tag:blogger.com,1999:blog-36510101351736783582024-03-13T06:16:28.885-05:00Investor Relations MusingsA blog devoted to the practice of investor relations; the interplay between Wall Street analysts and corporate investor relations professionals.John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.comBlogger163125tag:blogger.com,1999:blog-3651010135173678358.post-67998953303416671792014-08-15T11:23:00.000-05:002014-08-15T11:23:43.251-05:00My Last Blog Post <div dir="ltr" style="text-align: left;" trbidi="on">
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First and foremost, I would like to thank everyone who has
taken the time to read what I’ve written on Investor Relations Musings over the
past 7 years. Over that time period I’ve posted 162 articles on topics that
have ranged from the tongue in cheek (essential life skills for the investor
relations officer) to the academic (efficient market theory) to the personal
(the importance of saying thank you). The blog has been accessed almost 60,000
times by approximately 40,000 different users from 153 different countries, so
hopefully I’ve given a few people something to think about.<o:p></o:p></div>
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Now, however, to use a phrase common among startups, I find
that my career has “pivoted”. Several months ago, as I was contemplating
retirement, a friend of mine from business school called me up and asked if I
would like to join him in starting up a medical device company. It sounded like
fun, so at the ripe age of 64 I find myself an entrepreneur.<o:p></o:p></div>
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I’m quite excited about the new company we are forming,
which will be called Arterium Medical. We’re going to use patented technology
to monitor and measure blood flow using Doppler ultrasound. Unlike traditional
ultrasound, we will provide doctors and nurses with quantitative data, not
images. And also unlike traditional ultrasound, our device is contained in a
thin film, which is applied using a bandage, eliminating the need for an
ultrasound technician. It’s really a neat little gadget.<o:p></o:p></div>
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In the past, doctors have used blood pressure readings in
their diagnoses, but in many instances, blood pressure is a proxy for blood
flow. We plan to help them measure what they really care about, which is the
blood flow that keeps organs and limbs alive. If we are successful, we think
that we can give doctors and nurses a new monitoring tools to help improve the standard of medical care in several areas.<o:p></o:p></div>
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With all of the tasks that come with a startup, from the
mundane - setting up offices - to the sublime – raising money – I will no
longer have time to rigorously follow and write about investor relations, so I
feel I must bring this blog to a close.<o:p></o:p></div>
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Thank you for being a reader.<o:p></o:p></div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-23646147645129346562014-03-28T13:29:00.000-05:002014-03-28T13:29:00.416-05:00It’s the Quality of Disclosure, Stupid<div dir="ltr" style="text-align: left;" trbidi="on">
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When Bill Clinton was running for president for the first time, one of the catch phrases of his campaign was, “It’s the economy, stupid”. One of the things meant by this (with Bill Clinton, you’re never sure if you’ve captured all of the intended meanings) was that people should focus on the main issue and stop talking about the many smaller peripheral issues that can distract voters from what is important. That’s the way I feel about many earnings press releases I read.</div>
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Take, for example, Walgreens recently released second quarter 2014 earnings. Readers of this blog will know that I often write about Walgreens, but when you write, its best to write about something you know, and having worked at Walgreens, I think I know it better than the average investor (I also own the stock). There are a lot of things going on in the second quarter earnings release, and to a certain extent, Walgreens finds itself boxed in by all the adjusted earnings they’ve reported in the past. Having elected to report “adjusted earnings” (see my post from June 26, 2013 “The Slippery Slope of Adjusted Earnings” http://investorrelationsmusings.blogspot.com/2013_06_01_archive.html ) Walgreens now finds itself in the uncomfortable position of reporting that what they consider core earnings reflecting the true underlying nature of the business are 5% lower than they were a year ago. This compares to earnings only being down 1% on a GAAP basis. I give them full credit for continuing to report this way, as many companies would have stopped reporting on an adjusted basis the moment it didn’t serve their purpose, but it just goes to show how you can get boxed in by these adjustment shenanigans. </div>
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However, what really caught my eye in the earnings release was a claim of combined synergies for Walgreen and its strategic partner, Alliance Boots, of approximately $236 million in the first half of fiscal year 2014. When I see a claim for such a big number, a red flag always goes up in my mind and I start looking for where all this money has filtered into the earnings statement. After all, if you are claiming a synergy, you either have to be buying better and thus reducing your cost of goods, or lowering your expenses, reducing your selling, general and administrative expense. Synergies of $236 million on a base of $37.9 billion should result in savings of .62% in these ratios for the first half of the fiscal year. Yet when I compare the cost of goods and S, G & A ratios from year end 2013 to 2Q2014, I find that cost of goods have actually gone up 10 basis points, so they’re not buying better as a result of the acquisition. The S, G & A ratio on the other hand, has declined 60 basis points to 23.3% from 23.9%. So maybe they are within shouting distance, 8 basis points, but then I have to ask, “Does this synergy number mean that your earnings would have been worse by $236 million if you had not done the acquisition?” I suspect not, and I think you would very quickly get an answer from the company that the calculation of synergies does not tie directly to earnings.</div>
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Unstated in all of this is that “synergies” is a non-GAAP term, not constrained by the bounds of normal accounting. Companies can and do throw all sorts of “opportunity costs” and hypothetical savings into the pot when calculating these sorts of things. It is sort of an alternative accounting universe that does not have to tie out to the earnings statement. (I’ve also written about this before, see my post of March 3, 2012, “Where’s the Beef?” http://investorrelationsmusings.blogspot.com/2012/03/wheres-beef.html )</div>
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Which brings me full circle. These types of claims detract from and make it look as if the company is trying to obscure what is really going on - “Look at the great synergies we’re getting, not at the fact that earnings are down”. So my advice to companies that engage in this sort of junky accounting is: “It’s the quality of disclosure, stupid.” </div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-18669553518667003522014-03-03T10:09:00.000-06:002014-03-03T10:09:53.588-06:00The Intersection of Law and Financial Theory<div dir="ltr" style="text-align: left;" trbidi="on">
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When lawyers and judges venture into the realm of financial theory, interesting things happen, often accompanied by unintended consequences. Take, for example the efficient market hypothesis. As anyone with a grounding in financial theory knows, the efficient market hypothesis (in the semi-strong version) holds that the market quickly incorporates all readily available information into stock prices. In 1988 the United States Supreme Court used this theory to create the legal doctrine of “fraud on the market”, which holds that shareholders do not have to directly prove that there is a connection between a shareholder’s losses and the fraud being alleged. Rather, the courts assume that the shareholders have been harmed by an alleged fraud because the market has incorporated the fraudulent information into the stock price, regardless of whether the aggrieved shareholder can show direct reliance on the fraudulent information.</div>
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The upshot (and unintended consequence) of this legal doctrine was a surge in the number of securities class actions filed beginning in 1988. In fact, it became so bad that Congress stepped into the fray and enacted the Private Securities Litigation Reform Act of 1995. This act made things tougher on plaintiffs, requiring them to plead the alleged securities fraud with a great deal more specificity than before and creating a “safe harbor” for forward looking statements made by a company. But the act did not specifically do away with the “fraud on the market” doctrine, and plaintiff’s lawyers, being a resilient and resourceful bunch, continued to file securities class action lawsuits. In fact, according to a paper written by Donald C. Langevoort at the Georgetown University Law Center, such lawsuits in the last 15 years have resulted in more than $70 billion in settlements (Judgment Day for Fraud on the Market? Reflections on Amgen and the Second Coming of Halliburton http://scholarship.law.georgetown.edu/facpub/1226 http://ssrn.com/abstract=2281910). This is because, even with the heightened filing requirements, with the fraud on the market doctrine, all shareholders are part of the class of damaged investors, not just those investors that can show they relied upon the alleged fraud. As a result, the class is so large and the potential damages can be so great that almost all securities fraud class actions that survive the pleadings stage wind up getting settled. Which, coincidentally, generates large fees for plaintiffs’ lawyers.</div>
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Now, however, the Supreme Court is taking a second look at the “fraud on the markets doctrine. Arguments in the case of Erica P. John Fund v. Halliburton Co. will be heard shortly and four of the Supreme Court justices are on record as opposing the fraud on the market doctrine. If the court reverses the doctrine, or even if they significantly curtail it, the upshot will be a lessening of class action securities lawsuits. For the first time since 1988, plaintiffs will have to actually prove that they were aware of, relied upon, and were damaged by the corporate statements they allege are fraudulent. Wouldn’t that be something? </div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-83059015493110485422014-02-06T12:36:00.000-06:002014-02-06T12:36:53.013-06:00CVS, Tobacco and the Economically Rational Decision<div dir="ltr" style="text-align: left;" trbidi="on">
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Yesterday I was interviewed by a reporter for National Public Radio’s Marketplace program regarding the decision by CVS Drugstores to stop selling tobacco products. You can find the article here: <a href="http://www.marketplace.org/topics/business/why-cvs-giving-smoking">http://www.marketplace.org/topics/business/why-cvs-giving-smoking</a>. I’m always happy to talk to the people at Marketplace, as it’s one of the few programs on National Public Radio that takes an even-handed approach to business affairs.</div>
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The issue of drug stores and pharmacies selling tobacco products is not new. The question used to get asked back in the 1990s when I was doing investor relations for Walgreens. The reason the question came up back then is that the provinces in Canada had begun to ban the sale of cigarettes in pharmacies beginning in 1994. Today, all but one province in Canada bans the sale of cigarettes by pharmacies.</div>
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What is interesting here to me is the communications aspect of this situation and how it compares with the business realities of selling tobacco. CVS has, of course, positioned their decision as the morally right thing to do. They are a healthcare related company, and they shouldn’t be selling products harmful to the public’s health. The decision has great appeal to a majority of people and earns them lots of good will. </div>
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Underlying all of that may be other reasons that CVS has gotten out of the business of selling tobacco. In business school terms, what CVS has done is to compare the net present value of the profit stream it would receive from continuing to sell tobacco to the potential profit it will receive by virtue of being more closely associated with a healthcare image and the additional business that will bring in, both on the consumer and the health care benefits sides of their businesses. In this case, they have decided that healthcare is a better business choice, plus it makes them appear to be on the side of the angels.</div>
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However, here are a few business reasons why CVS may have gotten out of the business:</div>
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1.<span class="Apple-tab-span" style="white-space: pre;"> </span>Tobacco usage has been declining in the United States for many years and the trend shows no signs of bottoming out.</div>
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2.<span class="Apple-tab-span" style="white-space: pre;"> </span>Cigarettes are a relatively low gross profit margin product, with margins I estimate in the 15 – 16% range compared to an average of 30% for general merchandise in drug stores.</div>
