Why quality control is key
Set against the backdrop of our IR experts advising ‘quality over quantity’ when it comes to sell-side engagement, it is quality itself that seemingly falls short in today’s coverage landscape.
‘Our biggest frustration is that with some of the sell side, the time to put in the detailed research these days is lacking,’ comments Victrex’s Andrew Hanson. ‘Everyone is busy, but the variability of quality output has increased, unfortunately. We also recently had a major broker visit us with a clear bear case and we offered to review the key facts. This wasn’t taken up and the resulting initiation had many errors picked up on by us and the buy side. There is no consistency of approach.’
Adding his views, Neil Frohnapple of Timken concurs with the need for IROs to be more proactive to minimize the risk of oversights. ‘It seems sell-side analysts are being asked to cover more companies with fewer resources,’ he says. ‘Given their more limited bandwidth, I have been surprised at how many times they may have overlooked something, such as a new disclosure in an investor presentation or SEC filing. Therefore, it is more important than ever to be proactive with analysts and over-communicate as needed.’
For Foresight Group’s Liz Scorer, there has been a noticeable decrease in the volume and detail of coverage. ‘Coverage is definitely less, and lighter,’ she says. ‘I often click on the sell-side notes expecting to see more detail but it regularly isn’t there. I’m also having to be much more proactive in building the relationship these days where, previously, analysts definitely seemed to put in more work with plenty of calls from their side to keep momentum going. In short, the relationship dynamic now seems to be more push from me, more pull from them.’
At Timken, we have conducted sell-side targeting trips where we organize a day of meetings in New York with industry analysts who do not currently cover the stock. It gives the firm an opportunity to meet with senior management and begin to build a relationship.
Be willing to attend a conference or allow analysts to organize a non-deal roadshow even before they launch coverage. It shows you are committed to partnering with them.
The buy side can be an important advocate on your behalf to a potential sell-side analyst. We have received inbounds from non-covering analysts who said: ‘XYZ Capital suggested I should pick up coverage of Timken’ and then ask to set up an intro call. Therefore, get creative and leverage a strong relationship with a buy-side person and/or shareholder to get attention and an introduction to the sell-side analyst.
Prepare well and prepare early for sell-side meetings. Don’t let management go in underprepared.
Don’t repeat the same process: IR is a busy role and it’s easy to take the same approach time after time. Once a year or so, look at your processes and evaluate whether they’re still fit for purpose.
It’s important to really focus on digital engagement and using new communication tools to help you increase reach and stand out in the competition for capital.
The sell side is important but remains only one part of the influence on the capital markets. Buy-side interaction has only increased in recent years.
Think innovatively about how you can get greater attention for your investment case outside of earnings roadshows: if you’re a manufacturer or have a tangible product, look at investor days, seminars or briefings – they all help.
Have a clear investment case in a few bullet points, consider some goals (but only if they are achievable) and report back on progress. Build in what your approach to ESG is, too – it’s essential now. The days of capital markets being focused solely on earnings are gone, so make the most of your credentials outside of just the numbers.
‘We look at some of the industry surveys on investor relations and how we rate there, but it’s primarily to ensure we devote sufficient time to each broker during the year, through a range of access points. A collaborative site visit using the sell side has worked well for us. It helps the sell side in targeting its coverage and it is a good mixed approach to gain access to the buy side.’
‘The quality of your consensus estimate is a good indicator. If the consensus is a fair reflection of historical business performance and accurate with regards to future predictions, then we view this as a success. A new analyst came on last year. We spent lots of time with her and, when she published, we really benefited from this time investment. The coverage was great – she really got under the skin of the business and has created volume and liquidity in the market. It has been a really positive experience and management is very pleased.’
‘Keep in mind that it is a significant time investment for a sell-side analyst to initiate coverage, so it is important to be patient and stay engaged with as many potential analysts as possible. While it depends on your market cap, adding a net-one analyst per year is a realistic aim. Some of the best examples of effectiveness have involved leveraging the sell side for investor targeting in middle-market territories when they have made introductions to buy-side accounts where I have had trouble initiating dialogue.’
