Addressing Sell-Side Research Challenges: What to do When Your Company is Faced with Unfavorable or Inaccurate Analyst Coverage
At the top of almost any IR to do list, and certainly one of the more important metrics used to evaluate a successful program, is sell-side analyst research coverage – particularly as it relates to quality banks, favorable rating, and accurate consensus estimates. There is no shortage of reference material on ways to encourage and attract coverage, approaches for analyst targeting, and commentary on what is the right “mix” of profiles and what is the right number for your company’s size/market cap. But what if the unexpected occurs and you actually want to eliminate some coverage?
Yes, this happens. There are a few reasons why your team may want to address this: a rogue analyst whose estimates meaningfully skew your consensus numbers; an analyst that misinterprets or mis-states the fundamentals of your business despite repeated attempts to make a correction; an analyst that has become disengaged; and of course, the disappointing negative rating. There is a lot that goes on behind the scenes within any sell-side bank before coverage is launched, so getting an analyst (or the bank they represent) to discontinue coverage outside of an acquisition or exit from a certain sector is actually quite rare.
Let’s put this into perspective. In the absence of a transaction and at the outset of coverage, an analyst needs to support his or her rationale for covering a specific issuer, including a bull/bear case that will lead to sales and trading dollars, changes in the macro environment that present a new opportunity, and the overall fit within the coverage universe. On top of that, analysts do significant due diligence prior to launching coverage, both quantitative and qualitative. Building a model and becoming entrenched in a company’s business model is a big commitment, and it takes a lot of time and resources. Once launched, it is considered a long-term commitment. This is why analyst coverage is most often at the top of the priority food chain.
However, this is also what makes it very hard to get coverage dropped, particularly by banks that are making a market in your stock. Pursuing dropped coverage should be a last resort, only considered when it’s been deemed truly necessary for the best interest of your shareholders – not because you don’t like the analyst’s opinion, rating, financial model, or personality. Furthermore, it should not be based on a lack of time or interest to engage with another covering analyst. In our opinion, that reason should be a non-starter.
We would first encourage your team to evaluate whether you are offering that analyst the same access that you give all the other covering analysts. At a minimum, after every quarterly earnings release/conference call, offer to schedule a 1×1 call to connect on key messages, strategy, themes, and expectations. Like most relationships in life, an open dialogue with the analyst can go a long way towards clarifying misunderstandings and realigning messaging. Similar to how you would handle any discussion that has taken a left turn, engage in a conversation about the underlying assumptions and information that led to the analysis or financial estimates. We aren’t suggesting that you provide any information that isn’t in the public domain, but challenging model assumptions that seem out of line from publicly stated guidance is certainly recommended.
If the problem is lack of engagement, make a concerted effort to get as much public material in front of the analyst. For example, send an email and say, “We just wanted to be sure you were aware of XXX. This is a meaningful new component of our business that, as we stated on our call, we expect will boost growth by XX%. I’d love to discuss this with you in more detail, as it wasn’t noted in your latest report or model.” Be sure to copy the analyst’s whole team.
If you’ve reached a point where additional measures are deemed prudent, here are a few approaches that might move the needle:
- Talk to the bankers at the firm about the relationship, future opportunity to work together, your company’s goals (e.g., financing, M&A, ATMs, etc.), and the importance of an improved relationship with the covering analyst.
- Reach out to the Director of Research. There may be an opportunity to have coverage reassigned or re-directed if the relationship is hurting both parties. In this conversation, point out things like your public messaging that isn’t reflected in current notes, responsiveness to your outreach, the financial model relative to consensus, or in some cases, the lack of routine updates following earnings or other significant news.
- Decline requests for Non-Deal Roadshows (NDRs) or participation in bank-sponsored conferences and events.
- Decline to take questions from the analyst on public calls.
- Eliminate the bank from participating in any potential offering or M&A transaction.
While these may or may not have any impact, maintaining long-term relationships should always be a top priority of investor relations. It is extremely important to try keeping these relationships positive and on track – even if you and your management team don’t agree with the message or model. Our goal as IR professionals is first and foremost to ensure that any material information that an investor needs to know to make an informed buy/sell/hold decision is consistently publicly available and readily accessible in one of the many formats that the SEC has deemed appropriate under Reg FD (e.g., press releases, websites, or conference call webcasts with open access).
It’s in the fine print.
At the end of any published research note, there is a section called “Analyst Certification.” In this section, the author certifies that (i) the views expressed in the research report accurately reflect his or her personal views about any and all of the subject securities or issuers, and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report.
So, it is important to keep in mind that there should always be room to discuss that view. That should be the ultimate goal. Contact Gilmartin today for guidance on any sell-side analyst challenges you may be facing.
Leigh Salvo, Managing Director