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3.<span class="Apple-tab-span" style="white-space: pre;"> </span>Typical sales in drugstores are for one or two packs of cigarettes at a time, meaning that you don’t make up for a low margin sale by having a big dollar sale, as you would by selling a carton.</div>
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4.<span class="Apple-tab-span" style="white-space: pre;"> </span>With prices per pack as high as they are, smokers tend to be price sensitive, meaning that they are not your normal, loyal customer.</div>
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5.<span class="Apple-tab-span" style="white-space: pre;"> </span>High prices also lead to more internal theft in this category than many others.</div>
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6.<span class="Apple-tab-span" style="white-space: pre;"> </span>Local regulations prohibiting the sale of tobacco to minors leads to a headache at the cash register as clerks need to verify the age of many purchasers. </div>
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So when the dust settles, CVS will have given up 2% of its revenues, but much less than that of its profits. Plus they probably looked north of the border and realized that the Canadian drug store industry hasn’t gone into a death spiral since they were prohibited from selling cigarettes.</div>
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All of this also helps to explain why you won’t see CVS eliminating the sale of salty snacks, sugary drinks of candy any time soon. All of these products don’t fit with the image of a healthcare provider, but they don’t share the same business trends as tobacco, so CVS will make the economically rational decision to keep selling them.</div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-36694541728704780272013-11-13T10:46:00.001-06:002013-11-13T10:46:07.442-06:00Tell Me a Story<div dir="ltr" style="text-align: left;" trbidi="on">
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I wrote in October about the importance of using a variety of delivery methods in order to help your audience learn from and retain what you are saying. Because this is a blog about investor relations (mostly, although I confess to straying from the topic from time to time), today I want to expand upon this idea in one way that can help companies better get their message to Wall Street. In short, stop thinking of investor relations as simply a conduit of information and start thinking of it as a way to also tell a story about your company.</div>
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The meat and potatoes of any investor relations program is the ability to convey to investors basic financial information that relates to the company. There is no getting around this - it forms the core of all subsequent discussions. Yet this information often falls into the boring, but important category. Additionally, there are at least two problems with this data. First, unless you are among the lucky few companies that are showing outstanding growth and financial performance, it’s easy to get lost in the shuffle. As they say in the entertainment business, there’s no hook. Secondly, information about past performance does not always give investors a good idea of where the company is going in the future, nor does it give a sense of the way the company operates. This is where making it memorable by telling your story becomes important.</div>
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Building upon basic financial information is a critical factor in helping a company stand out from the crowd. When you combine this with the fact that most people learn and retain information better when they get it from a variety of sources, you can begin to appreciate why investor relations should be more than drafting the next press release. Being able to place your company into context in terms of your industry by telling the story of your company is an example. People remember stories. If your company relies on product development, being able to tell the story of how a product was developed can bring context to the bare fact of how much you spent on research and development. This concept can be transferred to almost any industry, be it oil and gas development, retail or consumer goods, to name a few. </div>
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After all, companies are a collection of people, and where you have people you have stories to tell about how those people create unique approaches to the way they do business. How those people set your company apart from other operators and cause it to be unique are integral parts of the story that mere financial numbers can’t tell. It is in providing this context in a memorable fashion that investor relations can add value.</div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com1tag:blogger.com,1999:blog-3651010135173678358.post-14873076145457500762013-10-31T10:25:00.001-05:002013-10-31T10:25:07.463-05:00Are You Talking About What You Want to Say or What Your Investors Want to Know?<div dir="ltr" style="text-align: left;" trbidi="on">
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I confess that I’m not an avid reader of much of what gets
churned out in the business press by the so-called experts. I readily admit
that this is somewhat of a contradiction in me, because I want people to read
what I write about in my area of expertise, but let’s face it, there’s a lot of
crud out there. Most business writers seem to approach their subject as if it
were the key component to business success. If their readers would simply
follow their cookbook formula, everything would be peachy. If only life were so
simple. So I tend to restrict my reading to The Wall Street Journal, The New
York Times, The Economist and a few other assorted publications.<o:p></o:p></div>
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One of the other assorted publications I tend to pay
attention to is the McKinsey Quarterly, and it is an article there that spurs
me to write today. The article, which was published early in October, 2013, is
entitled “How B2B companies talk past their customers” and it examines the gap
between the messages that suppliers send to their customers and what their
customers really want to know. The article struck me as particularly germane to
investor relations because, stripped to its bare essentials, IR is a
business-to-business marketing effort where companies present the reasons to
own their stock to sophisticated purchasing managers who are interested in
buying a commodity that will benefit their customers, such as mutual fund investors
or pension managers. <o:p></o:p></div>
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The article, which is available at <a href="http://www.mckinsey.com/insights">http://www.mckinsey.com/insights</a>,
looked at how companies in the business-to-business sector positioned their
brands and came up with a list of 13 broad themes and topic areas ranging from
the practical (low prices) to the lofty (corporate social responsibility). Then
the authors turned around and asked customers how important they thought each
theme was in evaluating the brand. What they found was that there was an almost
complete mismatch between what companies were saying and what customers thought
was important.<o:p></o:p></div>
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This piece of research is instructive to investor relations
because IR departments are formulating brand messages all the time, whether
it’s in an investor presentation or an annual report, yet in my experience, the
vast majority of all such messages are put together based upon what the company
wants to say, not what investors want to hear. <o:p></o:p></div>
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So here’s a radical thought. The next time you put together
a presentation, stop and think about what investors want and need to hear. This
shouldn’t be terribly difficult, as IR departments are constantly bombarded by
questions from analysts and good investor relations practice dictates that you
should track the types of questions being asked. The data should be there – you
simply have to integrate it into your message.<o:p></o:p></div>
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At the end of the day, it comes down to a relatively simple
rule of communications – know your audience. Unfortunately, it is a rule that
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-35766201189646004182013-10-01T14:19:00.000-05:002013-10-01T14:19:45.620-05:00Make It Memorable<div dir="ltr" style="text-align: left;" trbidi="on">
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One thing I have learned from teaching over the past six years is that if you want your audience to not only learn, but also remember what they learn, you have to make it memorable. There are many ways to do this – you can speak with passion, you can use humor, you can have catchy phrases and acronyms, you can even (heaven forbid) have a catchy PowerPoint presentation – but what you are saying and doing has to catch and hold the audience’s attention. In a way, it is education as theater, and it is particularly effective in an adult education setting where the distractions of emails and messages from the office are a constant challenge.</div>
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Last week I attended the NIRI Southwest regional conference in Ft. Worth and it reinforced my opinion that the Southwest regional conference is a better overall learning experience than the NIRI national conference. I have a variety of reasons for saying this, but for today I want to focus on the educational aspect of the Southwest regional conference. The national conference seems to be locked into a format that is heavily dependent upon panel discussions featuring panelists that are long on narrow technical expertise and short on speaking skills. This was true a year ago when I attended in Seattle and a quick review of the 2013 National conference agenda reveals that the vast majority of the sessions continue to be panel discussions. The result of many panel discussions viewed in quick succession is the verbal equivalent of Chinese water torture – many words delivered in a monotone, leading to eventual brain damage. </div>
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The Southwest regional conference, in the years when it has been organized by the Houston chapter, has broken from this mold. In 2010 and 2012 the conference featured a case study that forced attendees to work together and make decisions. They went beyond that and introduced several new formats to the conference this year. (Full and fair disclosure: I was on the conference planning committee, but due to my move back to Chicago, cannot claim much credit for the work of the planning committee.) In addition to the usual speakers and panel discussions, the conference introduced an interactive case study based on a real life example (featuring yours truly), a point - counterpoint style debate featuring practitioners discussing current hot topics in IR, an IR version of the dating game where IR officers try to convince an analyst to cover their company’s stock, and my favorite, three short (20 minute) TED style talks where people addressed issues near and dear to their hearts with passion and conviction. The result was a mix of information delivered in memorable fashion that consistently engaged the audience.</div>
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When you are in investor relations, a key element to what you do is communication. I can only hope that the National Investor Relations Institute takes note of how the Southwest regional conference is expanding the communication boundaries in order to help people remember what they learn at conferences and become better practitioners of investor relations. After all, isn’t what these conferences are all about?</div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-48505935377439861262013-07-23T10:17:00.000-05:002013-07-23T10:17:54.251-05:00Lights! Camera! Earnings Call!!<div dir="ltr" style="text-align: left;" trbidi="on">
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Lets face it – earnings calls are boring. Lawyers will tell you that this is a good thing because you are far less likely to get sued or have regulators come down on you if you don’t do anything splashy. So for most companies the earnings conference call has evolved into an elaborate kabuki theater consisting of 20 – 25 minutes of prepared remarks followed by 25 – 30 minutes of questions from analysts.</div>
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The prepared remarks are the worst – many times all you get is a regurgitation of the earnings press release, proving only that the CEO and CFO can read. This is because lawyers, ever fearful of Reg. FD, are reluctant to allow even the smallest snippets of information to vary from what has been “broadly disseminated” in a press release format. So you wind up with a highly paid executive reading dishwater dull financial information to analysts and investors who have already read the press release and put the numbers in their models. My guess is that with earnings season being notoriously busy, most analysts are only listening with half an ear to the prepared remarks while they multi-task on other things.</div>
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The question and answer sessions are a bit more interesting, if only because there is some uncertainty at work, both in the questions that are asked and the answers given by executives. Keep in mind however, that companies have a system for controlling who gets to ask questions, and when on the call the questioner will appear. Thus invariably, the company’s favorite analyst (read “biggest booster”) will get the cherished first question position, and the question is likely to be one that management has no difficulty answering. Thus analysts are often reduced to the role of the old Kremlin watchers, where more information is to be gleaned from nuance, voice tone and innuendo than in the party line answers executives spout.</div>
