Print this article | Return to Article | Return to CFO.com
How can a company tell a compelling story about its stock to the right
analysts and investors?
Vincent Ryan, CFO Magazine
September 1, 2012
Many finance chiefs would like to have the kind of investor-relations problem that Ciena CFO Jim Moylan has. In his fifth year at the communications-equipment supplier, Moylan says his latest challenge is keeping sell-side analysts realistic about the timing of an imminent communications-network upgrade cycle that is expected to boost Ciena's revenues. "The sell side is trying to anticipate when that uptick in sales growth will occur," says Moylan. "We don't want them to get ahead of themselves."
The other goals of Moylan's IR team are more familiar. They're trying to shift Ciena's shareholder base from traders to investors. And they want to help equity analysts get their financial models right so they can value the company correctly. Simple enough, right?
But the familiarity of those tasks makes them no less difficult. The rockiness of the equity markets and the prevalence of high-frequency trading and exchange-traded funds make cultivating an investor base tougher than ever. Given the "risk-on, risk-off" climate of the equity markets over the past two years, CFOs also have the basic problem of just getting investors to listen to and comprehend the investment case for an individual stock.
"Many companies were frustrated that their share price appeared to be out of their control as macroeconomic factors seemed to dominate decisions last year," said a 2012 IR survey report by Citigate Dewe Rogerson. But a good story about your stock can decouple share performance from the economic forces and risk aversion driving the financial markets. To help get that story across, make their stock stand out, and improve IR, here are five things CFOs should keep in mind.
1. Be specific about where growth will come from.
Equity analysts are tired of hearing about how cost cutting and greater efficiency will lead to profit growth. Against the backdrop of a national economic slowdown, growth stories have to be more compelling. At Ciena, Moylan and his IR team make sure analysts understand the buying behavior of the company's customers, since those customers' capital expenditures are Ciena's revenue.
To do this, they communicate the factors that affect customers' spending patterns: local macroeconomic trends, customer business models, regulatory and political environments, shifts in demand, and individual customers' network-upgrade cycles. "We try to pull it all together and give [analysts] a picture of our major customers," Moylan says.
Ciena's presentations focus not just on the absolute size of its customers' capital expenditures, but also on where those customers are allocating capex. AT&T is one of Ciena's largest customers, but "it spends [its money] on all kinds of things, from laying fiber in the ground to wireless networks to all sorts of devices for wireline networks," Moylan says. "We discuss how that capital allocation is going to affect us."
2. The sell side is still important . . .
In 2003, 10 Wall Street brokerage firms paid regulators $1.4 billion in fines for issuing dubious equity research. Although that tainted sell-side analysts' reputations, they are still a key audience for a stock's story. Sell-side analysts write research reports, but they also set up meetings between company management and buy-side clients that want face time ("corporate access") with management. Going through the sell side to get to investors is also cheaper, observes Chris Taylor, managing director of global investor relations at Ipreo, a provider of corporate IR services. "The sell side provides services during road shows at no charge," he points out. "Otherwise, those costs would come out of the company's pocket."
3. . . . but the sell side has to be managed.
Sell-side coverage is a case of the haves and have-nots. Small-cap companies are typically undercovered by analysts, while large-cap companies tend to be overcovered. Tech giant Apple, for example, has 144 equity analysts covering its stock, according to S&P Capital IQ. Typically, 25 to 30 analysts follow large companies. Moylan says 26 sell-side analysts cover Ciena, and he meets with 70% of them each year.
But a company's executive management seldom sees value in having more than 10 analysts cover the company's stock. "It's a burden to manage these folks," says Taylor, so companies have to focus on a core group of analysts who understand the story and have the most influence. An IR team can't ignore the others, but it doesn't have to give them the same amount of time if they're not writing regular updates on the stock — publishing reports only after quarterly earnings releases, for example. "You can't cater to everyone," says Taylor.
4. Give enough guidance.
Many companies provide guidance on company performance in future quarters, and most companies are satisfied with the amount of guidance they give. The most common metrics are revenue, capital expenditures, tax rates, and earnings, according to the National Investor Relations Institute (NIRI). But analysts often need more than the standard numbers to project out the company's financials more than a year. Ciena provides ranges for earnings and revenue in future quarters, Moylan says. But because the company is in a financial transition, it also occasionally gives the sell side targets on sales growth rate, gross margin, and operating margin. "We give it to them not so much with a timetable but as targets," Moylan says. These goals help analysts build their three-year financial models.
5. Find the right investor base.
Lately, Ciena has conducted two to four road shows every quarter to target a new investor base, one that reflects a company that has moved from being highly cyclical to having a broader, more diversified set of products, geographies, and customers. As the company finishes integrating a large acquisition and enters a period of sustained profitability (or so it hopes), Moylan is targeting shareholders who are focused more on holding a reasonably priced stock than on quarterly results. Those investors now constitute 33% of Ciena's shareholder base, up from 20% at the beginning of the year, he says.
Approximately 84% of IR personnel reported engaging in investor targeting for their company, a NIRI survey found this year, and 82% saw results in one year or less. Locating and targeting investors whose portfolios suit a company's valuation, capitalization, and geographical region is smart, says Taylor. But it is difficult to shift a shareholder base radically, he says. "The story of your stock, your valuation, your fundamentals is what drives investors to your shares," says Taylor. "Unless you change those fundamentals or your strategy, it is very difficult to alter the makeup of your shareholder base."
The holy grail for many IR officers is securing buy-and-hold investors, who often make shares less volatile. But such investors may come at a price, warns Taylor. "The companies that have long-term buy-and-hold investors tend to be undervalued, and those investors have the patience to wait for an event that will raise the valuation," he says. "So CFOs had better watch what they hope for, because if they attract many buy-and-hold investors, the company may be at a valuation that the CFO doesn't like."