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Transcript of Perspectives on the Sell-Side An Examination of the Evolving Priorities and Needs of Sell-Side...
Perspectives on the Sell-Side
An Examination of the Evolving Priorities and Needs of Sell-Side Analysts
© 2008 Rivel Research Group. All rights reserved.
The material contained in this presentation is part of a published report and the sole property of Rivel Research Group. No part of this presentation may be reproduced in any form or by any means, without permission in writing from Rivel.
Presented by:
Brian Rivel, President, Rivel Research Group
Gene Rubin, Vice President, Rivel Research Group
Webcast for NIRI Chicago Chapter
April 3rd, 2008
Rivel Research Group 2
Established in 1991
One core competency – marketing research
A unique specialty – investment community research
Thousands of interviews with investment professionals every year
Clients include one third of the S&P 500
Rivel Research Group
Rivel Research Group 3
Broad-based, nationally representative studies
Provide context for investor communications strategy
Monitor attitudes and behaviors of vital IR constituencies
Track key trends and developing issues among sell-side analysts, buy-side professionals, IROs and CEOs
Perspectives on the Buy-Side
Perspectives on Investor Communications
Perspectives from the CEO
Perspectives on the Sell-Side
Rivel’s Perspectives Research Series
Rivel Research Group 4
Profile today’s sell-side
Clarify chief motivations/priorities
Ascertain what prompts coverage decisions
Identify drivers of sell/buy recommendations
Prioritize most valued information resources
Measure the impact of investor relations
Implications for investor communications
Study Objectives
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Methodology
251 sell-side analysts
+/- 6% margin of error on total US data, the focus of this presentation
230 US interviews
Additional context provided by 21 Canadian interviews
Mid Sept. to Mid Nov. 2007
In-depth telephone interviews, split in US as follows:
77 Large Institutions (over 50 analysts), 61 Medium (20 to 50 analysts), 92 Small (5 to 19 analysts)
51 Bulge Bracket, 57 National, 42 Regional, 57 Specialty/Boutique, 32 Independent
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Key Takeaways
Providing management access a top goal
Significant hedge fund clientele
Decisions hinge on same criteria as buy-side
Investor communications have definitive impact
Intangible: management credibility, business strategy
Tangible: free cash flow, revenue growth, earnings growth
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How Brokerage Firms Judge Performance of Their Analysts(Aided)
7%
8%
16%
38%
47%
48%
56%
High Institutional Investor magazine ratings
Facilitating investment banking business
Managing investor conferences
Trading volume generated
Thorough/ comprehensive research reports
Accurate stock recommendations
Providing client access to corporate management
Rivel Research Group 8
Trading Volume Accounted for by Hedge Funds(Among analysts able to make an estimate)
Note: 50% unable to estimate
15%
21%
64%
Median = 50%
Fifty percent or more
One-third to 49%
1% to one-third
Rivel Research Group 9
Triggering the Recommendation
Management credibility – 83%
Effective business strategy – 82%
Attractive growth in EPS – 75%
At the bottom of the list …
What factors drive sell-side decisions? A mixture of tangible and intangible items...
Prospects of LBO/being acquired – 8%
Attractive dividend – 5%
Social responsibility – 3%
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87% need to meet with a firm’s top management before they will initiate coverage
One in three say twice or more
Face-to-face is most direct and tangible, thus impactful
How Are Intangibles Communicated?
As with the buy-side, management needs to show progress versus goals to be credible.
Senior executives must be on the road communicating:
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Which Tangible Metrics Lead the Way?
Free cash flow – 59%
Revenue growth – 52%
Operating margins – 47%
Earnings per share – 47%
ROIC – 45%
EBITDA – 43%
While free cash flow dominates when buy-siders are asked this question, sell-side analysts are more apt to give equal billing to revenue growth
Rivel Research Group 12
Focus on Communications
Three critical stages of involvement with a stock
Making the Radar Screen
Influencing Buy/Sell Recommendations
Sustaining the Relationship
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Making the Radar Screen
Buy-side professionals – 89%
Meetings with senior corporate executives – 88%
Business/trade press articles – 79%
Industry experts – 73%
Communications from IR executives – 68%
How do you make it to the radar screen?
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Be visible/management access – 30%
Show tangible growth potential – 24%
Outreach/be proactive – 20%
Have compelling story – 20%
Demonstrate management/strategy effectiveness – 16%
Get bigger, larger market cap – 10%
Making the Radar Screen
What if we are a small-cap company?
When the buy-side has been asked this question, it’s all about getting bigger and financial performance.
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Influencing Decisions to Recommend
Senior management meetings – 95%
Quarterly conference calls – 91%
SEC filings – 91%
Corporate websites – 81%
Communications from IR executives – 79%
We made it to the radar screen, how can we best reach the next stage? What resources are key?
All cited more often among sell-side than on the buy-side (who again give top priority to in-house research)
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Senior management meetings – 96%
SEC filings – 96%
Quarterly conference calls – 96%
Communications for IR executives – 83%
Corporate websites – 80%
Most helpful communications after coverage initiated?
Again, the sell-side relies on these resources to a greater extent than the buy-side (especially IROs and the website).
Sustaining the Relationship
Rivel Research Group 17
Insufficient disclosure/transparency – 44%
Poor guidance/management of expectations – 31%
Too promotional – 29%
Disingenuous/withholding information – 29%
Lack of communications/under-communicate – 10%
Insufficient management visibility - 8%
Sustaining the Relationship
Where do companies go wrong? What are the biggest mistakes made when communicating with the investment community?
Rivel Research Group 18
Does IR Affect Valuation?
Question: In your opinion, does good investor relations affect a company’s valuation?
Yes – 82%
No – 15%
Premium for “superb IR” – 10% (median)
Discount for “poor” IR – 18% (median)
Rivel Research Group 19
How IROs Can Enhance Their Value (A sell-side view)
9%
10%
14%
19%
19%
25%
30%
40%
Be in the strategic loop/ have seat at the table
Convey company message clearly
Be communicative/ proactive
Provide access to management
Be accessible/ available
Be more responsive
Increase company/ strategic knowledge
Work to increase disclosure/ transparency
* Multiple responses
Views often parallel those expressed by CEOs in 2006
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Believes effective investor communications impacts valuation.
More often relies on IROs and company-supplied info for insight.
Hangs hat on info and access disseminated/managed by IROs.
Covets similar drivers/messages as buy-side.
Is a bridge to hedge funds (whose views often mirror those of traditional buy-siders).
Often is a company’s only constant spectator over the long term.
Sell-side’s importance is evolving and moving toward playing more of a facilitator’s role.
Yet, our buy-side studies consistently confirm its ongoing relevance. And, the question most often asked of sell-siders is … “Should I buy/sell the stock?”
Sell-side still holds immense promise as an investor communications tool:
Rivel Research Group 21
Even if their end goal is facilitating access, it’s obviously crucial that the facilitator be well acquainted with the story and a supporter.
As with the buy-side, management needs to be on the road talking about strategy, setting goals, meeting them and reminding people they have been attained, which leads to credibility.