Thursday, June 19, 2008

Investor Relations is Not a Passive Activity

You get the most amazing insights into companies from luncheon conversations.  Last week I was at the NIRI annual conference and I spent one lunch session chatting with Rick Hans, the investor relations officer of Walgreens.  I happen to have a passing familiarity with Walgreens, having spent 23 years of my career there, during 15 of which I was responsible for investor relations.  I still own a good sized slug of their stock.  I also know Rick Hans fairly well, as I hired him many years ago.  I like Rick and he’s is a good, smart guy, but in this instance I think he’s indicative of some of the failures many companies have when it comes to investor relations.  So Rick, if you’re reading this, my apologies, but it’s your turn in the penalty box.


The story goes like this - during the course of our conversation, I mentioned that I noticed that Jessica Spaly, the retail analyst for Capital Research, had been on a panel discussion on Monday morning and I asked Rick if he had spoken to her.    Rick’s response was “No, I don’t need to - I talk to her almost every day”.  I thought this was an interesting response given that Capital Research owns 77 million shares (7.8%) of Walgreens’ stock. Why would you ever pass up potential face time with a shareholder that important to your company?  Who knows, you might learn something about what they are thinking or you might continue to build a relationship with the analyst by showing that you were willing to go out of your way to say hello.  To do nothing to me is indicative of corporate hubris - you have to come to us, we won’t go to you.  I’ve known Jessica for about 5 years and I made a point of looking her up because I believe that investor relations is a profession build on relationships.   Capital Research certainly doesn’t own stock in my company, but the relationship is important to me,  During my very brief chat, I even got an indication of their thinking about Walgreens. My opinion is that investor relations officers need to be proactive about these opportunities - take every opportunity to get face time with your investors and build your relationships.


Later on in the same conversation, I asked Rick if he had seen the research note put out by Deborah Weinswig of Citi regarding a recent group meeting she hosted at Walgreens headquarters.  It was of interest to me as the first bullet point of the note stated: “Our Take — WAG is focused on five growth priorities, including: 1) protecting its core retail business;...”  The use of the word protecting was of particular interest to me as it sounds as if management is growing defensive regarding its retail store base.  If so, this would mark a significant shift from one of the premier growth companies around.  


Allow me to pause here and say that this is not your run-of-the-mill analyst.  Deborah has been a top rated analyst by Institutional Investor magazine for a number of years.  Institutional Investor rankings may not be perfect, but they are certainly indicative of an analyst having a following on the buy side.  When they write a note, it is worth paying attention to, as it goes out to a very wide audience of buy side analysts and portfolio managers.


What Rick said next stunned me, and I confess that as a result I am just a tad fuzzy on the details.  His comment was to the effect that he either hadn’t seen the research note, hadn’t read it or didn’t get Deborah’s research.  Take your pick, they’re all equally bad.  Regardless of how you feel about sell side research, you have to read it and know what they’re saying.  Not to do so is tantamount to not doing your homework.  Investors are going to read the research and form opinions about your company because of it, and you have to be ready to respond.  It’s part of the basic information gathering function of investor relations.


Maybe all of this could be forgiven if Walgreens stock price and P/E ratio were flying high.  Unfortunately, that’s not the case.  One year ago Walgreens stock was trading at $44.27, today it trades at $35.13, a decline of 20.6%.  The trailing twelve month P/E ratio has suffered even more, declining 26.4% from 22.7 to 16.7 during the same period. Obviously, when you get this type of decline in a stock price, something fundamental is going on, and Walgreens has struggled to control their expense ratios while they have expanded into “adjacent” businesses such as specialty pharmacy (see my blog post of October 8, 2007 for a more detailed discussion of their disclosures around this issue).  Investor relations alone won’t fix this issue, but is sure doesn’t help if you’re being passive in your approach to Wall Street.  When things are tough is exactly when you should be proactive.


Walgreens has just gone outside their organization to hire a new CFO, something that is extremely unusual in this company that believes strongly in promoting from within.  My sources tell me that one of the driving reasons they went outside the organization was because they needed someone who could talk to Wall Street, as none of the senior executives wanted to, or were particularly good at doing so.  Analysts that I’ve talked to who know the new CFO say he’s very good with the Street.  Maybe Walgreens is going to take a fresh approach to how they deal with investors.  I think they could use it.

6 comments:

Jeffluth said...

Sorry for the delayed comment, but I just read the June 19 post and was struck by the reference wherein Walgreens IR admitted to speaking with Capital Research "almost every day." I don't care how many shares of Walgreens Capital owns; when the dialogue is that frequent, one must question the propriety of the information flow. How much additional non-material information can the Capital analyst gather "almost every day"?

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