Sunday, April 26, 2015

Stocks DD Opines: Investor Relations and some Best Practices

Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

Additional Disclaimer: This is a general article and no references is intended to any company.

What is Investor Relations  ?
National Investor Relations Institute defines IR as "A corporate marketing activity, combining the disciplines of communication and finance, providing current and future investors with accurate portrayal of firm's performance and prospects, thereby having a positive effect on total value relative to the overall market and the firm's cost of capital."

I would use the word Fair in lieu of Positive. I would also use word Price in addition to Value because of the following: What if the company has decided they are never going to raise capital again in the market ?

What does IR Best Practices involve ?

It primarily involves the following:

1. Quarterly Conference call with all stakeholders on Earnings, Outlook & Mid/Long term Strategy with adequate time for Q&A.
2. Annual attendance in a few Investment Conferences where fund managers and analysts go and where market peers present. After all, capital assets with similar risks(same sector) are often rated relative to one another by same market participants (Same Intermediary analysts and Mutual Funds).
3. Conducting Annual Investor Day with interactive Q&A with all stakeholders
4. Ensuring information on risk, 2-3 year outlook of business & high level strategy is provided (without disclosing commercially sensitive information)
5. Ensuring adequate number of analyst firms cover the stock.
6. Ensuring IR team is quick and responsive to existing or future investor information requests

All the 6 pieces are required so the risks and the outlook of the business are clearly known to as many market participants (including intermediary analyst firms) to ensure proper valuation and liquidity relative to other similar capital market assets . Ultimately, valuation is based on perceived risk on business outlook (not just past performance) in relation to similar capital market assets (peers). If adequate information is not disseminated, then likely the company will have less following by analysts, investors, less independent opinions on outlook,  leading to potentially reduced liquidity and an improper valuation. Free sharing of Information in adequate channels aids in price discovery. 

An example for disseminating Risk and Outlook information objectively ( point 4 above, without giving away anything to competition) is demonstrated in this below slide. Note this information DOES NOT have financial guidance.

Financial Guidance

Examples of Annual analyst or Investor Day presentations can be seen here

Annual Investor Days is a great forum to showcase the business, risks, juxtaposition of risks and price with similar peers, outlook, strategy and how the company intends to add value to shareholders both in the mid term as well as in the long term. It is meant for market participants which includes Mutual Funds, Pension Funds, Hedge Funds, Analyst firms and Individual Shareholders. Investor Days could be a 2 way exchange of information. Shareholders could share their ideas of enhancing and protecting shareholder value with the management and get their feedback.

Investment Conferences
  • Barclays Global Heathcare Conference
  • RBC Global Healthcare Conference
  • J.P. Morgan Healthcare Conference
  • Goldman Sachs Healthcare Conference
  • Morgan Stanley Healthcare Conference

Summary - Robust investor relations practices  is needed so there is adequate information sharing, transparency and thus ensuring the integrity of the capital market system.

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