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Now, however, the earnings call may be starting to evolve. Last week Yahoo’s CEO and CFO presented a live webcast of its second quarter earnings call. In most respects, their webcast was just like an earnings call, except you could see the executives. Thus, in addition to voice tone and inflection, analysts and investors could also judge body language. This also means that, unless it was done off camera, no one could surreptitiously slip answers to the executives. This is perhaps a small step, but it does add a few more points that investors can use in judging management.</div>
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A few days later, Netflix also broke with the typical earnings call with a slightly different format. In their presentation, which was conducted on Google Hangout via webcam and posted to YouTube, Netflix dispensed with the prepared remarks entirely and went directly to questions and answers. This is probably a good development, as it avoids needless repetition of financial information. The questions were compiled beforehand and posed to management by a reporter and an analyst. This may be a less salutary development, as it favors a single analyst and reporter, and while the company says that it did not see the questions beforehand, this process may be open to manipulation. In addition, because many of the questions were composites, there was no attribution of questions to any particular analyst, which I’m sure did not please the sell side community.</div>
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In general, both presentations were well received as bringing something new to the staid conference call format. I can only hope that more companies start to push the envelope in order to make things more interesting and to stand out from the crowd. Because, with disclosure to investors, as with classical economics, more is better - at least until you get to the point of disutility…</div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-42479466134496442522013-07-11T10:23:00.000-05:002013-07-11T10:23:22.450-05:00The Application of Greek Mythology to Investor Relations<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: Times, Times New Roman, serif;">Having received a degree in history from a small liberal arts college, I periodically feel the need to justify all the obscure, unrelated and mostly useless knowledge I picked up in the course of my education. This actually comes in handy from time to time if you are in the business of communicating, which, of course, we all are in investor relations. </span><br />
<span style="font-family: Times, Times New Roman, serif;">When I teach or give a public talk, I like to bring in a variety of arcane sources in order to keep the audience engaged. I find that introducing something interesting, which, at first blush has no connection to the topic, helps to get people thinking about what you’re saying. Of course, sometimes it’s the only thing they remember from your talk, but I’m happy if they remember anything at all from my talks.</span><br />
<span style="font-family: Times, Times New Roman, serif;">For example, a number of years ago I was given the task of explaining executive benefits at a 7:00 AM meeting. This is about as bad as it gets – a dull topic at a miserable time of day. The strategy I hit upon to liven things up enough to keep people awake was to use song lyrics to illustrate my points. (I freely admit that I stole this idea from a Bar exam prep teacher I had many years ago, but the best ideas are often stolen.) I had to work at it – not many songs mention stock options or long term disability insurance – and eventually references ranged from Gershwin to 1960s Motown to Pink Floyd, but I kept the audience interested in what I was saying. </span><br />
<span style="font-family: Times, Times New Roman, serif;">I bring this up because one of the obscure references I like to mention when I discuss the role of communications in investor relations is Sisyphus. Those of you that were blessed with a proper grounding in Greek mythology will recall that Sisyphus was the Greek King who incurred the displeasure of Zeus and was sentenced to roll a huge bolder up a steep hill, only to have the bolder roll back down to the bottom of the hill before he arrived at the summit, forcing Sisyphus to begin all over again. This ceaseless effort very concisely describes the process of communications in investor relations.</span><br />
<span style="font-family: Times, Times New Roman, serif;">When you are communicating with investors, as they used to say in an old Nike ad, “There is no finish line”. The company is constantly moving towards its next reporting date. You are either just reporting results or getting ready to report results. The company and its strategy are continually evolving, requiring you to refresh your message. The composition of your investor base is also routinely changing as the stock is bought and sold, causing you to have to regularly educate an entirely new set of investors. In short, it never stops.</span><br />
<span style="font-family: Times, Times New Roman, serif;">Nor should it. Good investor relations requires continual communication with investors and potential investors. The more you communicate in a transparent manner, the fewer surprises will confront investors and the less volatile your stock will be. When more information that is routinely transmitted to the Street it also means that there is less opportunity for insider trading. In short, as in economics, more is generally better until you arrive at the point of disutility. What constitutes disutility of information is a discussion for another day. For now, I will leave you to roll the rock up the hill.</span><br />
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<span style="font-family: Times, Times New Roman, serif;"><i>(For those of you who are interested in classical Greek analogies, you may also be interested to read my post from October, 2008 “Greek Classics Revisited” comparing the financial crisis to the Iliad.)</i></span><br />
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-57874014539582151632013-06-26T11:29:00.000-05:002013-06-26T11:29:11.378-05:00The Slippery Slope of “Adjusted” Earnings<div dir="ltr" style="text-align: left;" trbidi="on">
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I’m just a simple guy. I tend to like my food without fancy sauces, and when it comes to ice cream, I favor simple flavors such as chocolate and vanilla. And when it comes to reading earnings reports, I prefer a simple, understandable description of what the earnings were in accordance with generally accepted accounting principles. </div>
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I have a simple rule of thumb – the more “adjustments” that a company makes in reporting its earnings, the less I believe them. I’m not so unsophisticated that I won’t concede that there are times when special circumstances have occurred and reporting the effects of those special circumstances is helpful for investors. In fact, I am a proponent of more disclosure rather than less. But the fact of the matter is that companies have a large amount of discretion about what goes into and out of accounting reserves and adjustments. And when there is discretion, there is always the temptation to make the numbers look better by playing with the adjustments. </div>
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So it was with some interest that I read Walgreens third quarter earnings report yesterday. (Disclosure – I own Walgreen Co. stock.) The first thing that caught my eye was that the release led with a statement that adjusted earnings per share increased by 18.1%, compared to a 4.8% increase in GAAP EPS. This is a pretty large discrepancy, so I naturally I went looking for the reasons. And to their credit, in the third paragraph of the release, Walgreens details all the adjustments they make in arriving at their adjusted earnings number. The paragraph goes on for a bit, and it will never win a prize for clear expository prose, but when you add things up, Walgreens adjusts their earnings in the third quarter for six items, adding back $.20 to GAAP earnings of $.65. In other words, Walgreens wants you to believe that earnings were a full 30% better than generally accepted accounting principles require them to report. </div>
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Thirty percent is a bit of a stretch, but if it helps you to understand the basic business, then it could be helpful. So I went through all of the adjustments and applied a simple rule of thumb; if the adjustment related to something outside of Walgreens control, meaning that the charge didn’t result from something management elected to do, then it was a legitimate adjustment. When you do that, then only one item, a settlement with the DEA, was really from an outside agency. Everything else, related to acquisition costs, a LIFO charge, a tax related to Alliance Boots, and the change in value of warrants, was caused by decisions management made in entering into transactions or electing an accounting treatment. If we are to judge a company not only on their earnings, but on the quality of decision that management makes, then these are charges that the company is responsible for and should be reported as such. </div>
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Back in the height of the internet bubble, you had a lot of companies reporting in this manner. People referred to it as “earnings without the bad stuff” and it gave the impression that management was trying to divert investors’ attention from problematic performance. I can only hope that Walgreens, a company long known for its integrity, is not going down that slippery slope.</div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com1tag:blogger.com,1999:blog-3651010135173678358.post-47816341471381167012013-05-31T09:32:00.001-05:002013-05-31T09:32:17.767-05:00Social Media, the SEC and Corporate Disclosure – a Wobbly Three Legged Stool<div dir="ltr" style="text-align: left;" trbidi="on">
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I’m always surprised by it, but it turns out that some
people actually read what I write. In my last post I wrote about the practical
implications of the SEC’s recent Netflix social media investigation. In a
nutshell, here’s what I said: <o:p></o:p></div>
<div class="MsoNormal" style="margin-left: .5in;">
“…the release basically establishes
a safe harbor for the use of social media which investor relations departments
should waste no time in establishing as a prudent risk management tool. The SEC
has said that companies should take steps to alert the market about which forms
of communications a company intends to use for dissemination of material,
non-public information. Therefore, adding language to a company’s web site and
press releases to the effect that the company may from time to time use social
media sites to disclose important information would seem to be the prudent
thing to do.”<o:p></o:p></div>
<div class="MsoNormal">
Shortly thereafter I received an email from Broc Romanek at
TheCorporateCounsel.net (<a href="http://www.thecorporatecounsel.net/">www.thecorporatecounsel.net</a>)
explaining his take on the issues at hand. I have a great deal of respect for
Broc and will readily admit that he knows more about the ins and outs of how
the Securities and Exchange Commission works and thinks about issues than I do.
On the other hand, I’ve spent the bulk of my career inside public corporations
and have a pretty good feel for that particular viewpoint. I’ve reproduced (with Broc’s permission) the
email exchange below because I think it is a good illustration of the two
points of view on this subject.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="margin-left: .5in; mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span style="color: #1a1a1a; font-family: Arial;">John –
on your blog about the SEC’s guidance, the CYA approach actually is
problematic. As borne out on my webcast on this topic last week, I hear that the
SEC Staff is not happy with those companies announcing a bevy of SM
channels for which they have no real intention of using them as investor
communication venues. And investors probably don’t want to be forced to track a
bevy of channels for which the company doesn’t intend to provide useful info
for them. It’s a loser on both fronts.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .5in; mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<br /></div>
<div class="MsoNormal" style="margin-left: .5in;">
<span style="color: #1a1a1a; font-family: Arial;">thx, broc<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="color: #1a1a1a; font-family: "Avenir Next Condensed Regular"; mso-bidi-font-family: Arial;">Broc:<o:p></o:p></span></div>
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<br /></div>
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<span style="color: #1a1a1a; font-family: "Avenir Next Condensed Regular"; mso-bidi-font-family: Arial;">I recognize that it's problematic,
but it is a problem the SEC created. If I was a general counsel, and I had the
opportunity to create one more layer of insulation from Reg FD claims, I would
grab it. Fear of Reg FD retroactive enforcement is a giant bugaboo for many
companies, so doing everything you can to lower the chance that the SEC will
open an investigation makes sense.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="color: #1a1a1a; font-family: "Avenir Next Condensed Regular"; mso-bidi-font-family: Arial;">From an investor's standpoint it is a
real headache to follow multiple feeds, but most investor relations departments
will take the view that it is not their job to make the analysts' job easier.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="color: #1a1a1a; font-family: "Avenir Next Condensed Regular"; mso-bidi-font-family: Arial;">I think the CYA approach only works
if the social media site is widely followed and qualifies as a recognized
