Posts Tagged ‘Bear market’

Tough times? IR can shine

March 10, 2009

cole-3-10-09-kcThe Kansas City chapter of NIRI heard today from Derek Cole, an experienced investor relations pro and NIRI national board member who is Vice President-IR & Corporate Communications for ARCA biopharma Inc. in Denver. A sampling of Cole’s advice on “Winning IR in a Tough Economy”:

  • “Get out there” – despite the tough economy and market. The recession causes some CEOs to withdraw because they don’t feel comfortable with a negative macro picture and the difficulty of predicting where it’s headed, Cole says. Companies need to explain what they don’t know, as well as what they do, he says. And investors won’t expect a CEO or IRO to have crystal-ball answers that no one has. They’re looking for sound management and strategy amid this environment.

A bunker mentality creates a dual “opportunity”  for the IRO: First, you can be an advocate with the CEO and CFO to get out and meet with investors – build credibility and distinguish your company. And, second, as an IR person you can get out more yourself – if the CEO or CFO will send you, it’s a great time to develop your relationships with investors and analysts without taking their time. Stepping up at a difficult moment enhances your stature.

  • Be a strong advocate for good disclosure, including taking your hits when things go wrong. Cole told of a heated internal debate, in a former job, when a key clinical trial failed for a biotech company: Do we announce the trial failed, or come up with positives to gloss it over?

Telling it straight, Cole said, is how companies develop long-term credibility with investors and other constituencies. “If you’re correct in what you’re doing, you really should be willing to push your management team very hard to do the correct thing,” he said.

  • Be sure you’re targeting IR efforts to the appropriate investors. In the life cycle of companies, and through economic cycles, your mix of investors will change. You may know and love the manager of a giant mutual fund, but if you’re a microcap you won’t be appropriate for that manager’s portfolio – so meetings and communication could be wasted.

Cole says a database of institutions yielded 2,500 investors who have owned names in his company’s industry in the past 12 months. He and the CFO know the top 75 or so very well. But those aren’t necessarily the ones they should target right now – smaller funds by make a better fit – he says. The IRO brings expertise to decisions on where to focus efforts for maximum benefit.

  • From a career standpoint, a tough market can be a time to shine. Most IROs are probably getting more face time with CEOs, CFOs and boards right now – in a crummy market – than during easier times, Cole notes. It’s a time to be the center of information for those constituencies.

Create an “Ask and Read Hour,” Cole suggests. Set aside time to increase your expertise in critical areas. He suggests reading more about your industry, your market, how-to ideas for IR, your boss’s concerns (read magazines that the CFO or CEO draw upon). Also, ask questions that help you learn: What do your analysts or investors want that they don’t currently get? Where do industry experts see down the road? What is the CEO’s strategy?

  • Investor relations is about explaining your company – and this doesn’t change in a tough economy or bear market. Cole says the macro environment may change your content, but not the mission of IR. You need to keep explaining your business, what your company does, how you see the economic situation and its impact on your business.
  • Really, says Cole, it’s not about “Winning IR in a Tough Economy.” It’s just about “Winning IR.” And he’s right.

Decremental? Don’t go there

March 2, 2009

As a word lover, I’m always intrigued by the latest buzzwords, names for new technological or social phenomena, and so on. So here comes The Wall Street Journal with “Decremental? Fitting Word for Ugly Times.” The story helped start Monday off as a very – well, decremental day for anyone interested in the market.

“Decremental,” it seems, has been popping up a lot in sell-side reports (and now the WSJ) as an adjective to describe the impact of earnings or sales going down:

Decremental is a real word; it’s a negative increment, or the linguistic inverse of incremental. …

The word ultimately translates into shrinking earnings power, which is a big factor in stock-market declines that have driven share prices to their lowest level in more than a decade.

In good times, when sales are going up, the WSJ reminds us that operating leverage causes profits to rise even more because “incremental” revenues are going up faster than costs. But in bad times, as sales decline and costs remain sticky, earnings can fall off a cliff. Some analysts are labeling this “decremental margin.”

[Deutsche Bank analyst Peter Reilly] calls it ‘an ugly word,’ and says it’s ‘just a fancy way’ of measuring the degree to which earnings decline with each dollar of sales lost. ‘If a company sells $100 less widgets and profit falls by $20, then the margin on decremental sales is 20%,’ he says.

