According to a recent survey by the Investment Company Institute and the Securities Industry Association, one out of every two households in the US now owns stock. That translates into around 78.7 mn people, an increase of 85.6 percent since 1983.
Many of these newly indoctrinated investors are fanatical. They surf the internet on their coffee or lunch breaks, combing through message boards and chat rooms in search of anonymous investment tips. They are a fickle bunch, ready to sell on rumors of rumors of profit warnings. By the time a company actually announces negative earnings – and ‘negative’ can simply mean below the ‘whisper number’ – these investors are already shifting their money into an internet company that lost $30 mn and has no business plan, just a really cool concept.
There is, however, a semblance of sanity out there. Institutional investors have not become quite so rash, and analysts have enough at stake to be a bit more patient. The good news is companies still have a golden opportunity to present their cases directly to these investment professionals. They still have the conference call. The bad news is, most blow it.
As hedge fund manager James Cramer recently noted in his now famous column for TheStreet.com, companies that bungle calls or decline to hold them are really missing out on ‘the single most important non-operating chance a company has to boost its multiple.’ Unfortunately, as he also points out, most investor relations conference calls are a ‘haphazard, hit-or-miss exercise.’
No lone ranger
The trouble is that Cramer is no lone voice in the wilderness; no wildcard hedge fund manager sticking his neck out. Not only do many companies receive failing grades for their calls, some do not even bother to stage them anymore. Pfizer, for example, has opted to forgo the traditional earnings call altogether. Instead, it puts out a lengthy press release, as well as its own Q&A.
Jim Gardner, vice president of investor relations at Pfizer, says the company is well justified in its decision to abandon the traditional conference call route. ‘Given the detail and the real comprehensiveness of our release, we’ve found that we don’t need to put on a call. In addition, Pfizer does not announce the date and time of its earnings release, so it’s impossible to arrange a call even if we wanted to. Finally, we believe that when you hold a conference call, it’s very difficult not to get into a situation where you’re making some sort of selective disclosure.’
But Pfizer also enjoys a history of strong performance, and can dictate its terms better than others. Most analysts, however, balk at the idea of earnings announcements minus conferencing. According to Barbara Ryan, managing director and pharmaceutical analyst at Deutsche Banc Alex Brown, calls are not only efficient, but actually equitable in the way they aid companies to distribute information. ‘I think companies that don’t hold calls do themselves a great disservice. It used to be that if you had a great relationship with a company you didn’t want a conference call, because they’d call you first. Now we get it at the same time, which is a lot fairer.’
Other situations, in addition to earnings, should also be usefully addressed by IR conference calls, argues Ryan, particularly in her sector, the pharmaceutical industry. ‘Some companies will have the product managers do a conference call when they have a new product introduction. Those are really helpful, and more companies should do them. Merck does this very well.’
Take two
Others use conference calls effectively for damage control. Tyco International did this in its October 14 call to counter rumors of accounting irregularities.
In Federal-Mogul’s case, chairman Richard Snell had the unenviable position of presiding over an initial call on September 13 to address a profits warning and management shake-up. The call was not well received by the Street, to put it mildly. Federal-Mogul endured a devastating 23 percent drop in share price.
At ground zero that day was Steven Feeny, Federal-Mogul’s brand new vice president of investor relations. As part of his initiation into the IRO role, Feeny was deluged with calls from a harried group of analysts and investors demanding more information.
‘It was a perfect time to start,’ says Feeny. He and his predecessor Bonnie Price asked for a follow-up call on September 27. ‘We answered a lot more questions on the second call as part of the Q&A – we had so many questions coming in for further clarification.’
The decision to hold the second call to deal with the overflow proved wise, as a number of analysts were publicly calling for further disclosure from the company. ‘It was great that they put out the second call as a follow-up, because there were a lot of unanswered questions. The CEO had promised to get back to us with a post-mortem, and he did,’ says Crédit Lyonnais industrials analyst Joseph Amaturo.
Despite the calls, however, Federal-Mogul’s stock has continued to shrivel, hitting a 52-week low in October. But Feeny says it was important to keep communications flowing, something the company has been praised for by analysts. ‘I definitely think the call benefited them,’ agrees Amaturo. ‘Disseminating info to the investment community today is critical, as is providing accurate information, especially when there’s an earnings surprise or other material issues with the company.’