channel of distribution, but as more companies use social media, and CEOs
become more comfortable with blogging & posting, there has got to be a way
to facilitate open communication without constant fear that you will wander
into the Reg FD quagmire.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="color: #1a1a1a; font-family: "Avenir Next Condensed Regular"; mso-bidi-font-family: Arial;">John<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="margin-left: .5in;">
<span style="color: #1a1a1a; font-family: Arial; mso-bidi-font-family: Calibri;">John: I believe there is way too
much paranoia about Reg FD compliance. Just because a statement may be Reg FD
compliant – because a CYA channel was created – it isn’t insulated from a 10b-5
claim that the statement was misleading or omitted something, which will be the
more likely result – and much more serious result – when something “material”
is posted on a SM channel, particularly Twitter since it is limited to just 140
characters.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .5in;">
<span style="color: #1a1a1a; font-family: Arial; mso-bidi-font-family: Calibri;">Broc<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .5in;">
<br /></div>
<div class="MsoNormal">
<span style="color: #1a1a1a; mso-bidi-font-family: Calibri;">I’m
not sure what all the implications of this social media stuff are, but this is
probably a good illustration of the law of unintended consequences relating to
governmental regulation. The SEC says its OK to use social media to disclose
material non-public information if it qualifies as a </span>“recognized channel
of distribution” for communicating with their investors<span style="color: #1a1a1a; mso-bidi-font-family: Calibri;">, </span>but
then is not happy when companies announce they intend to use them. Companies on
the other hand, see this as a way to add a layer of protection so they don’t
wind up in the SEC’s crosshairs when their CEO either gets carried away when
writing a blog or Facebook post or writes something that they genuinely believe
is not material as Reed Hastings of Netflix did. <o:p></o:p></div>
<div class="MsoNormal">
The point of all
of this should be to enhance and facilitate the flow of information to
investors and allowing social media to serve as a recognized channel of
distribution will help accomplish this. <o:p></o:p></div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-71813156499505517252013-05-15T11:48:00.000-05:002013-05-15T11:48:41.394-05:00The Practical Implication of the SEC’s Netflix Social Media Investigation <div dir="ltr" style="text-align: left;" trbidi="on">
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Investor relations Musings has been on hiatus over the past five months as various items from my personal life – selling a house, moving back to the Chicago area, buying a new house, finishing my teaching at the Jones Graduate School of Business at Rice University – have conspired to keep me from doing much writing. However, now I’m back to add my two cents to whatever investor relations topics catch my fancy.</div>
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In the period during which I’ve been silent, perhaps the most interesting investor relations development has been the SEC’s report of investigation regarding Netflix. You may recall that Reed Hastings, the CEO of Netflix, used of his personal Facebook page to disclose that Netflix had exceeded 1 billion hours of viewing during a single month and the SEC investigated whether this constituted a violation of Regulation Fair Disclosure. The case presented a number of interesting issues. First, there was the threshold question of whether an internal company metric such as viewing hours should be considered material, when company revenue was based on fixed subscriber fees, not viewing hours. Second, the case presented a great example of how a company, by talking about an internal company metric such as viewing hours in both public documents such as press releases and shareholder letters, and in less public documents such as blogs and Facebook pages, builds a case for the SEC that the information is in fact material. (This is a great example of how trying to be transparent can get you into trouble with regulators, but that is a topic for another day.) </div>
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However, the SEC sidestepped these issues by giving Reed Hastings and Netflix a pass on any regulatory sanctions and using the investigation to issue guidelines on the dissemination of material non-public information through social media sites. In a nutshell, the SEC said you can do it, as long as you tell investors where to look and your social media sites qualify as a “recognized channel of distribution” for communicating with their investors. </div>
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From my point of view, the release basically establishes a safe harbor for the use of social media which investor relations departments should waste no time in establishing as a prudent risk management tool. The SEC has said that companies should take steps to alert the market about which forms of communications a company intends to use for dissemination of material, non-public information. Therefore, adding language to a company’s web site and press releases to the effect that the company may from time to time use social media sites to disclose important information would seem to be the prudent thing to do. For example, here’s what General Electric said in its first quarter 2013 earnings release: </div>
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“GE’s Investor Relations website at www.ge.com/investor and our corporate blog at www.gereports.com, as well as GE’s Facebook page and Twitter accounts, contain a significant amount of information about GE, including financial and other information for investors. GE encourages investors to visit these websites from time to time, as information is updated and new information is posted.”</div>
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For most companies the point of this statement would not be to establish social media as their principal points of disclosure, but rather to insulate them in the event some important piece of information slips out in a twitter, Facebook or blog post. Remember, what is considered material, non-public information is determined with the benefit of 20/20 hindsight.</div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-48907276791026558312012-12-05T14:37:00.000-06:002012-12-05T14:37:59.512-06:00Used Car Auctions, Disclosure and Investor Relations<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: Georgia, Times New Roman, serif;">Economists love auctions. Nowhere else can they as clearly observe the interplay of various causes upon supply and demand. It is capitalism at its most naked and allows economists to indulge their insatiable desire to measure the effect of different inputs upon prices. And sometimes they even come up with some useful stuff. </span><br />
<span style="font-family: Georgia, Times New Roman, serif;">The finance section of the November 24th edition of The Economist magazine featured an article on the work of several microeconomists that might actually have some useful application to real world markets. The one that caught my eye was a study by a couple of economists on the effect of information disclosure on used car auctions. (Information Disclosure as a Matching Mechanism: Theory and Evidence from a Field Experiment by Steven Tadelis and Florian Zettelmeyer, Electronic copy available at: http://ssrn.com/abstract=1872465).</span><br />
<div style="min-height: 14px;">
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
<span style="font-family: Georgia, Times New Roman, serif;">Now you may roll your eyes and mutter, “What do car auctions have to do with investor relations?” but indulge me for a moment. What we are interested with here is the information being disclosed and its affect upon pricing, not the item being sold. To quote the authors of the article:</span><br />
<div style="min-height: 14px;">
<br /></div>
<span style="font-family: Georgia, Times New Roman, serif;">“A market’s efficiency critically depends on whether its participants have sufficient information about the nature of the goods and services being traded. The potential hazard a buyer faces when trading in markets with information asymmetries often leads to market imperfections and stifles efficient trade. Indeed, in resale, housing, labor, health care, and corporate securities markets, sellers may have better information than buyers about the good or service being traded. Furthermore, sellers may have control over how much information to disclose, and buyers may choose how much information to acquire.”</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">In a survey of over 8,000 used car auctions, what the authors found was that increased information disclosure regarding the quality of the cars increased expected revenues. This is in line with current academic theory. But there was an interesting twist to their findings. Cars in the middle of quality rankings saw only modest gains while the biggest gains in revenue resulting from increased disclosure came for the best and worst quality cars. You might expect this with higher quality cars, as people will bid up the price if they know they are getting higher quality, but if the disclosures are of bad quality, logic would lead you to the conclusion that prices would go down further. Here’s what the authors say about their findings:</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">“When disclosed information coincides with expectations given observables, then it does not affect the composition of bidders who bid on the vehicle, and as a consequence, the outcomes are the same as they would be without information disclosure. However, when the information disclosed is either a positive or negative surprise relative to expectations, it will attract bidders who are relatively strong given the disclosed information. This benefits the seller regardless of whether information is good or bad news.”</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">In other words, the additional disclosures, even if they are bad news, attracts new bidders who are interested in that class of goods and who may have a better understanding of the merchandise and its value to them. The result is that they pay more than bidders with a more general outlook. </span><br />
<span style="font-family: Georgia, Times New Roman, serif;">Now think of the implications for the stock market. Typically, weak performing companies tend to disclose as little as possible about their problems. As a result, there is usually a fair amount of uncertainty about their future performance and that helps keep their stock price depressed. According to this new research however, they would be better off to more fully describe their problems. By eliminating some of the information uncertainty, even though the news is bad, they will attract more value and deep value investors who are better able to assess the risks of the investment. The result would be a better alignment of the firm’s intrinsic value with its market value. (Of course, it will still be a lousy stock price because the outlook is bad, but it will be a better lousy stock price than without the additional disclosures.)</span><br />
<span style="font-family: Georgia, Times New Roman, serif;">I would love to be able to test this academic theory in a real world setting where a company has hit a bad patch, but something tells me that I am more likely to find an honest used car salesman than I am to find a CEO willing to bare all about his company in bad times.</span><br />
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-26467487723578208402012-11-05T14:17:00.000-06:002012-11-05T14:17:15.876-06:00Economics, Incentives and Investor Relations<div dir="ltr" style="text-align: left;" trbidi="on">
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One of the favorite theories of economists is that people
respond to incentives. Ask an economist about how to change a person’s behavior
and they will respond that if you put into place the proper incentives, people
will alter the way they do things.<span style="mso-spacerun: yes;"> </span>Of
course, there always seems to be unintended consequences, but that gives people
like me something to write about.<o:p></o:p></div>
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Looking at incentives has a number of applications with
respect to investor relations. For example, if you really want to understand
why corporate managements are doing what they’re doing, look at the
compensation programs their companies have in place. For example, if a company
has as a key component of its incentive plan Return on Equity, investors need
to consider the consequences. In itself, ROE as a measure used in compensation
bonuses is not a bad thing, because it rewards efficient use of corporate
capital and causes corporate managers to think twice before undertaking risky
projects. However, the unintended consequence of using ROE may well be that
instead of expanding the company through new projects, management will figure
out that it is safer for their bonuses to buy back stock in order to lower the
equity denominator in the ROE equation. As a result, the company may shift away
from expanding its core business and focus instead on buying back stock, in
essence becoming more driven by financial measures than operating measures. <o:p></o:p></div>
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Or consider how a company’s bonus plan is constructed. If
management’s bonus is calculated off actual results, the focus will be on
achieving that particular target, whether it is improvement in EPS or operating
profit or something more exotic. However, if a compensation plan is constructed
to measure against management’s plan for the coming year, then there is every
incentive for management to sandbag the plan, thereby setting up easily
achieved bonus goals. In such a case, investors need to ask “What’s the plan?”