OK, as a humble word guy laboring in the trenches, who am I to argue with high-priced talent on Wall Street or in the City of London? They presumably need fancy words to add flair to otherwise bleak reports.

But how about a company communicating its results to investors? Don’t go there, I would suggest. Ordinary words are far better than the likes of “decremental.” If I’m a shareholder, the company should tell me sales are “lower,” margins “declined” or earnings are “down.” They should explain that sales dropped but fixed costs couldn’t be cut that fast. I may not be happy, but at least I’ll understand.

And creating understanding, after all, is the goal of investor relations.

This isn’t good …

February 23, 2009

angry_grizzly_istockSo the bear market reasserts itself. In an ugly two weeks, the S&P 500 finally breaks below its 750-ish autumn low, back to 1997 levels. Bad news echoes and re-echoes. We’re on Financial Bailout 3.0 or 4.3 or … well, big banks almost want to be owned by Uncle Sam. Automakers swoon. Fear rules. President Obama puts Joe Biden in charge of reviving the economy.

What’s an investor relations person to do?

1. Hold fast. Hang onto your job, of course, to the extent that it’s under your control. More to the point, hold fast to your company’s story. How is your business planning to survive hard times – and make shareholders a bundle of money when the economy does get better? This is the “hope factor.” Keep telling it.

2. Remember that it’s not about today. The investors you want on board are focusing on 2010 or 2011, and this should be your focus with the market. A NYSE floor broker tells the Wall Street Journal today, “This isn’t an investing market anymore, it’s a trading market.” While investor relations feeds timely information to everyone, we’re really about providing the longer term story to longer term investors.

3. Be calm and factual. You shouldn’t hype the story (no one would believe that now anyway). But neither should you convey despair. What is your best, most realistic assessment of the current business environment? What macro factors actually drive your business, up or down? What are you doing to maintain or improve your market position, and to be profitable? What are you doing to reduce your cost structure? To improve your balance sheet? What are the risks? We should be students of these questions.

We’d like to think the market has to be headed up from this point, but it may not be. Meanwhile, we need to keep talking to people.

I shared some other ideas on “bear market IR” in earlier posts here and here and here. Please feel free to add your ideas, experiences or reactions by commenting on this post (anonymous is fine). And good luck!

© Copyright 2009 Johnson Strategic Communications Inc.

Communicate your relative strengths

January 29, 2009

A couple of Boston Consulting Group gurus urge companies to “Seize the Advantage in a Downturn” in the February 2009 issue of Harvard Business Review – and investor relations is part of their story.

After listing actions management can take to maximize cash and working capital, reduce costs, and drive revenue, authors David Rhodes and Daniel Stelter cite valuation as a competitive tool:

Your company’s share price, like that of most firms, will take a beating during a downturn. [Been there, done that – my comment.] While you may not be able to prevent it from dropping in absolute terms, you want it to remain strong compared with others in your industry.

Enhancing relative valuation, a familiar benchmark for IR people, calls for communicating your strengths vs. the peer group. Of course, messages to investors must follow concrete actions by management:

In a downturn, our data shows that markets typically reward a strong balance sheet with low debt levels and secured access to capital. Instead of being punished by activist investors and becoming a takeover target for hedge funds, a company sitting on a pile of cash is viewed positively by investors as a stable investment with lower perceived risk.

Stability that may seem sleepy and boring in good times is suddenly popular – but you need to talk about it, the BCG guys say:

For that to happen, you need to create a compelling investor communications strategy that highlights such drivers of relative valuation. This will also be important as you try to capitalize on the competitive opportunities that a recession offers, such as seeking attractive mergers and acquisitions.

The consultants also say raising dividends has proven more effective than share buybacks in driving valuation. But they note the potential conflict between richer dividends and maintaining a healthy cash hoard.

(Call or email me if Johnson Strategic can help you put together a compelling IR strategy or craft messages for these turbulent times.)

Economic winter and IR

January 9, 2009

Amid the general chill and dreariness, January is also prime time for economic forecasts – an especially dismal science this year. Based on three crystal ball sessions this week, I’m thinking about the recession and our job as investor relations professionals.

Some bits from the economists’ briefings:

The president of the Federal Reserve Bank of Kansas City, Tom Hoenig, said Wednesday that 2009 will first bring more pain – and likely a beginning of recovery in the second half. (See text.)

But don’t expect short cuts or painless solutions, Hoenig added. We spent more than a decade getting entangled in excess leverage.