Avoiding the questions
But simply holding a conference call is not always enough. McKesson HBOC learned this on April 28 this year, when the company shocked investors with news that more than $44 mn in revenues it had recorded had actually never been realized. Nobody likes a financial blunder, especially when it is accompanied by an earnings restatement for the most recent quarter and the previous fiscal year. McKesson HBOC’s stock price suffered dearly, losing half its value almost immediately. But in its conference call to analysts, the company refused to answer any questions, leaving many clamoring for information.
‘The lawyers and auditors agreed to a very limited amount of information because of an ongoing review,’ explains Janet Bley, vice president of investor relations at McKesson HBOC. ‘They restricted the conference call to simply restating the facts and did not allow management to answer questions following that.’
But legal potholes aside, investors consider the Q&A segment a critical component of conference calls. ‘I don’t like it when companies leave out the Q&A,’ says Ryan. ‘McKesson delivered their bomb and didn’t say anything to us. My opinion is, if you’re not going to have Q&A, then put the call out in a press release.’
Surprisingly, there are investors who support the concept of forgoing the Q&A segment of the call. John Davenport, chief investment officer at Mentor Investment Advisors in Richmond, Virginia, explains that some portfolio managers would rather keep a revealing question between themselves and the company. In doing so, they avoid tipping their hand to their competitors on the conference call. But, Davenport says, ultimately, this is the wrong approach.
‘The Q&A is more efficient than fielding calls one-on-one after a conference,’ says Davenport. ‘There are also certain questions that every investor would ask. Does the company want to answer those questions over and over again in phone calls, and risk unintended variations to their responses? I don’t think so.’
Key access
While the question and answer session is closely watched and can definitely make or break a call, success depends as much on the messenger as it does on the content of the message. ‘It’s important to have the chief executive, chief finance officer, and maybe even the chief operating officer on the call to field questions,’ says Sam Kim, investment manager at BlackRock Financial Management. ‘It doesn’t do much to have someone just reading the call from a script.’
Some companies do get away with letting their top dogs dodge the calls, but it can be a hit or miss policy. ‘It depends on how a company handles the call,’ says Harry Ikenson, senior retail analyst at Hambrecht & Quist. ‘For example, chief executive Les Waxman never gets on the calls for The Limited. What they do is have the CFO on. At Zale, the CEO always gets on the conference call. Each company does it somewhat differently. The question is, do they do it well? I’d say the larger-cap companies do it much better than the less-seasoned, smaller-cap companies.’ That’s perhaps not surprising, given their lower level of resources.
As for pharmaceutical companies, Ryan admits most forgo having the CEO on the call, but she adds that the majority of these companies are extremely mature and have very strong people in the investor relations or treasury function. ‘If someone gets on the call and doesn’t know what they’re talking about, then that’s a problem.’
Ryan says companies can also benefit from including other members of senior corporate management on calls, such as relevant product people. ‘These are layers of management we may not know, and they’ll get on to talk about a specific subject and then take questions, which is an excellent way to handle the call.’
One trend that may put pressure on companies to improve the quality of their calls is increased scrutiny by investors and the demand for conference calls to be made available to everyone interested. In response, companies like America Online and Microsoft Corporation, (cited for its conferencing quality by the Investor Relations Magazine US Awards), have been using the internet to open their calls to the public and the media.
‘Eight to ten thousand people listened to our last conference call live,’ says Carla Lewis, senior director, investor relations at Microsoft. ‘We’ve been doing this for years. People are interested in the Microsoft story, and there’s a lot of shareholders, both institutional and retail, who follow the stock closely. We do the best we can to make sure we have broad disclosure of things that are of interest to people. This is one of them.’
Message to the masses
Opening the calls up removes concerns over selective disclosure, too. And both America Online and Microsoft leverage off their use of the internet to provide investors with substantial information ahead of time by posting it on their web site.
‘They can spend a brief amount of time outlining the key issues from the results and leave more time for thorough questions,’ says Davenport. ‘The best example of a company that does this well is American Express. They fax out [and post on their web site] extremely detailed quarterly results and information, probably 40 pages or so. And it’s consistent from quarter to quarter, so you can develop a feel for the format. They send it out early on the day they release earnings; then they have a conference call, usually after the markets close so you have enough time to look at it.’
Companies are using the internet to reach the broad investing public in other ways, aside from conferencing and posting of financials. Some CEOs have gone so far as to respond to questions and address rumors in online chat rooms, though this approach has yet to be proven effective or even wise.
The question that remains, however, is will more companies choose to raise the bar for conferencing as this democratization of investing continues? James Cramer, a proponent of opening up calls to the public, predicts that over the next two years, all conference calls will be available over the web. If he is right, companies will be hard-pressed to continue giving short shrift to the calls in such a transparent environment.
