Charles Armitage
Charles Armitage, aerospace & defense analyst, Merrill Lynch
Charles Armitage is an analyst at Merrill Lynch in the volatile aerospace and defense sector. He doesn’t seek reams of corporate information from investor relations officers; he just wants the all-important risk factors upfront and center. ‘I’m always looking for a lack of surprises,’ he comments. ‘The more consistent things are or well-flagged, the better; it’s a combination of consistency and lack of uncertainty.’
Credibility and consistency are critical to Armitage. If a company comes out and says it’s going to grow at x percent, and has consistently put its margins target at 20 percent, but always fails to reach its growth target, then he doesn’t have the confidence in the company’s ability to forecast accurate margins. However, he suggests, ‘It’s probably easier for US companies to regain credibility faster because of their quarterly reporting rules, whereas in the UK it takes 18 months or longer.’
Armitage notes how a company with an earnings miss gets harshly punished. On the other hand, firms that regularly low-ball their profits end up getting a reputation for it, he says. ‘It’s far better to be in that scenario than in the other extreme; if everything goes right, then that’s what we expect – it sounds obvious.’
He’s wary of using discounted cash flow as an all-encompassing financial model. The late 1990s internet boom saw too many people incorrectly using this paradigm, he says. ‘It has generally fallen from credibility, particularly for lower-growth companies. The parameters and accuracy become questionable.’
This defense analyst, who has followed companies like Rolls-Royce, BAE Systems and Thales for Merrill Lynch for the past two years, points to US defense technology firm Raytheon in the late 1990s as an example of a company that badly flunked earnings forecasting. A heavy dose of analyst skepticism was needed. ‘They were heavily dependent on future internet contracts back in 1999. It was all based on the best-case scenario with them.’ He mentions other companies like Smiths Group that are notable for doing consistently a bit better than expectations.
Corporate governance and corporate social responsibility are of questionable value for Armitage. ‘If I do come out with a view on CSR then even if my comments are right and the market doesn’t recognize it, I will be wrong; my job is to call stock prices.’ He admits to being slightly suspicious of companies that crow about their CSR credentials anyway. ‘It’s a bit like saying, I hereby certify that I’m not lying.’
Online information is extremely variable, he says, but he highly rates trade magazines like Aviation Week & Space Technology and Flight International as well as government web sites. ‘I don’t bother with business gossip columns – I haven’t found one that is sufficiently relevant to be useful. The aerospace sector is really about avoiding the upsets and making money over the index. If you can avoid the blow-ups then you can do rather well.’
Peter Cartwright
Peter Cartwright, healthcare analyst, Williams De Broe
Top-rated Williams de Broë healthcare analyst Peter Cartwright gets – broadly – quality information from IROs. ‘Although they can be a bit evasive if there’s just been a profit warning or if the guys at the center are short on information.’
His priority when eking out information is discovering what makes management tick. ‘Are their goals strategic or financial? It’s pretty factual stuff really – market sizes, economic conditions, shifts in operating capital. Then you look behind the figures. What’s the competition? What’s the medium-term objective? We serve a pretty diverse investor base but the common characteristics are value, reasonable prospects and net worth creation. If you have that, then it’s an easy case for the client to buy into.’
Nevertheless, the hard-to-put-your-finger-on intangibles – quality of management, who’s complacent, who isn’t – are not always easy to prize out of IROs. ‘Sometimes it’s body language, or an abrupt change in attitude,’ Cartwright says.
Cartwright cites UK medical device firm Smith & Nephew as a good example of a case where he sensed something was about to change before it became evident. ‘Eventually they split the company. But we picked up on their renewed vigor quite early. Then they had a wake-up call, decided internally they weren’t going anywhere, hit on a new strategy and really got stuck in.’
The Williams de Broë healthcare analyst expresses some unease over ethical disclosure, specifically the amount of dialogue emerging from IROs when, for example, a company is close to a trading statement. ‘It’s about selective disclosure, keeping a level playing field. Some companies are more liberal and give a more general briefing at the end of a quarter, so analysts get the same information at the same time rather than individually. However some boundaries are still not clear.’
Although corporate social responsibility issues may be of concern to some companies, for mainstream healthcare it’s not on the radar, according to Cartwright. ‘Compared to more economically sensitive sectors in which you’re at the mercy of consumer sentiment, a lot of healthcare CSR passes me by.’
Healthcare, however, can still be volatile. ‘Someone coming through with a new drug, for example. But it doesn’t come out of the blue and you’re always tracking new drugs through research.’
One investor relations irritant that seems to linger, complains Cartwright, is accessibility. ‘There’s nothing worse than calling a company and hitting voicemail, especially if you need reaction to news or if a rival company comes out with a profit warning. Any extra info that we can fold in is always useful.’
Cartwright’s job as an analyst, he insists, isn’t overly clever. ‘Much of it is about balance sheet tools: profits and earnings, cash flow, changes in equity and debt. We try and keep it tight and sensible and always apply the quack test: if it walks, swims and sounds like a duck, it’s probably sensible.’
