When planning for a meeting with an analyst, always send them an advance packet of preparatory information. This packet should include a fact book about the company’s strategy, performance, and products. The analyst must complete a considerable amount of analysis before issuing a recommendation, so issuing them the fact book will allow them to complete an initial set of questions, which they will then pose during the meeting. Thus, sending advance information allows the analyst to maximize his or her meeting time.
When preparing for an analyst meeting, it is extremely important to anticipate all questions that might be asked. If a manager were to appear befuddled by a question, the querying analyst might be concerned about the manager’s ability to run the business, and so would decline to provide coverage of the stock. To avoid this problem, maintain a list of questions that have been asked during meetings with other analysts, and supplement the list with questions asked during investor conference calls or other investor meetings. In addition, brainstorm the types of questions that might be asked in response to current or prospective changes in the business. If other comparable companies are hosting conference calls prior to the analyst meeting, then listen to those calls to see if analysts are asking any new questions that have not been heard before. With these questions in hand, construct a standard set of answers, and have a dress rehearsal with the managers who will attend the analyst meeting.
An analyst expects to be provided with a considerable amount of information about the company. During the meeting, the investor relations officer (IRO) should address the types of products and services that the company sells, which ones provide the bulk of the company’s revenues, and the geographic areas and markets in which the products and services are sold. This sales discussion should also include the overall size of the company’s markets, the future of those markets, its share of those markets, the market growth rate, and management’s expectation for its eventual market share. Analysts are very interested in competitors, so be prepared to discuss primary competitors, their sales volume and market share, and their strengths and weaknesses. If there have been acquisitions in the past or are likely to be in the near future, then also be prepared to discuss the criteria the company uses to select acquirees, and how it integrates acquirees into the rest of the organization. In addition, be prepared to talk about growth goals, how the company plans to meet them, and the company’s recent track record for meeting those goals. Finally, analysts concentrate heavily on how various risks will impact a company’s prospects, so cover the key risks faced by the company, and how the company is prepared to protect itself from them.
In addition, analysts are very interested in intangible issues, such as the ability of the management team to run the company. For this reason, they will likely probe management’s commitment to long-term planning, profit planning, and control systems, all of which are cornerstones of long term management success. In addition, they will probably want to meet with the managers of the product development and marketing departments, to ascertain their skills in these two key areas. Given the likelihood of this level of questioning, the IRO should ensure that anyone who may come in contact with an analyst is coached in the legalities of disclosing information. Further, the IRO should attend any meeting between an analyst and an employee, to ensure that disclosure rules are followed, and to make note of any inadvertent disclosures that must then be released to the public in an 8-K filing.
A key element of an analyst meeting that has a major bearing on the analyst’s target price for the company’s stock is the discussion of comparable companies. Unless persuaded otherwise, most analysts will base their target stock prices on the prices of the stocks of comparable companies in the same industry. For example, if the stock prices of comparable companies result in market capitalizations that are two times revenues, then analysts will assume the same ratio for all companies in the industry. The analyst may not even bring up this issue, assuming that the usual industry comparisons will be used. If the IRO feels that the company is more readily comparable to other companies, perhaps outside of the industry, then this is a good time to discuss which companies are better “comps” and why the analyst should use them as such. In short, define a group of comps for the company, or else analysts will independently do so, likely resulting in lower target prices being included in analyst reports.
After an analyst issues a recommendation, the IRO should review it in detail. Analysts are among the most knowledgeable independent observers of a company and its industry, so their commentaries are worthy of considerable review and discussion within the management team. In particular, note any commentary regarding how an analyst has arrived at a particular estimate of revenue or profit, especially the assumptions used to arrive at those numbers. By understanding analyst assumptions, it is possible to predict their behavior when the company’s metrics change in the future. Also, if an analyst points out in a report a perceived flaw in the company’s strategy or operating assumptions, the flaw may be indicative of a general marketplace perception that is keeping the company’s stock from achieving its full valuation. If so, treat these perceived flaws as opportunities for strategic changes, or perhaps as grounds for additional education of the marketplace to mitigate the perceived impact of the flaw.