“The hard fact is that the sharp deterioration of banking and credit conditions, the deepening slump in consumer and business confidence, and the ongoing housing correction must work its way through the economy,” Hoenig said. “While we must do what we can to mitigate the effects of this deleveraging process, to attempt to avoid its effects entirely is to repeat past mistakes and may sow the seeds for the next crisis.”

The Virtual Chapter of NIRI (National Investor Relations Institute) on Thursday offered a panel of three economists (hear replay). Outlooks ranged from recovery in the second half of ’09 to a US version of the decade-long collapse in Japan following the 1980s asset bubble.

When an IR person asked what companies can do to stabilize stock values, Scott Brown of Raymond James Equity Research said management should show it’s taking the downturn seriously, cutting costs, and positioning for eventual recovery. But he added, “At some level I think you just have to realize that you’re at the mercy of the broader economy.”

More bullish was Brian Wesbury of First Trust Advisors, a frequent prognosticator on CNBC. He told the Association for Corporate Growth and Financial Executives International in Kansas City today that the Fed has made monetary policy so loose – and Congress is spending so much – that all this stimulus can’t help but produce recovery, at least near-term.

“We’re going to have a rip-roaring economy in the next 18 months. We’re going to ride a wave of money – to growth and much higher stock prices,” Wesbury said. The slide in key indicators has been decelerating, with an upturn now in the works, he said.

The danger lurks further out in Wesbury’s forecast: A surge of inflation on the heels of that 18-month boom. He believes the Fed has cut rates way too low, just as it did earlier this decade – which Wesbury cites as the No. 1 reason for the housing bubble that got us into this mess. Inflation will whipsaw us back into monetary tightening – and then what? Whether that next phase of the cycle is mild or ugly depends on how Obama-era policies play out, he said.

As an Econ major in college, one of my key learnings was that economists are ambidextrous – “On the one hand this, and on the other hand that.” To put it mildly, current macro forecasts reflect a high level of uncertainty.

My philosophy on IR strategy is to disclose management’s view of where we are in the economic cycle now. And talk plainly about actions the company is taking to survive the recession and preserve value through the trough – whether the down cycle goes deeper, lasts longer, or turns fairly quickly into recovery.

We can hope for sunnier times to shine in the second half – but we should also discuss how we would endure a longer economic “winter.”

“The patient is in a coma.”

December 17, 2008

bernankedec08I suppose it could be good news, in some circumstances, if the doctor comes out of an operating room and says your loved one is in a coma. The patient hasn’t died. But most of us wouldn’t cheer.

So the Federal Reserve cuts its target Fed Funds rate to near-zero (good story in The Economist). The Fed is saying the patient is comatose. The doctor administers a maximum dose of the primary tool for restoring vitality to the economy. The nurses are trying to keep the patient breathing. Specialists are all saying “Hmmmm.”

And the stock market … goes all ecstatic. Up 5% yesterday, gives back 1% today. One of these days, positive vibes on an auto industry bailout may trigger another round of exuberance.

As an old Econ major, I know life moves in cycles. And I’m all for Dr. Fed and Nurse Treasury and even the Capitol Hill quacks doing what they can to revive business when the cycle takes a dire turn. We need the medicine.

What doesn’t make sense, entirely, is the wild enthusiasm the stock market unleashes at each new stage of the bailout. Maybe it’s escapism: A one-day binge of silliness takes us back, ever so briefly, to the good old days of 2007 or 1999 – or whenever we remember as a stock-market nirvana.

Those of us who communicate the financial prospects of companies (public or private) need to try to keep an even keel. We shouldn’t give in to doomsayers on bad-news days. Nor should we break out the champagne when the Fed adopts an interest rate of zero.

Clearly, the doctor is not smiling. This patient has a long recovery ahead, and we must be realistic. Discussions with investors should reflect real data on our businesses – not the market’s mood.

© Copyright 2008 Johnson Strategic Communications Inc.

Beware the perfect storm

December 10, 2008

perfect-stormIn any time of disruptive change, some CEOs and politicians latch onto a metaphor to try to communicate what’s going on – or an oversimplified version of it – to us common folk. Trouble is, this often doesn’t work. And coining a cliche (speechwriters beware) can make the speaker look like a follower, rather than a leader.

So we come to the perfect storm. Washington Post business columnist Steven Pearlstein skewers that literary (or movie) allusion in his column today:

A bit of unsolicited advice to business executives trying to explain why their company or their industry is suddenly in the soup:

Please spare us the “perfect storm” metaphor.

