Archive for the ‘Capital markets & IR’ Category

Do we focus on the long term?

March 17, 2014

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.

How IR adds value for investors

March 6, 2014

NIRI KC 3-6-2014 Hancock & BurnsAt the NIRI Kansas City chapter’s “IR and Governance Bootcamp” today, Debbie Hancock, vice president of investor relations for Hasbro, Inc. did a great job – with an assist from Bruce Burns, director of investor relations for Westar Energy – marching us through “a day in the life” of an IRO, skill sets we need and the role of IR both internally and out in the capital markets.

That’s a lot of ground to cover – really, the whole job of IR. I’ll share one thought of many that struck me, from Hancock’s comments on a slide headlined “How IROs Add Value to Investors.” Note that she focused on adding value to investors. On her list: representing the company honestly, being prepared with answers for questions, informed and responsive, conveying understanding of the numbers.

The Hasbro IRO  listed one value-add that especially stood out to me:

Put the story together for investors. I think this is super-important…. What are the big takeaways from all this information? Put that together for them, put that story together.

Providing perspective, thinking like someone on the investor side and meeting the needs of an asset manager or analyst trying to make an investment decision, is probably the greatest value we can add in IR.

© 2014 Johnson Strategic Communications Inc.

It’s the CEO

January 31, 2014

When it comes to interacting with the investment community, Numero Uno is still No. 1. According to a global survey of more than 1,200 investor relations officers by IR Magazine, nearly two out of three IROs (64%) say the Chief Executive Officer is more important than the Chief Financial Officer in relationships with investors.

At least in terms of CEOs’ primary role in investor relations, customs aren’t that different around the globe, according to a story in IR Magazine‘s December 2013-January 2014 issue.

Among small-cap companies, even more IROs (76%) say the CEO is preferred over the finance chief by investors seeking access, while 61% of mid-cap and 59% of mega-cap IROs agree.

According to one European small-cap IRO quoted in the survey:

Investors want to believe in the vision, not in the quarterly figures.

I’ve seen it both ways: companies whose CEOs “own” the story and are the best salespeople for it, and others whose investors would rather talk with the CFO while the CEO stays home to run the business. What’s your experience?

© 2014 Johnson Strategic Communications Inc.

Is ‘guidance’ all there is?

November 13, 2013

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.

Are stock buybacks overhyped?

June 19, 2013

Share repurchases aren’t the magic potions some investors and corporate managements think, according to an analysis of Standard & Poor’s 500 companies in the June 2013 Institutional Investor. Stock buybacks can create value, but they can also destroy value – and the actual results suggest some humility in talking up the advantages.

Cash stackSome institutional investors love financial wizardry. Share repurchases automatically increase EPS by reducing shares outstanding – and send a message of confidence in a company’s stock. So financial engineering fans press the idea on a CEO or CFO more than any business strategy, such as investing corporate cash in growth or new product creation.

And some companies love share repurchases. Now Institutional Investor, working with Fortuna Advisors, has begun publishing a quarterly scorecard of how effective stock buybacks actually are, at least in the large cap world. Based on S&P 500 companies that repurchase more than $1 billion in stock or at least 4% of their market cap, the magazine reports rolling two-year ROI for buyback programs.

You can get the overview in “Corporate Share Repurchases Often Disappoint Investors” or dive into raw data in a table detailing ROI for S&P 500 companies with big repurchase programs. (A majority – 268 of the 488 index members that were public for the whole two-year period – bought back at least $1 billion or 4% of their market value.)

The II-Fortuna analysis calculates ROI as an internal rate of return to evaluate investment performance of cash spent on buybacks over two years, including share value increases/decreases and savings on dividends avoided.

Results suggest investor relations people – and CEOs – may want to be more modest in discussing share repurchase plans. The accounting effects of buybacks are assured, but benefits to shareholder value aren’t:

Returning cash to shareholders is supposed to benefit everybody – at least, that’s how the theory goes. Investors who want cash get plenty; shareholders who prefer to stay the course see higher earnings and cash flow per share …

The fanfare that typically accompanies buyback announcements never hints that poor execution can torpedo more value than accounting-based bumps in earnings or cash flow can produce on their own.

Apple is the magazine’s poster child for the disparity between  theory and reality. The magazine dings Apple CEO Tim Cook for his $60 billion repurchase program, the biggest authorization in history, which he enthusiastically called “an attractive use of our capital”:

Buyback ROI reveals a less ebullient story at Apple than Cook described. The company’s -56.7 percent return on buybacks trails those of all S&P 500 companies that compete in the rankings. Every dollar spent by Apple on share buybacks during the two-year period was worth less than 44 cents. …

Trouble is, companies often buy back shares when the price is high – and as we know, stocks go up and down. Timing is everything, at least for returns over a typical investment horizon of two years. Often the timing is wrong:

“During the downturn in 2008 and 2009, even companies with good cash balances didn’t buy back stock, and now they are buying back shares,” says Adam Parker, Morgan Stanley’s top U.S. equity strategist. “A lot of companies have not done a particularly good job of buying low.”

