analysis shops – in droves – according to “Research Renegades” in the November 2009 Bloomberg Markets magazine.

The ongoing transformation of the sell side – through the financial crisis, the bear market and assorted tribulations still taking shape in Washington – is a big change that calls for investor relations professionals to flex with the times.

If we are to connect with our companies’ audiences in the investment markets, we must pay close attention to boutiques and independent analysis firms, as well as the old-line brokerage houses that have traditionally provided research coverage.

Bloomberg writer Edward Robinson quantifies the shift:

The number of independent research firms in the U.S. has soared to 2,667 from 1,012 in 2006, according to Integrity Research Associates LLC., a New York-based consulting firm.

The article notes that traditional investment banks (mostly) aren’t going away. Their underwriting and ability to allocate securities offerings undergird relationships with institutional clients. The buy side sends 70% of commission dollars to giant firms, and only 3% to the independents, according to Bloomberg.

“There is a symbiotic relationship between the bulge-bracket bank and the typical institutional investor, and I can’t see that being displaced,” [Jay Bennett, a consultant with Greenwich Associates] says.

Yet many sell side analysts are departing, starting up their own shops or joining small firms. The article focuses on analysts leaving to avoid conflicts of interest at investment banks, but the broader Wall Street meltdown and dearth of offerings in the past couple of years must also be contributing to the exodus. Economics trump philosophical purity in most job moves on Wall Street (or elsewhere).

Point is, we must follow the analysts, learning about their world as they study ours. Our contacts must extend to the independent firms – without giving up on the big guys. And most IROs probably should focus a lion’s share of attention directly on the buy side. (See earlier post on declining sell side coverage.)

What’s your experience with independents? Any ideas to share with IR colleagues?

IPOs – not coming back?

The market for initial public offerings is drier than a creek bed in Death Valley, but don’t wait around for spring rains to make IPOs start flowing again, two Grant Thornton advisors say in “The Slow Degradation of the IPO Market” in the September 2009 issue of Mergers & Acquisitions.

David Weild and Edward Kim of Grant Thornton write:

Recent signs of life in the IPO market have led some to believe that the worst is behind us and that we’re about to enjoy another bountiful period of IPOs. Don’t be fooled.

While conventional wisdom may say that we are merely experiencing a cyclical downturn in the IPO market, exacerbated by the credit crisis, we assert that the reality is much darker. In fact, we believe that, given its current structure, the market for underwritten IPOs is closed to most of the companies that need it.

Sorry to pass along this gloomy picture, but it’s useful for investor relations practitioners to have a perspective on the overall landscape of our profession.

Weild and Kim say the decline in IPOs arises from long-term causes in the US stock market and regulatory system, not the bear market or recession of 2007-09.

Among the structural factors are regulatory and legislative changes that contributed to a weaker sell side: repeal of Glass Steagall, which coincided with large firms swallowing up i-banks that used to focus on venture-backed IPOs; Regulation FD, which democratized information for investors but reduced the value of sell side research; legal restrictions on conflicts of interest between research and investment banking, which may be good but took more of the reward out of sell side research; a crackdown on use of one-eighth point spreads, which had given market makers an incentive to generate volume in small cap names; and decimalization, which cut spreads in most stocks to $0.01 and further hurt market making.

All this adds up to a structural and legal landscape that doesn’t favor IPOs, especially smaller companies that might want to emerge into the public markets. The market’s big second-quarter bounce brought only four venture-backed IPOs, and the authors don’t expect great things even if the stock market recovers further.

The guys from Grant Thornton do offer up a “solution” – creating a new capital market where stocks might trade in 10 or 20-cent increments, brokerage houses could earn improved commissions, and i-banks might stage a comeback. They propose allowing companies to opt-in for this “Back to the Future” marketplace.

Given the devastating impact of the recent bear market “scandals” on any kind of financial innovation, I wouldn’t wait around for this idea to gain political traction. Instead, I hope the pessimists are wrong and IPOs do recover. Access to capital markets through IPOs has been an important factor in US technological and economic progress, not to mention the growth of industries like tech and biotech.

Sell side shrinks, IR task grows

The shrinking sell side poses a big challenge to public companies, forcing management to get out more and pitch investors directly, says Michael Mayhew, co-founder of Integrity Research Associates, which studies securities analysts and advises institutions which ones to use for various investment themes.

The universe of analysts has been hit hard by Wall Street layoffs, the demise of Bear Stearns and Lehman, and distressed mergers of big I-banks, Mayhew blogs in a June 1 post.

From September 2008 to mid-May, he quotes FactSet as saying, 26% of all sell side reports on small cap companies were announcing dropped coverage. Withdrawal of coverage accounted for 17% of all mid cap reports and 16% of large cap reports.

Mayhew also cites an academic study that found an individual stock that loses analysts typically underperforms its industry for 12 months following the dropped coverage, then recovers and outperforms in the second 12 months.

The loss of coverage both deprives buy side investors of research and hurts public companies themselves, Mayhew says:

The result of this trend has been that many companies have been orphaned, losing some if not all of their research coverage.  If history is a guide, the stock price of these public companies is likely to underperform their peers, at least over the short-term.  This will force many company executives to increase the amount of time they spend meeting with investors to tell their companies’ stories.

Investor relations professionals still must cultivate sell side analysts, as well as seeking out independent research firms (ones that work for investors, not the pay-to-play shops). And more than ever, companies need to go direct to the buy side.

Majority still offer guidance

Despite the wild economic ride we’re on, most companies haven’t stopped providing forward-looking guidance on earnings, according to a survey by the National Investor Relations Institute.

In an Executive Alert published May 18, NIRI says the practice of guidance continues to decline – but not very fast:

One might assume that the recent dramatic economic decline would necessarily result in a meaningful decline of public company guidance. Counterintuitively, NIRI member respondents have not abandoned guidance in large numbers.

A few highlights from the 2009 survey of 515 NIRI members:

60% say they do provide earnings guidance, down from 64% a year ago. The ranges companies provide are wider amid economic uncertainties.

50% of the companies offer guidance on revenues, also down a bit.

Guidance on annual expectations is most popular, with quarterly updates.

The most common reason for offering guidance is as a way to keep sell-side expectations in line with what seems reasonable to companies.

My own feeling is that the decision “To guide or not to guide?” is individual to each company. The answer depends on needs of your investors, comfort level of your management and board, predictability of your business and so on. In some cases, offering qualitative or quantitative views on earnings drivers such as trends in key markets in which you compete may be as useful as an EPS range.

Point is, most investors assess the value of your stock based on some forward-looking estimate of earnings or cash flows – so IR needs to provide as much guidance as the company is comfortable providing.

A company’s policy on guidance, NIRI suggests, should include decisions on metrics that management wants to give forward-looking information on, time frames for that guidance (annual, quarterly, monthly), and frequency of communicating guidance. NIRI also offers links to supplemental information for members (see the Executive Alert).

So there it is – some guidance on guidance.