It’s hackneyed, for starters. It doesn’t square with the facts. And for people who fancy themselves leaders, it’s downright unbecoming.

Newspaper and real estate magnate Sam Zell and Wall Street presence Robert Rubin have laid claim to the perfect storm metaphor recently, Pearlstein notes.

The worst aspect of this turn of phrase is that, far from letting executives off the hook, “perfect storm” refers to a dangerous weather pattern for which ship captains like the one in the movie (if you missed it, see trailer here) are likely to receive more than ample warnings.

The captains of industry and Wall Street heard dire warnings before 2008, Pearlstein contends, so this storm exonerates no one.

In crafting investor relations messages, we usually do better with straight language than metaphor. Results generally speak louder than words, and the goal of a company’s explanation ought to be clarity – rather than spin.

Biotechs & the Big Three: We all need a plan

December 2, 2008

dna-bluepurple1In any business, a collapse in stock price tends to stimulate soul-searching. Biotech companies have suffered, along with almost everyone else, a painful loss of value in the current bear market. Investments in R&D are risky, in a time when risk hasn’t been paying well. And the financial crisis has pretty much dried up equity offerings for biotechs or anyone else.

So the In ViVo blog, an offshoot of the business-of-medicine magazine of the same name, has been fretting lately about the state of biopharma companies. Today, the In Vivo blog noted that biotech industry leaders – like the Big Three auto companies’ CEOs – recently went hat in hand to Congress to beg for financial aid. The carmakers got a tougher reception, however, as Congress demanded the execs go back to Detroit and work out plans to revive their businesses.

Says In Vivo:

What’s odd to us is that BIO didn’t get the same assignment from Congress. We’ve never gone so far as Socrates in suggesting that the unexamined life isn’t worth living. But we do go so far as saying that the unexamined business plan sure isn’t worth funding. We’re all for biotech investors getting some additional incentives for funding the industry, but we’d also – for the good of investors, patients and taxpayers – like to see some ideas for how biotechs ever plan to make back the money they’re asking for.

The issue isn’t innovating scientifically. Or even clinically. The challenge is getting products approved and paid for.

And at the moment, biotechs aren’t doing that well enough to justify their funding.

Lurking in that exhortation for biotechs is advice that makes sense for all: Let’s go back to the business plan. Be sure we understand the path our companies are charting to achieve future sales and profitability. Let’s not focus so much on the minutiae of this quarter’s issues that we overlook the fundamental strategies to create value.

Especially in tough times, surviving and thriving – for companies and shareholders alike – is all about basics. So is investor relations.

The R word … it’s official now

December 1, 2008

As you’ve probably read, the recession is finally official. The National Bureau of Economic Research (NBER), a private group of scholars, called the recession today. The business cycle gurus confirm that economic activity peaked in December 2007 and has been going in the tank ever since.

As an old Econ major I try to be scrupulous with use of the word recession in writing investor reports or presentations for clients.

My problem with the R word is that it actually has a meaning, which ties back to data. A recession isn’t just a case of indigestion in our business, but a specific change in the macro numbers. We used to say a recession was two consecutive quarters of decline in Gross Domestic Product, although NBER now uses a more complex set of metrics.

My peeve is that too many media folks are eager to drop the R word into their stories about a crisis in whatever they’re writing about. Politicians who stand to gain by painting a bleak picture also love the R word. And some business executives like to declare they are simply victims of a recession, whether or not the R word applies by objective measures.

But now it does apply. The official arbiters have declared, somewhat after the fact, that these folks are all correct in deploying the R word to describe what ails us. And we can use it in investor reports – although, let’s try not to blame all the consequences of past decisions on the R word.

The good news, you might say, is that we’ve already been in this recession for a year, according to NBER. So how ever long it lasts, the first year has passed and we’re that much closer to recovery. Wahoo.

Quote, unquote – Buyer’s market

November 15, 2008

“Welcome to a buyer’s market without buyers.”

– Jason Zweig, “Joe Investor, the Markets Are All Yours Now,”
The Wall Street Journal, Nov. 15, 2008, p. B1

So there’s the sorry situation. For investor relations people, the agenda of the day is to continue building long-term relationships, as well as to seek out contrarians, nearer-term, in the midst of a dreary market. The good news is that Jason offers some tips on what to consider investing in personally. Then, again, the bad news is that common stocks are not really at the top of his recommended shopping list.