If you’re interested in more analysis, Fortuna Advisors CEO Gregory Milano offers companies some direct advice on how to approach share repurchases in “What’s Your Return on Buybacks?”

I’d love to hear your feedback on buybacks.

© 2013 Johnson Strategic Communications Inc.

Guiding expectations: Of course we do

May 9, 2013

It’s as close as possible to unanimous: 97% of investor relations professionals say their companies attempt to manage expectations of shareholders, according to a survey of corporate members of the National Investor Relations Institute (NIRI).

No surprise, really. The results published today by NIRI just affirm the definition of IR as cultivating accurate understanding among investors of a company’s business, performance and prospects – communicating all that goes into valuing a stock.

IROs said the biggest focus (61%) is on guiding expectations for the current year, with smaller numbers of companies focusing on longer-term expectations.

What approach do companies use to manage expectations? Some 70% release financial metrics such as goals for revenue, margin or earnings; 27% offer “micro” industry-level metrics; and 22% give “macro” business-environment expectations.

Most CEOs and CFOs know instinctively that their job includes painting the clearest possible picture of the direction and prospects of the business. Exactly how to manage  expectations varies greatly from company to company – and executive to executive. You’ll find details and examples in the NIRI survey – and other sources.

As to the imperative of communicating with the market, it’s unanimous: We all do.

© 2013 Johnson Strategic Communications Inc.

3 common mistakes in small-cap IR

December 29, 2012

Small-cap company boards should help CEOs and CFOs face the difficulties of connecting with investors and analysts, governance adviser Adam Epstein argues in a roundtable on investor relations (“Communicating with the Street: Addressing Small-Cap Challenges”) in the Nov-Dec 2012 issue of Directorship magazine.

Here, for example, are three prevalent mistakes that small caps make in IR:

  • “A failure to communicate clearly with an appreciation for the audience [emphasis mine]. … A mix of small, growth-oriented institutional investors and retail investors typically owns shares of smaller public companies, and many lack technical educations and backgrounds. Accordingly, communications with the Street will resonate with only a small portion of investors unless that technology-speak is simplified and more emphasis is given to what most small-cap investors care about—growth and financial performance.” (David Enzer, Roth Capital Partners, small-cap banker)
  • Small-cap habits that “destroy management’s credibility [emphasis mine] and make investors run for the hills and on to the next opportunity: One, a failure to communicate on a consistent, scheduled and timely basis, regardless of whether the news is good or bad. Two, a failure to translate non-GAAP metrics into GAAP metrics, e.g., no one except management knows what ‘orders’ or ‘bookings’ means in terms of revenue. And three, chronically overpromising and underdelivering.” (Timothy Keating, Keating Capital, small-cap investor)
  • “A systemic failure to treat investor relations as a strategic imperative [emphasis mine] … Electing not to put the proper investor relations policies and procedures in place to offer management the opportunity to present a cogent business plan, with proper forward guidance to targeted investors and analysts, will all but guarantee life in the ‘boundary waters’ of Wall Street for small-cap companies.” (John Heilshorn, Lippert/Heilshorn & Associates, IR consultant)

IR is about the basics, in other words. CEOs and CFOs of smaller companies, especially, tend to be so focused on daily demands of running the business that they don’t devote the time or resources needed to communicate well. Where boards can help is by identifying a lack of engagement in IR – and encouraging more. It takes commitment to identify your audience, speak their language and explain who you are. And more commitment to maintain a consistent, proactive outreach.

Although the Directorship piece focused on small caps, commitment to excellence in IR really is the issue with many companies – from micro-cap wannabes to global mega-cap giants.

© 2012 Johnson Strategic Communications Inc.

Google gags on Q3 snafu

October 18, 2012

In the “Things Could Be Worse Department,” an investor relations nightmare struck Google Inc. today: Not only did third-quarter 2012 earnings decline and miss expectations, an unfinished draft of GOOG’s Q3 release was filed prematurely on the SEC’s EDGAR website, triggering a big sell-off before trading was halted.

“I think this is probably the worst technical screw-up I’ve seen in an earnings release in 20 years. I can’t think of anything as bad. I mean, clearly this was a premature release – it was put up on EDGAR prematurely. It even has boilerpate text in it that says, ‘PENDING LARRY QUOTE,’ ” said Bloomberg contributor Paul Kedrosky, a Kauffman Foundation fellow and blogger at Infectious Greed. “The result, however, combined with how poor the numbers actually are, is pretty dire.”

Oh, yes, pretty dire. GOOG closed down 8% on nearly five times average volume, a haircut of about $20 billion for shareholders. No telling whether the stock price would have reacted as violently if bad earnings had been released in a more orderly way – say, after the market closed.

