Investor relations and the sell side
For an IRO, constructive relationships with investment banking and independent research analysts are critical. One key element of that is the sell-side analysts’ expectations about the company’s future performance as quantified in detail in their spreadsheet models. When aggregated, these models represent a quantified market view of the IRO’s company.
Unlike ‘traditional’ consensus metrics, which focus primarily on outcomes such as revenue, net income or EPS, examining the actual analyst models and the detailed forecasts contained in them provides insight into how analysts believe those outcomes will be achieved – the underlying drivers of the business.
The value of analyst models and consensus dataModel forecasts drive market sentiment and the forward-looking view of the company presented to investors. Indeed, given the scope of investible opportunities, institutional investors generally outsource a significant portion of their research and analytical needs to the sell side. Data that consolidates the views of the sell-side analyst community can therefore help IROs better understand the information environment of their investor base and how investors see the company’s positioning, as well as help IROs better anticipate potential investor reactions.
IROs can track how expectations are evolving and how they compare with the company’s own projections and guidance, allowing them to adjust communications strategies and facilitate conversations with sell-side analysts, as well as identify areas of investor concern for internal discussion and benchmark against industry peers.
The value of assessing the range of analysts’ viewsWhile IROs will know the key investment questions analysts and investors have about their company, quantifying those investment controversies can be difficult. The range of analyst views on key line items – unit volume growth of a new product, net impact of cost reduction, maintenance of margins for major product lines, and so on – can put precise numbers on the upper and lower bands of market expectations and levels of uncertainty about the company’s key performance metrics.
If the range of forecasts is wide, it may indicate a need for additional disclosures, insufficient guidance or simply widely divergent analyst opinions. IROs can use this information to proactively address concerns with specific analysts and investors.
Timeliness is crucialReading every research report or obtaining and digging into every analyst model to tease out changing assumptions can be a major challenge. Delays in tracking meaningful changes in key forecasts can seriously hamper an IRO’s ability to respond effectively. This is exacerbated by the growing size and complexity of analyst models and rising volume of revisions.
According to a recent Visible Alpha study, the average number of consensus line items per company was 161, with a high above 1,500. In the same study, the average number of revisions per company during a quarter was 14, with a high above 100.
Not just for earningsAccording to another Visible Alpha study, while a significant volume of analyst revisions (32 percent) occur within a day of an earnings announcement, the flow of information from analysts continues during the rest of the quarter. Almost 50 percent of analyst revisions are made between two weeks after earnings and two weeks before the next reporting.
The study found substantial value for IROs receiving and consuming sell-side models and forecasts in as close to real time as possible. Stale snapshots of analyst sentiment or high-level forecasts that do not illuminate the market’s changing view of their company’s key drivers cannot serve IROs in the face of the continuous flow of new information.
Having timely access to comprehensive sell-side analyst models, forecasts and market consensus can provide IROs with valuable insights that can inform both internal business strategy and external communications with analysts and investors.
