Q. I work for a small-cap US company. Is it advisable to review all our analysts’ models, even though we don’t have that many covering us?
A. What’s the problem? It’s hardly going to take you very long. There’s nothing worse than having misinformation out in the market. Remember, while analysts in the US usually have good qualifications and most are CFAs (holders of the Chartered Financial Analyst qualification), in other parts of the world this is not necessarily the case. So you can’t assume that every analyst who follows your company is competent at devising and building financial models. It’s much better to assume that analysts, especially on the sell side, are badly trained unless you categorically know otherwise.
Sometimes just one wrong number could mean an analyst changing the rating on your stock. And that could move your stock price dramatically – a mole hill could become a mountain. If you don’t check analyst models, then you’re just running the risk of misjudged ratings and bad earnings estimates. Plus, remember that many journalists fancy themselves as market commentators and might write about the research that is published.
Q. It looks like we’re going to miss some analysts’ EPS forecasts by a cent or two when we report our next figures. At what point is it necessary to pre-announce or give some sort of warning?
A. It depends what your EPS forecast is. If the analysts’ consensus is 3 cents and you’re coming in at 1 cent, that’s one third of what was expected, which is bad. You may have to consider issuing some further guidance and expect a big stock price decline. If, however, the EPS is 48 cents and you come it at 46 cents, then well done. Basically, if you’re going to be within a penny or two of what seems to be the mid-range market forecast, and this is not a significant proportion of expected earnings, then that really shows how good you are at guidance. Congratulations! You hardly need a profit warning.
Q. The range of our earnings-per-share forecasts is getting wider all the time. At what point should we be concerned?
A. There will always be some analysts who will go out of their way to make a name for themselves, typically by standing out from the crowd. They’ll either be wildly bullish or wildly bearish. But as long as the majority of analysts covering your company are within a reasonably narrow range, it doesn’t really matter that you get some ‘outliers’. If it’s any consolation, most analysts consult the consensus figures religiously and are keen to remain close to them in case they get it wrong.
Q. Our CEO sometimes gets carried away at analyst briefings, often coming close to announcing material, non-public information. I’ve raised this with him before, but in the heat of the moment he still becomes embarrassingly candid. Any suggestions?
A. It may be time to buy your CEO a little present to remind him to stick to the rules. I assume he is computer-friendly, so why not buy him a mouse mat or set up a screen saver with some apposite quotes from Reg FD? In other words, imprint it on something he’s going to use every day so it becomes apart of his psyche. You can find this information at www.sec.gov. The equivalent UK rules are in the UKLA’s guidelines on dissemination of price sensitive information (www.fsa.gov.uk). If he’s too old for the computer age, buy him a copy of James B Stewart’s Den of Thieves. There’s enough about Michael Milken and Ivan Boesky’s fates in there to put anyone off wandering into the territory of inside information.
E-mail questions to Heather McGregor – [email protected]. McGregor is a former IRO and investment analyst who currently works on IR assignments for Taylor:Bennett, an executive search firm specializing in communications jobs