So Google is the lead news story on all the financial sites – with headlines like “Google results, filed by mistake, miss; shares dive” (Reuters), and “Live: the Google Earnings Disaster” (live blogging on WSJ.com). And, of course, the tribulations are even trending No. 1 on Google Finance.

The erroneous press release from EDGAR may become a collector’s item, something to post over your desk as a warning:

It will take time to sort out what all went wrong. Google blamed the early release on R.R. Donnelley, the financial printer that does a lot digital work for IR departments. No doubt there will be further statements and explanations.

For now, what is certain is that “Google – October 18, 2012″ will become a case study for investor relations officers in the future. A case of what not to do.

And each of us working on Q3 earnings for other companies should remember, “There but for the grace of God go I.”

© 2012 Johnson Strategic Communications Inc.

Trading at the speed of light

August 10, 2012

The rapid meltdown of Knight Trading, whose nifty new software went berserk last week and racked up $440 million in losses in about 30 minutes, immediately reignited the debate on high-frequency trading and how to regulate it.

Many investor relations professionals already held automated trading in contempt. Algorithms, derivatives and lack of fundamental reasons for buying or selling leave IR out of the picture – and focusing on milliseconds seems like the ultimate short-termism. Really, hypertraders care about tiny price moves, not companies.

Since there isn’t much “warm and fuzzy” in high-frequency trading, critics are quick to blame quants and computers for all the perceived wrongs of the stock market. Personally, I’m skeptical of attempts to regulate this kind of trading out of existence. I prefer a free market approach, with losses for players who make mistakes as Knight did – and rewards for smart investors or traders.

The most interesting piece I’ve read since the Knight Trading fiasco was not in the financial papers, but in Wired Magazine: “Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading” is somewhat critical of high-frequency trading:

Faster and faster turn the wheels of finance, increasing the risk that they will spin out of control, that a perturbation somewhere in the system will scale up to a global crisis in a matter of seconds. “For the first time in financial history, machines can execute trades far faster than humans can intervene,” said Andrew Haldane, a regulatory official with the Bank of England, at another recent conference. “That gap is set to widen.”

This movement has been gaining momentum for more than a decade. Human beings who make investment decisions based on their assessment of the economy and on the prospects for individual companies are retreating. Computers—acting on computer-generated market trend data and even newsfeeds, communicating only with one another—have taken up the slack.

What I found most interesting are the insights science writer Jerry Adler offers into the mechanics behind making our computer-driven marketplace ever faster and faster. If you like tech, read the Wired piece: This is science fiction becoming reality in the capital markets where we labor as IR professionals.

Technologies continue to advance, trading times are still accelerating and we probably haven’t seen our last scary moments in the stock market. To most IR people, super-fast trading is just “noise.” To me, it’s a very different kind of investing – not for me, but not a phenomenon I want Congress to try to ban. Politicians could wreak unintended consequences by trying to codify whether 15 or 20 milliseconds is too fast, 5 or 10 simultaneous orders are too many and so on.

An IR professional, I think, should stick to the job: Understanding markets for the company’s securities, telling the story to investors who do have an interest in the business and its value, and building relationships across the capital markets.

What’s your take on computerized trading and what it means for IR?

© 2012 Johnson Strategic Communications Inc.

Congratulations, FB, and good luck

May 17, 2012

Facebook pulled it off.

- The New York Times “DealBook” site, May 17, 2012

A nice summary by NYT “DealBook” writers Evelyn Rusli and Peter Eavis. Facebook did pull off the IPO of the year, pricing at $38 a share for a total sale of $16 billion. The market initially valued the company at $104 billion.

Congratulations, FB!

There is a sense of relief, after the IPO with more media hype than any in recent memory, in seeing it priced and starting to trade. Following a few more days of craziness, no doubt, investors can settle down and begin looking at Facebook as they would view any other public company.

Here are a few bits of information for the curious investor relations pro:

Being public will impose a new sort of discipline on Facebook the company. Thinking about disclosure vs. trial balloons and leaks. Telling investors the basics like revenue and earnings. Meeting quarterly expectations or taking a beating. Perhaps a future day when hedge funds and analysts call for a new CEO.

I’m not going to second-guess the valuation, roughly 100 times trailing 12-month earnings. Or $115 for each of those ballyhooed 900 million users. Enough market gurus already are opining on FB, and people were willing to pay the $38.

Rather, I’m looking forward to watching the biggest social network as it grows and matures in the coming months and years. The “DealBook” writers comment:

The question is whether the company’s management will make it work.

Facebook, in many ways, is like a mining company sitting on valuable deposits that are hard to dig up and refine. At a market value of $104 billion, investors believe Facebook is sitting on gold. But the share price could tumble at any sign that Facebook’s management can’t unearth it.

© 2012 Johnson Strategic Communications Inc.


Follow

Get every new post delivered to your Inbox.

Join 158 other followers