because if management exhibits a low opinion of its ability to hit operating
goals, investors shouldn’t be expected to build in large gains into their stock
performance expectations.<o:p></o:p></div>
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What caught my eye and started me thinking about incentives
actually comes form the opposite side of the equation. As you may recall, the
Dodd-Frank Financial Reform Act of 2010 contained language regarding payments
to whistleblowers in fraud actions. In short, if a whistleblower provides
independent information of fraud to the SEC that results in a successful
enforcement action that recovers at least $1 million in sanctions, the
whistleblower is entitled to recover at least 10% and up to 30% of the
recovered funds. For more on the law, see my blog post “Whistle While You Work”
dated February 28, 2011.<o:p></o:p></div>
<div class="MsoNormal">
Now, a little over a year after the law went into effect,
The Wall Street Journal through its Marketwatch web site reported on October
18, 2012 that the SEC is averaging 8 tips about fraud per day, for a total of
2,820 to date. It seems as if the incentive part of the law is working. Of
course, receiving a tip and conducting a successful prosecution are two
separate things, as the same article reports that to date, only one
whistleblower has received a payout under the provisions of Dodd-Frank. The
unintended consequence here may be that the SEC simply doesn’t have the
resources to sift through all the information to determine the best cases to
prosecute.<o:p></o:p></div>
<!--EndFragment--></div>
John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-23121963396096418142012-09-28T14:00:00.000-05:002012-09-28T14:01:07.405-05:00Selling the Academic Side of Investor Relations<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div style="font: 12.0px Helvetica; margin: 0.0px 0.0px 0.0px 0.0px;">
When you are an academic, if you really want to make it big, you need to come up with a snappy way to sum up your thinking on your area of expertise. For example, Porter has his Five Forces that describe his thinking on strategy – supplier power, buyer power, competitive rivalry, the treat of substitution and the threat of new entry. Similarly, Kotler has the four Ps of marketing: product, price, promotion and place. So I’ve been thinking: Why doesn’t investor relations have a way to neatly encapsulate what it is we do? Seeing this as a real hole in the academic literature, I have decided to step into the void and propose (with apologies to T. E. Laurence and the Seven Pillars of Wisdom), Palizza’s Five Pillars of Investor Relations.</div>
<div style="font: 12.0px Helvetica; margin: 0.0px 0.0px 0.0px 0.0px;">
I choose the wording of pillars because what I am about to describe are the skills needed to form a strong support base for an investor relations program (also, I couldn’t come up with a clever acronym or make everything begin with the same letter). Plus, this allows me to crate a clever visual slide for my class featuring Greek columns to drive the point home. So, without further ado, here is a brief description of what I consider to be the essential skill and knowledge requirements to do investor relations well – the pillars of investor relations.</div>
<div style="font: 12.0px Helvetica; margin: 0.0px 0.0px 0.0px 0.0px;">
FINANCE – It is essential that a good investor relations officer have a thorough understanding of the components of his company’s income statement, balance sheet and cash flow statement, as well as the accounting treatments they derive from. On the theoretical side, the IRO needs to be comfortable with the different valuation models used by Wall Street to value his company’s stock and the role of investor relations in the efficient markets.</div>
<div style="font: 12.0px Helvetica; margin: 0.0px 0.0px 0.0px 0.0px;">
MARKETING - How to segment the investment universe, target appropriate investors and position the company story to appeal to those investors are basic marketing skills that are critical to good IR. At a deeper level, using marketing techniques to more efficiently use limited resources to focus on the most important investors can help IR have a bigger impact.</div>
<div style="font: 12.0px Helvetica; margin: 0.0px 0.0px 0.0px 0.0px;">
COMMUNICATIONS – Crafting a memorable message that resonates with investors is a critical communications skill that is used in IR. This is closely followed by figuring out what disclosures, above and beyond those mandated by regulations, will assist investors in understanding the intrinsic worth of a company. All of this presupposes a solid understanding of your company and industry. Finally, the skilled use of multiple communications channels is becoming ever more important as new means of communication such as social media proliferate.</div>
<div style="font: 12.0px Helvetica; margin: 0.0px 0.0px 0.0px 0.0px;">
LAW – Everything in investor relations is circumscribed by laws, regulations and case decisions. They cover everything from what you say (the periodic reporting requirements of 10-Ks and 10-Qs and mandated disclosures of 8-Ks), to when and to whom you say it (Reg. FD) to why you say it (the case decisions concerning materiality and other items). </div>
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CAPITAL MARKETS – Knowledge of how the stock markets work is an essential skill of the IRO. If you don’t think so, try telling your CEO that you don’t really understand what the markets are doing the next time he sticks his head into your office and asks why the stock is trading down. Understanding liquidity, volatility, auction markets and the other things that impact the way your stock is traded and how to access information about them quickly are necessary pieces of information for the IRO.</div>
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Well, there you have it: The Five Pillars of Investor Relations. Now all I have to do is sit back and wait for the book offers to come rolling in…</div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com1tag:blogger.com,1999:blog-3651010135173678358.post-70875027453903221442012-08-15T16:22:00.000-05:002012-08-15T16:25:32.985-05:00A Hypothetical Model to Help in Thinking About the Value of Investor Relations<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: Verdana;"><i>(Author's Note: A version of this post originally appeared on the web site Corporate Eye. I liked it so much that I am recycling it here.)</i></span></div>
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<span style="font-family: Verdana;">People
in the academic world are big on constructing models to prove their financial
theories. These hypothetical constructs blithely disregard such things as
taxes, transaction costs and the fact that emotional, sometimes illogical
humans are part of the market process. They don’t allow messy reality to
interfere with their elegant equations, but the models are useful in
highlighting a theory or hypothesis. Many an academic prize (and even some
Nobel Prizes) has been won by building explanatory models that make huge
assumptions and leaps of faith. In fact, my favorite quote about finance makes
a nod to this as it relates to the Efficient Market Hypothesis. Fischer Black,
a former Professor at the Massachusetts Institute of Technology (MIT), which
sits next to the Charles River in Cambridge, Massachusetts, took a job with
Goldman Sachs in New York, situated next to the Hudson River. After working
there for a while, he was heard to remark, “Markets look a lot less efficient
from the banks of the Hudson than from the banks of the Charles”.<span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference"><span style="font-family: Verdana; font-size: 11.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;"><a href="http://www.blogger.com/blogger.g?blogID=3651010135173678358#_ftn1" name="_ftnref1" style="mso-footnote-id: ftn1;" title="">[1]</a></span></span><a href="http://www.blogger.com/blogger.g?blogID=3651010135173678358#_ftn1" name="_ftnref1" title=""></a></span></span><o:p></o:p></span></div>
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<span style="font-family: Verdana;"><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference"><br /></span></span></span></span></div>
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<span style="font-family: Verdana;">As
I consider myself only a quasi-academic – that is, I teach but I don’t engage
in any of the pedantic research that clogs the academic financial journals
(plus, I have not yet sewn patches on the elbows of my tweed jacket, nor have I
taken up smoking a pipe), I thought I would serve up for the benefit of my
readers a theoretical quasi-model to help think about the value of investor
relations. Recognizing that investor relations is a discipline that involves
real people and information, I will keep it quasi-simple.<o:p></o:p></span></div>
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<span style="font-family: Verdana;"><br /></span></div>
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<span style="font-family: Verdana;">Start
by thinking of two theoretical firms, both in the same industry and each
performing exactly the same in financial terms. That is to say, according to
their past performances, their growth rates are similar, their rates of return
do not differ in any material way and they serve the same customer base. Firm A
discloses exactly what is required by the regulations, and nothing more. It makes
no effort to explain its more complicated accounting treatments and it does not
reveal anything about its strategy or future plans. It does not respond to
investor inquiries, does not make management available to investors and
analysts, and does not present at any industry conferences. In short, beyond
the regulatory filings it makes, it remains silent.<o:p></o:p></span></div>
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<span style="font-family: Verdana;"><br /></span></div>
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<span style="font-family: Verdana;">Firm
B on the other hand, tries to be as open and transparent as possible, going
beyond the regulatory disclosure requirements to explain its business and
strategy, meeting with investors and regularly presenting at industry
conferences. They keep up a steady stream of information that keeps investors
informed on a timely basis, not just on a regulatory filing basis. <o:p></o:p></span></div>
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<span style="font-family: Verdana;"><br /></span></div>
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<span style="font-family: Verdana;">The
question to be asked then, is under that hypothetical situation, should Firm B
get a higher valuation than Firm A? I submit that under these conditions, it is
highly likely that a premium will be attached to the valuation of Firm B,
compared to Firm A. There are several reasons for this, chief of which is that
investors will view the greater transparency into operations and management
thinking about the future as enabling them to make better estimates about
future cash flows. Secondly, the cost to investors of acquiring information has
been lowered by Firm B, and this should show up in their valuation. Third, the
amount of information asymmetry between the company and the investors has been
lowered by Firm B, which should also be reflected in a higher valuation.
Finally, although the information Firm B extends beyond that required by the
regulations is not material in any one piece, in the aggregate it may help in
the assembly of a mosaic of information that may be material to investors.<o:p></o:p></span></div>
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<span style="font-family: Verdana;">Unfortunately,
I do not have an elegant equation to quantify the value of the of these
investor relations activities. I do think it suggests however, that at least
for companies where information is widely disseminated, much of the value in
investor relations is in the selection and disclosure of information beyond
what is required by regulation.<o:p></o:p></span></div>
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<span style="font-family: Verdana;"><br /></span></div>
<div class="MsoNormal" style="line-height: 150%;">
<span style="font-family: Verdana;">Now,
if you want to nominate me for an academic prize, be my guest. Of course, with
my luck it will turn out to be a quasi-prize…<o:p></o:p></span></div>
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<br clear="all" />
<hr align="left" size="1" width="33%" />
<div id="ftn1" style="mso-element: footnote;">
<div class="MsoFootnoteText">
<a href="http://www.blogger.com/blogger.g?blogID=3651010135173678358#_ftnref1" name="_ftn1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference"><span style="font-family: Garamond; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">[1]</span></span></span></span></a> As
quoted in <i style="mso-bidi-font-style: normal;">Against the Gods</i> by Peter
L. Bernstein.<o:p></o:p></div>
</div>
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John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com1tag:blogger.com,1999:blog-3651010135173678358.post-55189508675256907372012-07-09T14:44:00.000-05:002012-07-09T14:44:36.332-05:00Thoughts on the 2012 NIRI National Conference<div dir="ltr" style="text-align: left;" trbidi="on">
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It is a well-known axiom among educators that different
people learn in different ways. That’s why when you put together a program, you
include a variety of different types of learning mechanisms. Alas, this is not
a lesson that has been learned by the National Investor Relations Institute. <o:p></o:p></div>
<div class="MsoNormal">
Last month I journeyed to Seattle to attend the NIRI Annual
Conference. I had not attended the annual conference in several years and was
hoping to get updated on the latest developments in the profession. What I was treated
to was two and one half days of unremitting panel discussions. Not only that,
but most of the panel discussions featured speakers that were subject matter
experts in fields other than investor relations, so that we were hearing from
them about specialized topics as they might relate to IR. The amount of
coordination and preparation by and among the panelists appeared to be patchy
at best. There may have been good information in there, but after the first
couple of panel discussions I had gone numb. <o:p></o:p></div>
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Contrast this with TED Talks (<a href="http://www.ted.com/">http://www.ted.com/</a>).
If you’ve ever seen a speaker at TED, you know a.) They are passionate about
their subject, and b.) They are committed to giving the talk of their lives in
18 minutes or less. The result is consistently fascinating information
delivered in a riveting fashion. Why can’t NIRI, an organization of
professional communicators, come up with a way to be as interesting? For
communicators, a conference full of panel discussions is the equivalent of
going to a decorators’ convention and seeing everything painted white.<o:p></o:p></div>
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So here’s a modest suggestion for the NIRI national
conference: Put out a call to members of the profession for presentations, no
more than 15 minutes in length, about something they do that is unique,
different or best in class related to IR. The best presentations would then be
featured at the NIRI National conference in front of their peers. Talk about a
chance to shine and be recognized as one of the best in your profession. At the
same time best practices would be shared in an entertaining format. <o:p></o:p></div>
<div class="MsoNormal">
But it’s not just about sitting passively and listening to
people talk. People learn by doing as well. Interactive learning through case
studies is a great way for people to work with concepts in real life
situations. The Houston NIRI chapter has successfully used case studies at the
last two Southwest regional conferences they’ve organized and even received
awards from NIRI for them. So when the Houston chapter offered to put on a case
study at this year’s national conference, you would have thought that NIRI
would feature it as a great change of pace and a different way to impart
information. Instead, NIRI put the case study as an optional workshop after the
main conference had ended. I was participating in the case study and even I was
ready to go home by the time the case study started. As a result of the
scheduling, only 30 people out of the 1,300 that attended the conference stayed
around for the case study. Talk about the waste of a learning opportunity.<o:p></o:p></div>
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I have been making presentations for more than 30 years and
have taught in business school for 5 years, and one thing I’ve learned is that
people will remember things if you make it interesting and memorable. I hope that
NIRI learns the same lesson before the next annual conference. <o:p></o:p></div>
<!--EndFragment--></div>John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-29874406085592717572012-05-30T09:19:00.000-05:002012-05-30T09:19:30.516-05:00Guidance? Here’s a Map - Find Your Own Way!<div dir="ltr" style="text-align: left;" trbidi="on">
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While there are sound reasons for some companies to issue
earnings guidance, some of which I discussed last week, I want to go on record
as stating that I don’t like companies giving guidance. Part of this is that I
don’t like the gamesmanship that goes into the guidance number. (In business
school, game theory was a continuous source of puzzlement to me – I never did
figure out who was wearing the red hat.) <o:p></o:p></div>
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Because the market tends to penalize you heavily if you miss
your guidance number, most companies sandbag the number to a certain degree. So
after a few quarters where the company beats its guidance, analysts &
investors have yet another reason to question the credibility of management.
