The sell-side analysts that cover your stock are far busier than you might think. Failing to recognize this and blaming them for not properly understanding your story leads to valuation challenges and frustration by everyone involved. Conversely, understanding the demands on their time and the pressures they face fosters empathy and can vastly improve your relationship with the publishing analysts. A better relationship typically results in higher quality research coverage – ultimately leading to a stock valuation that properly reflects the underlying value of your business. Has your investor relations officer or IR consulting firm educated you about this yet?
Earnings Season is a Crazy Time
Have you ever heard an analyst say during the Q&A section of your quarterly call, “sorry guys – you may have covered this before, but I just hopped on and wanted to ask about ___”? Or have you been puzzled by questions coming from people you’ve never heard of and they say “hi guys – it’s [research associate] filling in for [insert senior analyst’s name]” followed by a pretty basic question? Consider this: how often do you choose the date of your earnings release based on when other companies are reporting? Never, right? So the ones who are left dealing with this chaos are the publishing analysts.
These analysts sometimes cover 20 or even 30 stocks and are jumping from one call to another at the same time. Once the earnings calls end, they’re spending time on call-backs, talking to their top clients who want to know what they thought of the call, and they’re adjusting their models – all before they sit down to have a cohesive thought and write the actual earnings note. Think about how stressful this is – particularly if the earnings results were meaningfully different from what they’d expected. When that happens, they must think about how they’re going to explain the results to their clients and how they’re going to get up in front of their global sales force the next morning to explain these results. Having a “pit in the stomach” doesn’t even begin to describe what this feels like if their preview was wrong and the stock is likely to have an adverse reaction.
Now think about this: if you’re trying to hammer home a key point about your story, or explain your new turnaround strategy, can you understand how these points might not get fully digested during earnings season?
I’m not at all saying that sell-side analysts aren’t smart. What I am saying is that they’re exceptionally busy and the nuances of your new corporate initiatives have the potential to get lost if they’re first unveiled during earnings season. If you’re looking for them to help tell your story to their clients, consider doing some extensive corporate access intra-quarter like attendance at conferences, an analyst day, field trips, or non-deal roadshows. This is when people have the time and attention span to pay attention to your shiny new strategy.
It’s All About Understanding
While earnings season can be total mayhem, the other 10 weeks of the quarter aren’t exactly a walk in the park either. Analysts are under pressure from their research directors to make hundreds of outbound calls per week to their clients, they’re taking calls from clients, they’re training their research associates and spot-checking the models for errors. They’re traveling around the country (and the world) marketing to institutional investors, they’re working with their conference planners on the upcoming investment banking conference, they’re doing pre-IPO due diligence and if they’re lucky, they’re able to squeeze in a little bit of time to conduct some primary research of their own. These analysts can easily log 70-hour workweeks before considering travel time.
The point is this: these guys are slammed doing the tasks that “keep the lights on” and don’t love having to spend extra time deciphering your press release to get to the “real non-GAAP numbers.”
I suggest to all of my clients that you tell them what they need to know by being as crystal clear as possible. If you have different expectations for different parts of your business, spell it out as clearly as possible. If you have a certain expectation for your tax rate or your interest income, tell people and leave no room for misunderstanding or accidental omission. Time and again, I hear my clients say things like “the sell-side analysts should do their work and not ask us to spoon-feed them the numbers," but to me, this misses the forest from the trees.
Help Them Help You
The market is different today than it was 10 or 15 years ago. Back then, the most important thing the buy-side cared about was the primary research coming out of the brokers. Clients paid their investment banks to get access to these amazing researchers and stocks moved violently on changes in analysts’ opinions and recommendations. While there are still plenty of analysts whose opinions are highly regarded by investors because they do amazing primary research, the reality is that this is no longer the key focus of their clients and with MiFID II, we’re likely to see the market continue to “devalue” the research component of this client/broker relationship. What we are seeing is that institutional investors place a high value on things like corporate access - 1:1 meetings with companies on road shows and at their investor conferences.
Recognize therefore, that taking the steps to make your analysts’ lives easier will be very favorably received. Tell them exactly what you want them to know and reiterate the key points of your story.
They’ll go do their own primary research to validate what you’ve told them (so make sure whatever narrative you’re weaving is true and can be backed-up through field work), but make sure you start on the right foot by ensuring that they actually know your story. Having your covering analysts not fully understand the key drivers of your company or changes to your strategic vision typically causes investor frustration and creates valuation gaps vs. your peers.
Leverage the Knowledge from your Investor Relations Specialist to Make their Lives Easier:
1. Provide clear and consistent metrics on each of your earnings calls.
Don't frequently change what you choose to disclose. If necessary, publish a "supplemental earnings sheet" that discloses the relevant items these analysts will use to build their models. Does one really smart analyst always ask a question that you're happy to answer but haven't thought to put it in the press release? Make everyone's lives easier and put all of these metrics that you're willing to disclose in the supplemental sheet.
2. Help them understand how your model works.
Just because you say you're going to earn $1.00 in EPS in 2018 doesn't mean they understand (or blindly believe) how you're getting there. If you have multiple different reportable revenue line-items, spell that out. Tell them how you think each will perform - particularly if they move at different paces and/or for different reasons. If you focus your business on gross margins, tell them and tell them what the pushes and pulls will be to drive gross margins higher or lower. If it's operating margins you focus on, then tell them how much you think you'll spend on the various opex line items. Is there seasonality in your business? Tell people about this BEFORE You experience it - not after (because then it sounds like an excuse). Be explicit in your "below the line" items like interest expense, "other income", taxes and shares outstanding. Don't leave this to Q&A - investors hate it when an analyst has to take up valuable time during the Q&A session to ask you about something as mundane as your share count and tax rate. But it's necessary to ensure everyone is on the same page with respect to the final EPS number.
3. Respect the common conventions of non-GAAP and don't create your own "non-non GAAP" measures.
If you report non-GAAP numbers, make sure that you are crystal clear in your commentary whether you're talking about GAAP or Non-GAAP - especially during your guidance. And if possible, publish a reconciliation in your press release that clearly walks analysts from GAAP to non-GAAP. Remember, it's way easier to build a cash flow statement with GAAP Net Income as the starting point… so most good analysts will maintain both GAAP and Non-GAAP income statements that are linked together. Realizing this, make their lives easier so that they can use whatever spare time they have to actually do primary research and share this with their clients vs. spending time wrestling with their models just to get the numbers to foot.
Obviously, none of this is rocket-science. It’s simply about understanding what they’re getting paid to do and “filling in the blanks” of how they spend their time when they’re not talking to you. Typically, this job falls to the investor relations department or the investor relations consultant you’ve hired to help facilitate your relationship with the sell-side. Make sure you ask your team if they understand how the sell-side works and be sure to ask for honest feedback from your investor relations consultant if you think you have room to improve in this area.