Mark Reed
Mark Reed, leisure analyst, Teather & Greenwood
Teather & Greenwood leisure analyst Mark Reed admits straight off he’s an information junkie. But getting quality data – which doesn’t always include trading statements and analyst packs – is a bind. ‘What I always look for is information breaking down actual performance, be it on a segmental basis or going back some time. Typically you get information from IROs for this year, last year and, if you’re lucky, the year before that. But to get a real handle on a company, you’ve got to take the long view, which means sometimes going back ten years. And if companies have restructured or resold, that can stop you getting that trend.’
Reed is sharply critical of IROs who don’t pick up on the segment splits of a business. Some, he says, don’t even appear to know the type of key markets for their companies. ‘If you’re following a five-star company then you really need to know their customer base, but you really have to pump this stuff out of [IROs] sometimes.’
Reed points to the aftermath of September 11 – when many hotels saw a near collapse in business – as an example of bad information flow from IR departments. ‘Comparing year yields from this year to last year was utterly meaningless. Only one company I know, Intercontinental Hotels Group, had the forethought to include yields from previous years as well in its reports.’ However he says the quality of information coming from companies – among them Fitness First, Holiday Break, Hilton International and Whitbread – is slowly improving.
Like other analysts in these profiles, Reed takes a pass on corporate governance issues. ‘It’s clearly an issue for shareholders but an analyst’s job is to take a view on the integrity of management and their ability,’ he argues. ‘Unless I see it as a threat to earnings, then it’s not an issue for me.’
One area where he wants to see more IR change is the widespread obsession with sales and earnings figures. Reed says analysts are far more interested in future returns. ‘There’s just too much poor and inconsistent information here – bad disclosure. All too often companies tell you what they’re about, and where they’ve been historically, but what they won’t look at so much is cap-ex and link it to returns. This has to change. If you do ask IROs about this, all too often they’ll say something like, Well, it’s too early to say, blah, blah, blah. That’s just unacceptable now.’
Annual reports can be useful when fine-tuning figures. Reed doesn’t bother much with the prelim statements but the big glossy company brochures, he says, can contain choice nuggets at the back. ‘Some disclosure can be interesting, for example information on pension deficits, which isn’t usually given in the prelims.’
Truly useful web sites are few, according to Reed but he does regularly keep an eye on Travel and Hospitality Industry Digest (e-tid.com). Travel Trade Gazette and Leisure Weekly are both strong industry reads, he says.
Harald Hendrikse
Harald Hendrikse, auto analyst, Credit Suisse First Boston
Auto industry analyst Harald Hendrikse is deeply appreciative of IROs who are prepared to do serious spadework. Digging out figures from the past six or more years – just to make sure analysts have enough background information and signposts – goes down handsomely. ‘It’s crucially important. We have lots of hard copies here. Most companies don’t realize how important this preparation is for us.’
The ability to dole out timely, relevant material is, he says, probably the most important function of an IRO. ‘We’re talking market size information, particularly with high-growth companies. Getting an idea of the overall scope of the market is also very important.’
Like other analysts, company credibility is super-critical to Hendrikse. ‘Anything management gives us, including names of suppliers and competitors’ names, is really useful. The better companies give us the basic stats. However some of them sometimes don’t realize from what a basic point we’re starting from. Some of us are covering 20-30 companies so accessibility and information relevance is so, so important.’
‘A lot of IROs,’ he continues, ‘have the attitude of that’s your job when I ask for information. But if a company wants to get its message across then you can’t rely on analysts to come out with the conclusions you want yourself if you don’t give them the information.’
Hendrikse has, he says, just been grinding through a spreadsheet on Porsche. ‘The work is infinite,’ he sighs. ‘It’s a huge investment of time that someone at the company could have helped us with. Seriously, the more help we get here the better.’
This CSFB analyst says US companies are typically better at information dissemination than their European counterparts. Spreadsheets do have their use, though he says not all IR officers themselves have a firm enough grasp on how their own business really works, he says.
‘I would send all IROs and other financial management people on a share price valuation course. Half of them don’t understand what drives share prices. Look at European companies and the wide range of forecasts you get. It just doesn’t happen in the US. You have to ask which is the more efficient market. It’s really about certainty, consistency, credibility and a proper understanding that management is looking after returns of capital.’
Financial models are flexible and depend on the particular company. ‘We tend to have large discounted cash flow models on most stocks, but mostly we concentrate on investment capital.’ He says getting up-to-the-minute valuations isn’t easy due to potential quarterly cash losses. ‘That can have a very material impact on valuations,’ he says.
Corporate governance barely registers with Hendrikse: ‘The fact is that our job is less wide than many people perceive it to be.’ But web sites have their place. ‘Particularly government ones – the wealth of data you can get from US government sites is incredible. At one point we even thought the internet might supersede us analysts. But, at the end of the day, you still need to make judgment calls.’