Then they start to raise their estimates because they are convinced that
management’s estimates are too low, and management starts to get into the whole
business of trying to keep analyst estimates in line. The end result is that it
becomes a vicious cycle consuming a lot of investor relations time and effort that
does little to help investors understand the intrinsic worth of the company.<o:p></o:p></div>
<div class="MsoNormal">
So now that you know my bias, here are a number of reasons
not to give guidance:</div>
<div class="MsoNormal">
<span style="mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"><span class="Apple-style-span" style="font-family: Times; font-size: small;">1. </span> </span></span></span>Don’t
give guidance if you are in an unpredictable business. This should be obvious,
but you see it all the time. For example, insurance companies are in the
business of underwriting uncertain risks. They don’t know when the next natural
disaster will wreak havoc with their earnings, so it makes no sense for them to
be giving guidance on earnings.</div>
<div class="MsoNormal">
2. Don’t
give guidance if you are not very good at it. If your company has given
guidance in the past, but you find that you have to constantly revise the
numbers downward, guidance is more trouble than it’s worth. Find a better
solution. (More about this later.)</div>
<div class="MsoNormal">
3. Don’t
give guidance if it will cause management to engage is short-term practices
that are not in the best long-term interests of the company. Jiggling things
around to “hit the numbers” is a slippery slope at best and the road to
perdition at worst.</div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
<o:p></o:p></div>
<div class="MsoNormal">
Because the market is focused on future cash flows as a
means of valuing your company, it will make an estimate of your revenues and
earnings whether you help them or not. And if you don’t help them in some
fashion, the dispersion of estimates will be wider than if they received some
input from the company. But the input doesn’t have to be guidance. <o:p></o:p></div>
<div class="MsoNormal">
If you feel that your company needs to give out guidance,
then your company is not giving out enough interim information to let analysts
and investors come to a reasoned estimate on their own. Many companies tend to
be “black boxes” in between quarterly reporting periods.<span style="mso-spacerun: yes;"> </span>This is unfortunate, because the ideal of a
good corporate disclosure program should be to dispense enough information, and
update the information frequently enough, so that investors are able to
reasonably reach informed decisions about how you are performing. <o:p></o:p></div>
<div class="MsoNormal">
For example, many retailers put out monthly sales numbers.
By the time quarterly earnings come around, everyone knows the sales number for
the quarter. For many companies, this eliminates guessing around one of the
more uncertain numbers on the quarterly income statement and reduces the need
for guidance.<o:p></o:p></div>
<div class="MsoNormal">
Or consider Progressive Insurance, a company in an industry
that is notoriously difficult to predict. Progressive doesn’t give out guidance.
Instead, every month Progressive puts out a monthly income statement and
balance sheet. And as a result, they are well followed and their stock trades
with less volatility than many of its peers.<o:p></o:p></div>
<div class="MsoNormal">
Alternatively, if your management really means it when they
say they are running the company for the long-term, tell the market what your
long-term goals are, and how you’ve performed against them. This is known as
putting your money where your mouth is…<o:p></o:p></div>
<!--EndFragment--></div>John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com2tag:blogger.com,1999:blog-3651010135173678358.post-59530170495224920582012-05-22T11:40:00.000-05:002012-05-22T11:40:48.043-05:00Guidance – Part 1, Can’t Live With It, Can’t Live Without It<div dir="ltr" style="text-align: left;" trbidi="on">
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Back in the sexist days of yore, men had a saying: “Women –
Can’t live with ‘em, can’t live without ‘em.” That’s sort of the way I feel about
guidance, especially earnings guidance. Personally, I don’t like it, but I
recognize there are times when it’s necessary. It seems to me that if you give
guidance, and you hit your projected numbers, then you get no credit for it. On
the other hand, if you miss the numbers you guided to, investors really penalizes
you because they expect that you have better insight into the business than
they do. And if you beat guidance, then you were sandbagging the numbers and
analysts raise their future estimates so high that you are sure to miss in the
near future.<o:p></o:p></div>
<div class="MsoNormal">
Yet lots of companies give guidance, so they must feel they
need to. According to a 2010 NIRI survey on guidance practices, of the 269 responding
companies, 90% provide some form of guidance, 58% provide guidance on
earnings/EPS and 62% on revenue or sales. Baruch Lev, in his book “Winning
Investors Over” uses data from First Call and comes up with around 800
companies that provided quarterly guidance and 1,400 that provided annual
guidance in 2007. Companies must feel compelled to issue guidance because no sane
businessman is going to want to make a public forecast unless he is forced to
do so.<o:p></o:p></div>
<div class="MsoNormal">
So I went looking for some data to see if guidance was a
good thing or not. Not surprisingly, the data is mixed. In his book Baruch Lev
cites a number of academic studies in support of giving guidance. First, there
is a study that shows that companies are more accurate at quarterly guidance
than analysts. (This, of course, is not evidence that company guidance is
necessarily very accurate, just that it’s more accurate than analysts’.) Second,
he cites studies that indicate that guidance enriches the information
environment in the capital markets. By this I think he means that the very act
of giving guidance is another piece of information, which helps improve
transparency. And academic studies show that transparency leads to higher stock
prices, lower stock volatility and reduced cost of capital.<o:p></o:p></div>
<div class="MsoNormal">
On the other hand, the consulting firm McKinsey, in a study
published in the Spring of 2006, concludes “Our analysis of the perceived
benefits of issuing frequent earnings guidance found no evidence that it
affects valuation multiples, improves shareholder returns, or reduces share
price volatility. The only significant effect we observed is an increase in
trading volumes when companies start issuing guidance…”<o:p></o:p></div>
<div class="MsoNormal">
So there you have it: dueling experts that lead you to
exactly opposite conclusions. Given that it is not totally clear that guidance
is for every company, I thought I would try to lay out some of the thinking
that might lead a company to make an informed decision regarding guidance. My
next post will take the opposite side, citing the reasons not to issue guidance
and discuss some of the alternatives that I think are better.<o:p></o:p></div>
<div class="MsoNormal">
You should engage in guidance if:</div>
<div class="MsoNormal">
1. You
are a small cap company and have low sell side analyst coverage. One of the big
issues for small cap stocks is getting on the radar screen of analysts and
getting coverage. Anything a company can do to improve their chance of
coverage, including issuing guidance, should come into play in order to gain
the increased trading volumes, liquidity and visibility that come with
increased sell side coverage.</div>
<div class="MsoNormal">
2. You
are in a predictable business with good insight into near term revenues and
profits. Companies with recurring revenue streams or large backlogs of orders
to be fulfilled in the near future are an example here. Businesses with wide
swings in revenues dependent upon one-time orders are not good candidates.</div>
<div class="MsoNormal">
3. You
don’t want to give continuous updates on your business in between quarters. The
more transparent you can be on a continuing basis, the less you need to help
the street by giving guidance. (More on this next week.)</div>
<div class="MsoNormal">
4. Management
has the intestinal fortitude to run the business to plan and not manage the
earning to hit guidance. Accounting is full of subjective judgments and timing
issues. It is possible to move revenues into the current quarter or fiddle with
loss reserves to make earnings look better in the quarter so you hit your
guidance. This is almost never a good thing, but the pressure to “hit the
numbers” can be overwhelming at times. Don’t issue guidance if it is going to
warp the way you run your business.</div>
<div class="MsoNormal">
5. You
figure that the market is going to make a forecast anyway, so why not take
control of the process.</div>
<div class="MsoNormal">
I suspect there are many companies
that give guidance that do not fit any of the above reasons, but instead do it
because all of their peer companies give guidance. This is probably the worst
reason to do it, and for support, I cite motherly wisdom about all your friends
jumping off a cliff.</div>
<div class="MsoNormal" style="margin-left: .25in;">
<o:p></o:p></div>
<!--EndFragment--></div>John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com1tag:blogger.com,1999:blog-3651010135173678358.post-42503952932375532252012-05-16T10:43:00.001-05:002012-05-16T10:43:14.629-05:00One Tweet Over the Line - Social Media, Investor Relations and Common Sense<div dir="ltr" style="text-align: left;" trbidi="on">
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<br />
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Occasionally a sacrifice must be made to the gods of new
technology. That is why innovation is sometimes referred to as “the bleeding
edge”.<span style="mso-spacerun: yes;"> </span>The latest cautionary tale about the
brave new world of social media just happens to be about Gene Morphis, the now
former CFO of Francesca’s Holdings, a public company, who used Facebook and
Twitter to make comments about company and board activities and got fired for
his comments. <o:p></o:p></div>
<div class="MsoNormal">
We have been living with social media for a number of years
now, so perhaps it’s not exactly leading edge, but in areas touching upon
investor relations, companies have been late adopters, so there is not a lot of
precedence to guide people. However, there are two touchstones people should
use when putting out blogs, tweets and other social media postings.<o:p></o:p></div>
<div class="MsoNormal">
First, consider what the Securities and Exchange Commission
has said on the subject. To put it plainly, the SEC has stated that that
statements made by a company, or anyone who could be considered as speaking for
the company, must comply with all of the requirements and restrictions of the
securities laws. That means that you must be truthful, complete and not
misleading in any statements you make. You also have to comply with the
requirements of Reg. FD, and if your blog or twitter feed doesn’t qualify as a
broad based distribution method (and most probably do not) then you cannot use
it to release material non-public information.<o:p></o:p></div>
<div class="MsoNormal">
The second item to take into consideration in making social
media comments about your company is plain old common sense. One way to test
what you want to put in a blog or twitter post is to ask yourself, “Is this
something I would be comfortable saying to a room full of equity analysts?” If
not, then don’t put it out on the Internet where everyone can see it. This is
not rocket science, but there seems to be a switch that gets flipped when some
people get on the computer and start typing. People seem to think they can say
anything and not be held to the consequences. Who can forget John Mackey, the
CEO of Whole Foods making derogatory postings on a discussion board about a
company Whole Foods later acquired? (As an aside, Mackey appears to have
learned from his missteps as he now has a blog on the Whole Foods web site
which gives you good insight into the way he thinks about his business.)<o:p></o:p></div>
<span style="font-family: "Times New Roman"; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "MS 明朝"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">In the case in question,
there are a number of statements Mr. Morphis made that are just plain dumb, and
probably were reason enough to get him fired by a CEO and Board of Directors
lacking in a sense of humor. One example was on March 6th when he said, “Dinner
w/Board tonite. Used to be fun. Now one must be on guard every second."
