“You date your investment bankers, but you marry your research analysts.” – well known IR saying. Sell-side analysts are there for the long haul, so developing a good relationship with them is vital for the accuracy of your company’s coverage. In this weeks’ blog we’ll share tips for effective communication with sell-side analysts.
Understanding Sell-Side Analysts
The first step to effectively communicating with sell-side analysts is to make sure you understand their job and incentives.
Sell-side analysts follow a set of companies, typically within the same industry, to provide valuable market research on behalf of their firm. Their narrow focus makes them experts on the companies and topics they follow (in theory). Analysts spend much of their time working on laborious financial models to predict results, along with interviewing executives, suppliers, customers, and competitors for more color. The final public-facing products they publish are research reports and investment recommendations, although much of their time is spent communicating their views with investors by phone, email, or face to face meetings.
The firms that employ sell-side analysts are hoping that institutional accounts (buy-side analysts) will use the information to make trades using their firm, and post MiFID II these firms also hope to directly sell this information to investors. So they are incentivized to consistently provide high quality information and get it out before the competition. At the same time, investment banks hope that companies will hire their firms to underwrite lucrative equity offerings at least in part because a top analyst will help sell the deal, shape the narrative.
However, this can put sell-side analysts in a potentially delicate position, as giving companies that they follow a public negative rating could create backlash (i.e. not giving information to the analyst’s firm in the future) and reduce the chances of their firm being hired as a lucrative underwriter. That is one of the reasons that buy-side analysts like to have a close relationship with the sell-side analysts, to better understand what is going on into their recommendations, and their not so public views.
Tips on Effective Communication
- Give easy access to the information that analysts need to create their models. Include spreadsheets on your IR website with key factors volume, pricing, COGS, etc.
- Be as concise as possible in your reporting. Analysts have to read dozens of reports every quarter, so make it clear and don’t be too long winded. Use tables, charts, and infographics to highlight key data points.
- Be consistent with the material you report. This will help analysts easily integrate the latest quarters’ results into their model. You don’t want to make them redo their model every quarter.
- Schedule your earnings call for a different time than your peers, to make it more likely for analysts to attend (they also will attend your peers’ calls).
- Don’t punish or reward analysts for their recommendations. For example, not giving them information in the future for a negative rating or cutting them from conference calls as this will likely deepen their negative views, and hurt your reputation with investors close to this analyst.
- Don’t wait to report at the last second at the end of the period, this will leave very little time between the report coming out and the call. This leaves less time for analysts to read the report and less time for you to prepare for the call.
- Seek out and spend more time with the best and highest ranked analysts, as they usually have the most influence and wider audience.
- Be consistent in your communication regardless of how good the results were. For example, don’t only talk to analysts when you have a positive quarter and ignore them in a negative quarter.
- Make the CFO and even the CEO available to talk with analysts as much as possible.
- Return analysts’ phone calls the same day.
- Be proactive and reach out to analysts after your earnings release, but only if you have something informative to tell them.
- Analysts are people, don’t make them sit through a pre-recorded or scripted earnings call that sounds like a robot is reading the results.
- Read their research, not just on your company but on their full coverage, to understand what makes them tick.
- When they make mistakes, point them out and politely ask for corrections. This is a professional relationship. Seek out their boss if they are being unprofessional.
- Junior analysts are often key, and often do most of the modelling work, and often much of the writing. Treat them in the same way as you treat a senior analyst, which one day they may become.
Take advantage of their insights
Speaking with analysts is also a good opportunity to get insight into what your investors think about the company, FAQs, potential opportunities, or areas of improvement. In addition, this can give you a better sense of what information your IR website is missing. Also, make sure to carefully read all of the analysts reports, recommendations, and study their models for insights.
How to get an analyst to cover you?
For many small and even mid caps, the main issue they face is getting sell side coverage at all, especially after MiFID II reforms in Europe (with a trickle effect globally) required unbundling of research and trading fees, which made research less profitable (except for the top research houses which found different avenues to monetize their products, but for it they focus on the most popular stocks for the largest institutional investors).
The first step is to draw up a list of possible analysts based on coverage of peers and information on research teams at brokerages. The second step is to try and secure a meeting with senior or junior analysts and highlight the qualities of your company. Most analysts want to cover a fast growing, exciting company, and have a bias to putting a BUY recommendation. The third step is to make coverage as quick and easy as possible, by being responsive, making top management available, and having data in excel files. The fourth step is to use fees your company pays the investment bank to pressure for coverage.
How Miranda IR Can Help
Miranda IR specializes in helping our clients effectively communicate with analysts and investors. We are happy to help with quarterly and annual reports, press releases, conference calls, and all other IR communications.
Contacts at Miranda Partners