But the post that, in my view, he deserves to get fired for was made the following
day when he wrote, "Board meeting. Good numbers=Happy Board." Given
that the quarterly earnings were not released until March 13, it appears to me
that he was making a comment on the upcoming quarterly earnings.<span style="mso-spacerun: yes;"> </span>It violates both of the considerations I
discuss above: it appears to disclose material non-public information in a
selective manner, and it is something that even the most junior investor
relations officer would have the common sense not to say. It is clearly, to
misquote an old Brewer & Shipley song, one tweet over the line.</span><!--EndFragment-->
</div>John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com1tag:blogger.com,1999:blog-3651010135173678358.post-57234986097336845092012-05-10T10:35:00.001-05:002012-05-10T10:37:59.845-05:00Read This Book - Winning Investors Over<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal">
To a large degree, investor relations exists in an academic
research vacuum. It is hard to find good data on many of the issues IR
practitioners spend their time on: guidance versus no guidance, how much
information should be disclosed, how to be effective on conference calls, and
the overall effectiveness of investor relations programs. Further, if you do go
looking for the data, as I have done for my class at Rice, it’s buried in
obscure academic journals and couched in dense academic verbiage. (If you are
looking for a summary of some of the findings, you can find them on my July 7,
2008 and March 13, 2008 posts.) As a result, much of what investor relations
people do is based upon common industry practices, hard learned experience and
word of mouth, filtered through the particular corporate environment in which
they operate. Hard data on whether or not these practices are effective is
simply hard to find and so people go with their gut reaction and what they are
comfortable with.<o:p></o:p></div>
<div class="MsoNormal">
To a certain extent I think this is because effective investor
relations covers a number of different disciplines, including finance,
communication, marketing and law. Add to that effectiveness mix the need to be
an expert on your company’s operations and industry and a comprehensive
understanding of how the capital markets work, and you can start to understand
why getting good comparisons on the difference between successful IR programs
and run of the mill efforts is so difficult.<o:p></o:p></div>
<div class="MsoNormal">
Recently however, I have run across a book that pulls
together the research in the area of disclosure and investor relations
activities and puts it into clear understandable language. (I’ve actually been
reading the book for a while now, but I’m having trouble getting through it
because I keep stopping to make notes to use in my investor relations class.) That
book is “Winning Investors Over” by Baruch Lev, a professor at the Stern School
of Business at NYU. It covers most of the issues that bedevil IR practitioners,
discusses what the research data shows, and makes recommendations on courses of
action. For example: Not sure what to do about guidance? Not only does this
book show you what the research says, it also helps you put the decision
process into a framework that helps you work through the issue. And he does
this with issue after issue. <o:p></o:p></div>
<div class="MsoNormal">
If you are an investor relations practitioner and you want
your company’s investor relations and disclosure practices to be informed by
the data, not just what everyone else does, you need to read this book. It is
so far beyond what I have seen in other books about investor relations as to be
in a class by itself. <o:p></o:p></div>
</div>John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0tag:blogger.com,1999:blog-3651010135173678358.post-13706369334203587792012-03-28T11:04:00.002-05:002012-03-28T11:06:43.684-05:00Moneyball for Investor Relations<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal">
I recently read Michael Lewis’ book Moneyball and was struck
by some of the similarities between what it discusses and what commonly occurs
in corporate investor relations. For those of you who may not have read the
book or seen the movie, Moneyball is the story of Billy Beane, the general
manager of the Oakland A’s baseball team who successfully positions his team to
compete against teams with much larger payrolls than the Oakland A’s were able
to afford. He does this by going against conventional wisdom and finding
players that do not fit the establishment’s idea of what a professional
ballplayer looks like but who contribute to winning in ways the establishment doesn’t
value. In essence, the normal way of viewing these players allows their
salaries to be mispriced in the marketplace and a general manager that
appreciates this can assemble a winning team for considerably less money. (The
football equivalent of this phenomena is Tim Tebow, who does not fit pro
football’s concept of what a professional quarterback looks like or does. All
he does is win yet the Denver Broncos seemingly couldn’t get rid of him fast
enough.)<o:p></o:p></div>
<div class="MsoNormal">
In investor relations, corporations are constantly applying
conventional wisdom to their detriment, which in their case means that the
value of their stock suffers. Take, for example, the following statement: “This
is what the regulations require us to disclose, and therefore that’s all we are
going to say”. This is what I call the regulatory mindset trap. The regulations
describe the minimum disclosure requirements, but they don’t tell you to put it
in context, or to make it intelligible. Anyone who has ever tried to parse
through statements in annual reports dealing with deferred tax accounting or
pension accounting can tell you that it is very difficult to make heads or
tails of these sections without help from the company. In academic terms, when
companies do this, they raise the cost of acquiring the information. This is
because investors have to devote more resources towards understanding the
information. Further, it also raises the specter of asymmetric information,
that is, the information gap between what management knows and what it allows
investors to know. Studies have shown that both increasing the cost of
acquiring information and high information asymmetry will increase the cost of
capital by lowering liquidity in the company’s shares.<o:p></o:p></div>
<div class="MsoNormal">
Or consider the conventional wisdom that causes companies
that take the position, “We simply report what we have done, and we leave it to
the investors to figure out what our performance will look like in the future.”
When you consider that the value of your company’s stock is equal to the sum of
its future cash flows, discounted back to a present value (this is Finance
101), not discussing the future is obviously leaving off a critical piece of
information. Investors will then make their own forecasts, whether a company
helps them or not. The forecasts then
become harder to make and carry a greater degree of uncertainty without some
input from the company. As a result, future values will be discounted to a
greater degree, leading to lower stock prices. <o:p></o:p></div>
<div class="MsoNormal">
So the investor relations thought for the week is that if
you hear someone at your company say, “We can’t say that” or “We’ve never
disclosed that”, question the conventional wisdom. Your stock could be
mispriced simply because investors don’t have the right information needed to
make an informed decision about the stock.<o:p></o:p></div>
</div>John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com2tag:blogger.com,1999:blog-3651010135173678358.post-16378061551456831442012-03-13T11:02:00.004-05:002012-03-13T11:16:11.426-05:00Just When You Thought It Was Safe To Go Back on the Call<p style="margin: 0.0px 0.0px 0.0px 0.0px; font: 12.0px Helvetica"><span class="Apple-style-span" style="font-size:100%;">Strange as it may seem, National Public Radio and Wall Street sell side research share a common business model – they both give the product away and hope you get paid later. The motivations are different; NPR is a not for profit entity while sell side research sits at the heart of profit driven capitalism, but NPR pledge drives and sell side marketing to get commissions directed their way are similar in many respects. Both occur long after the product has been delivered to the user with no obligation for the user to actually pay for it and both attempt to convince the user that they have been given a superior product. </span></p> <p style="margin: 0.0px 0.0px 0.0px 0.0px; font: 12.0px Helvetica"><span class="Apple-style-span" style="font-size:100%;">The reason I bring this up is that occasionally NPR comes up with a story that actually has some bearing on corporate earnings and Wall Street, and they recently did so on February 2, 2012 with a piece entitled “Is That CEO Being Honest? Tone Of Voice May Tell A Lot”. You can find it at http://www.npr.org/blogs/thetwo-way/2012/02/02/146288038/is-that-ceo-being-honest-tone-of-voice-may-tell-a-lot.</span></p> <p style="margin: 0.0px 0.0px 0.0px 0.0px; font: 12.0px Helvetica"><span class="Apple-style-span" style="font-size:100%;">In the story, NPR examines some software developed by an Israeli company based on research referred to as layered voice analysis. The software picks up on “vocal dissonance markers” that may indicate when the truth is being shaded, or when an executive is trying to avoid saying something that should be said in order to make an answer complete. </span></p> <p style="margin: 0.0px 0.0px 0.0px 0.0px; font: 12.0px Helvetica"><span class="Apple-style-span" style="font-size:100%;">Of course, analysts on conference calls listen to tone and inflection all the time, so this of itself is not a news flash. The part of this story that makes it interesting is that the research shows that the analysts are much better at hearing the positive tones in a call than they are at hearing the cognitive dissonance in messages that are being shaded from complete truth. According to the radio story, part of this may be that most analysts stand to benefit more from positive recommendations than negative recommendations. Another part may be that most people are less likely to ascribe nefarious intent when a person sounds less than chipper. To this I will add another factor: most conference calls have taken on a very formulaic approach, and much of the time, corporate management sounds as if they are discussing their immanent root canal surgery with their dentist. Sounding unhappy to be on the call is par for the course and, therefore, it is hard to distinguish an unhappy tone from a less than honest tone. Conversely, any time management sounds happy, it really stands out and is easy to pick up on. </span></p> <p style="margin: 0.0px 0.0px 0.0px 0.0px; font: 12.0px Helvetica"><span class="Apple-style-span" style="font-size:100%;">Faithful readers with long memories may recall that I wrote about similar research back in August 2010 in a post titled “Using Computers to Predict If a CEO is Lying”. In that case, researchers from Stanford Graduate School of Business took a look at word patterns during the Q & A sessions of earnings calls to help predict when company management was being deceitful. Now we have software that listens to voice tone that does the same thing. So maybe we are getting closer to the day when management will have no choice but to be completely honest with investors on earnings calls.</span></p> <p style="margin: 0.0px 0.0px 0.0px 0.0px; font: 12.0px Helvetica"><span class="Apple-style-span" style="font-size:100%;">It could mark the death knell of the earnings conference call…</span></p><div><br /></div>John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com2tag:blogger.com,1999:blog-3651010135173678358.post-6804347036019879942012-03-01T15:17:00.000-06:002012-03-01T15:20:28.707-06:00Where’s the Beef?<!--[if gte mso 9]><xml> <o:documentproperties> <o:revision>0</o:Revision> <o:totaltime>0</o:TotalTime> <o:pages>1</o:Pages> <o:words>655</o:Words> <o:characters>3737</o:Characters> <o:lines>31</o:Lines> <o:paragraphs>8</o:Paragraphs> <o:characterswithspaces>4384</o:CharactersWithSpaces> <o:version>14.0</o:Version> </o:DocumentProperties> <o:officedocumentsettings> <o:allowpng/> </o:OfficeDocumentSettings> 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unhidewhenused="false" qformat="true" name="Intense Reference"> <w:lsdexception locked="false" priority="33" semihidden="false" unhidewhenused="false" qformat="true" name="Book Title"> <w:lsdexception locked="false" priority="37" name="Bibliography"> <w:lsdexception locked="false" priority="39" qformat="true" name="TOC Heading"> </w:LatentStyles> </xml><![endif]--> <!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-language:JA;} </style> <![endif]--> <!--StartFragment--> <p class="MsoNormal">Way back in 1984, Wendy’s, the hamburger chain, ran a commercial that featured a little old lady, played by actress Clara Peller, and the tag line “Where’s the beef?” The commercial became an instant classic because it played to the common sense of the audience to look past marketing hype to try and find the substance of the product. You can find a video of the commercial here: <a href="http://www.youtube.com/watch?v=Ug75diEyiA0">http://www.youtube.com/watch?v=Ug75diEyiA0</a> <o:p></o:p></p> <p class="MsoNormal">I bring this up because I often feel the same way when I hear about the benefits of corporate restructuring programs. These programs are often announced to great fanfare by corporations when they take massive one-time write-downs. The benefits are then discussed in diminishing amounts as the ensuing years unfold and we are left to take the company’s word that they in fact achieved the benefits claimed.<span style="mso-spacerun:yes"> </span>So I thought I would go back and look at an example of one of these programs to see if I could understand the savings claimed.<o:p></o:p></p> <p class="MsoNormal">Here, for example, is Walgreens President, Greg Wasson, as quoted by StreetInsider.com on January 8, 2009:<o:p></o:p></p> <p class="MsoNormal" style="margin-bottom:10.0pt;mso-pagination:none;mso-layout-grid-align: none;text-autospace:none">"Our Rewiring effort is finding ways for Walgreens to be more effective and efficient so that our growth strategy can move forward" In its entirety, Rewiring for Growth targets $1 billion in annual savings by fiscal 2011. The company will achieve savings through:<o:p></o:p></p> <p class="MsoNormal" style="margin-left:.5in;text-indent:-.5in;mso-pagination: none;mso-list:l0 level1 lfo1;tab-stops:11.0pt .5in;mso-layout-grid-align:none; text-autospace:none"><!--[if !supportLists]--><span style="mso-fareast-font-family: "Times New Roman""><span style="mso-list:Ignore">•<span style="font:7.0pt "Times New Roman""> </span></span></span><!--[endif]-->strategic sourcing on indirect spend (all goods not for resale),<o:p></o:p></p> <p class="MsoNormal" style="margin-left:.5in;text-indent:-.5in;mso-pagination: none;mso-list:l0 level1 lfo1;tab-stops:11.0pt .5in;mso-layout-grid-align:none; text-autospace:none"><!--[if !supportLists]--><span style="mso-fareast-font-family: "Times New Roman""><span style="mso-list:Ignore">•<span style="font:7.0pt "Times New Roman""> </span></span></span><!--[endif]-->reduction in overhead and labor,<o:p></o:p></p> <p class="MsoNormal" style="margin-left:.5in;text-indent:-.5in;mso-pagination: none;mso-list:l0 level1 lfo1;tab-stops:11.0pt .5in;mso-layout-grid-align:none; text-autospace:none"><!--[if !supportLists]--><span style="mso-fareast-font-family: "Times New Roman""><span style="mso-list:Ignore">•<span style="font:7.0pt "Times New Roman""> </span></span></span><!--[endif]-->and the POWER project, which is designed to enhance patient-pharmacist interaction while reducing costs.<o:p></o:p></p> <p class="MsoNormal">Walgreens expects to incur costs of $300-$400 million over FY09 and FY10 as it implements Rewiring for Growth. 50% of the project’s benefits are expected to accrue beginning in FY10, with the full $1 billion in targeted annual savings beginning in FY11.”<o:p></o:p></p> <p class="MsoNormal">This sounds like great stuff. If Walgreens could take $1 billion out of its expenses, with 2011 sales of $72.184 billion, they should reduce their expense ratio by 1.38%, which presumably should go straight to the bottom line. So I went and looked at what has happened to expense ratios since 2008, the base year of the announced “Rewiring for Growth” program. When I looked at the S, G & A expense ratio for the company here’s what I found:<o:p></o:p></p> <p class="MsoNormal">2008 (base year) <span style="mso-tab-count:1"> </span>22.36%<o:p></o:p></p> <p class="MsoNormal">2009<span style="mso-tab-count:3"> </span>22.68%<o:p></o:p></p> <p class="MsoNormal">2010<span style="mso-tab-count:3"> </span>23.02%<o:p></o:p></p> <p class="MsoNormal">2011<span style="mso-tab-count:3"> </span>22.94%<o:p></o:p></p> <p class="MsoNormal">In other words, not only has the expense ratio not gone down, it has gone up in two of the three years since the program was announced and the ratio is 58 basis points higher now than when they started. In fact, if Walgreens had just maintained the same expense ratio that it had in 2008 before the program began, expenses would have been $476.4 million lower than they were in 2011. So I have to ask: “Where’s the beef?” How can you have an expense reduction program that results in rising expense ratios?<o:p></o:p></p> <p class="MsoNormal">In their 2011 Annual Report, Walgreens states way back on page 19: “We have realized total savings related to Rewiring for Growth of approximately $1.1 billion compared to our base year of 2008. Selling, general and administrative expenses realized total savings of $953 million, while cost of sales benefited by approximately $122 million.” If you go and look at some of the company presentations they go to great lengths to try and justify their calculations, but when I read it I find myself in a time warp back to the late 1990s where companies routinely issued press releases about “earnings without the bad stuff”. There must be a method to their calculations – but it’s a little too subtle for me and I always worry about how they decided what to leave in and what to take out. (And let’s not forget that they said they would be getting $1 billion per year savings by now, not over the life of the program.) I mean, they’ve got sophisticated accounting systems and I’m just one guy with a calculator, but I really would like to see it in the income statement numbers, because what they’re saying doesn’t make sense to me. It’s not a successful expense reduction program if you don’t lower expenses.<o:p></o:p></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">From an investor relations standpoint, this stuff certainly doesn’t help management’s credibility. Maybe this is just the way things are done, but it’s quit frustrating for your average investor. When I get frustrated, I tend to take it out with food, so I think I’ll go fix myself a hamburger… and find some real beef.<o:p></o:p></p> <!--EndFragment-->John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com1tag:blogger.com,1999:blog-3651010135173678358.post-37505052884839243942012-02-13T10:30:00.001-06:002012-02-13T10:35:42.600-06:00Practicing Safe Presentations<!--[if gte mso 9]><xml> <o:documentproperties> <o:revision>0</o:Revision> <o:totaltime>0</o:TotalTime> <o:pages>1</o:Pages> <o:words>620</o:Words> <o:characters>3333</o:Characters> <o:lines>95</o:Lines> <o:paragraphs>48</o:Paragraphs> <o:characterswithspaces>3905</o:CharactersWithSpaces> <o:version>14.0</o:Version> </o:DocumentProperties> <o:officedocumentsettings> <o:allowpng/> </o:OfficeDocumentSettings> </xml><![endif]--> <!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:trackmoves/> <w:trackformatting/> <w:punctuationkerning/> <w:validateagainstschemas/> 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unhidewhenused="false" qformat="true" name="Book Title"> <w:lsdexception locked="false" priority="37" name="Bibliography"> <w:lsdexception locked="false" priority="39" qformat="true" name="TOC Heading"> </w:LatentStyles> </xml><![endif]--> <!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-language:JA;} </style> <![endif]--> <!--StartFragment--> <p class="MsoNormal">How many times have you been at a conference and seen a corporate investor presentation that begins something like this:<o:p></o:p></p> <p class="MsoNormal">“Good morning. I’m Joe Terrific, CEO of Godzilla Industries, and I’m here to bring you up to date on all the great things we’re doing. (Pause while he moves rapidly from the title slide, past the safe harbor slide to the beginning slide describing the business.) Here at Godzilla Industries…”<o:p></o:p></p> <p class="MsoNormal">In other words, the safe harbor statement slide is up on the screen fleetingly, but not referred to verbally. The thinking being that they’ve shown the disclaimer about forward-looking statements, all the investors in the room are sophisticated institutional investors and know that when a company makes projections and statements about the future things don’t always turn out the way the company thinks they will. The requirements of the Private Securities Litigation Act of 1995 have been met, right?<o:p></o:p></p> <p class="MsoNormal">Well, maybe not. <o:p></o:p></p> <p class="MsoNormal">A recent ruling by a federal trial court for the Western District of Washington has underlined the need for companies to make sure they verbally reference the safe harbor disclaimer. The case is <i><span style="color:#151515;mso-fareast-language:JA">In re Coinstar Securities Litigation,</span></i><span style="color:#151515;mso-fareast-language:JA"> Case No. C11-133 MJP (W.D. Washington Oct. 6, 2011)</span> and all practitioners of investor relations should take notice of it.<o:p></o:p></p> <p class="MsoNormal">The case involved allegations that on various occasions the management of Coinstar made projections and statements about future expectations that did not come to fruition. As happens in these cases, the lawyers for Coinstar made a motion to dismiss the complaint. This is a motion made early in the proceedings that has the effect of cutting off the litigation before the really big legal bills start to pile up. It is done before pre-trial discovery takes place, which is when a plaintiff can drive a company to distraction by forcing it to produce thousands of pages of documents and produce members of management for time-consuming depositions. Once discovery starts, the chances of the plaintiff wringing a settlement out of the company go way up, as it is often cheaper to settle than to pay hefty lawyers fees for several years running while lawyers pore over boxcar loads of documents in the hope of turning up a smoking gun, with the Russian roulette of a jury trial lurking in the background.<o:p></o:p></p> <p class="MsoNormal">In the Coinstar case, one of the allegations made in the complaint was that forward- looking statements made by company management at an investor conference were false or misleading. In making the allegation, the plaintiffs relied upon a transcript of the presentation, and because the transcript contained no reference to the cautionary language on the company’s presentation slides, the court ruled that for purposes of a motion to dismiss, they could not take notice of something that wasn’t in the record and therefore the lawsuit could proceed on those allegations.<o:p></o:p></p> <p class="MsoNormal">This does not mean that Coinstar lost the lawsuit, but it does mean that the lawsuit can continue and move into the pretrial discovery phase, which is almost as bad as losing. Coinstar did not accompany their safe harbor slide with a simple statement such as, “Statements made in the course of today’s presentation may contain forward-looking information and actual results may differ materially from what we are presenting today. The slide you now see gives you more information on the assumptions and factors we consider in making those forward looking statements and where to go to get more information on our risk factors.” <span style="mso-spacerun:yes"> </span>As a result, they have subjected themselves to, at a minimum, additional and unnecessary legal bills, and at worst, the potential of a large settlement or jury award. <o:p></o:p></p> <p class="MsoNormal">So today’s lesson is, just because the safe harbor slide is in every presentation, and everyone has heard it dozens of times before, doesn’t mean that a trial judge will assume investors have heard about it. Practice safe presentations - always refer to the safe harbor statement and slide. <o:p></o:p></p> <!--EndFragment-->John Palizzahttp://www.blogger.com/profile/10899935474780095424noreply@blogger.com0