Talking With Wall Street

Dec. 21, 2004
Wonder how some companies get the attention from Wall Street and valuations they do? Performance matters most, but an effective investor-relations program also helps.

A year ago, EMC Corp., a computer-storage designer and manufacturer, was somewhat overlooked by Wall Streets financial pros. As of December 1997 its stock was trading at $23.50, a price-to-earnings ratio of about 25, a bit below the companys peers. It wasnt as if EMC wasnt performing. The companys revenues had nearly quadrupled in five years; 1997 sales were $2.9 billion. EMCs bottom line had grown even faster, reaching $539 million in 1997. Today, EMCs stock is outperforming its peers, a result in part of the companys continuing good results. However, its also a result of EMC management beefing up communications with investors and analysts. Management developed a company fact sheet, created a Web site, and wrote up case studies of customers using EMCs products. The company simplified its message and talked about EMCs value as a business, rather than focusing on its technology. Executives met with analysts and investors, attended conferences, and then invited investors back to EMC. Largely because of these efforts, the number of institutional shareowners jumped nearly 50% between June 1997 and 1998. Year to date, EMCs stock price more than doubled, to just over $54. Since 1994 the company has in-creased its market capitalization by a whopping $26 billion. "We had stellar financial performance, but were below the radar screens of investors," says Polly Pearson, director of corporate and investor relations with the Hopkinton, Mass., company. "We had to define EMCs importance in the world." Today, building a top-notch investor-relations function is critical. During the last 10 to 15 years, investment dollars have become increasingly concentrated in mutual, pension, and other funds, so that a smaller number of people have a larger ability to drive your companys stock price. An effective investor-relations program can help you get the word out about your company to the people most likely to be interested. By cultivating a rapport with Wall Street, your stock is more likely to be fairly valued. That enhances your ability to finance activities, such as expanding into a new country or adding a product line, without bringing on a lot of debt. Youll also have an easier time attracting executives and employees with robust stock-incentive programs. "Access to capital is a competitive advantage," says Michael Rosenbaum, president of the Financial Relations Board Inc., a Chicago-based investor-relations company that worked with EMC. It also helps ensure your own future. Managers of public companies serve at the whim of shareholders. "You want to know in whose hands your fate lies," says Michael Useem, a professor of management at the University of Pennsylvanias Wharton School. However, as many of those who work with Wall Street know, even as the game has gotten more important, its also gotten tougher. "Ive been in this over 30 years," says Gerald F. Morris, chief financial officer at Diebold Inc., a manufacturer of ATMs, security equipment, and other products based in Canton, Ohio. "Back in the 60s, there truly were long-term investors. Today, everything is so focused, so high tension." Not that Morris is complaining. A concerted effort by Morris and Donald E. Eagon, vice president, corporate communications, has broadened Diebolds shareholder base and boosted its stock price. Through most of the 1980s, Diebolds stock was pretty flat, and didnt reflect the value of the company. "We were not doing the job in getting the word out to investors," says Morris. Like Pearson at EMC, Morris and Eagon focused on the fundamentals. They revamped the annual report to make it easier to understand and included more information on the companys strategy, customers, and strengths. They added a fact sheet and corporate data book. Then the team hit the road and shared with the financial community Diebolds performance and plans for the future. It worked. At the beginning of the decade, almost 90% of Diebolds shareholders were institutional investors. That number now is at 65%, and ownership is distributed among a larger number of institutional owners. Diebolds stock price went from about $5 per share in 1990 to $50 per share, before getting hit when the market weakened in late summer. By early fall, it had settled at about $22 per share. However, as Morris indicates, talking with the financial community has changed in a couple of ways. Determining just what you can say to investors, always a loaded judgment call, has become even dicier, as shareholders who believe they have been misled have no qualms about suing. Different players are in the game. "Sell-side" analysts -- those who represent brokerage firms -- traditionally were the target of most investor-relations efforts. Today, the targets are "buy-side" analysts -- managers from insurance, pension, and mutual funds. One upside, says Louis Thompson, president and CEO of the National Investor Relations Institute (NIRI), Vienna, Va., is that it is easier for firms to directly pitch the fund holders that appear interested in them. "The companies that are afraid to share are the most exposed, because then analysts are forced to make their own guesses," Pearson says. Wall Street increasingly expects that whoever talks on behalf of a company will be able to speak candidly and knowledgeably about the firms performance, as well as its strategy and plans for the future. That means the person must have access to senior management. He or she also must cultivate a range of internal sources who can talk about whats happening throughout the company. Its also important that the companys representative to Wall Street has a firm grasp of financial concepts. The most widely used measure of financial performance today is a companys ability to return more than its cost of capital. Allegiance Corp., McGaw Park, Ill., has focused on boosting its return on invested capital since the company spun off from Baxter International Inc. in October 1996. At the time of the spinoff, Allegiances return was slightly more than 8%, says Jessica Fisher, vice president of investor relations, and since has risen to just over 10%. To get there, the company focused on tightly managing the balance sheet while also growing revenue. Equally important, management at the $4.4 billion manufacturer and distributor of health-care products lets Wall Street know what its doing. In two years, Allegiances stock price has zoomed from about $8 (adjusted for a split) to $31 today. "Were driving home the message that we are exceeding our cost of capital," Fisher says. Its increasingly expected that firms will be able to use technology in their investor-relations efforts, if for no other reason than the fact that most finance professionals themselves are proficient in using technology, says Beth Diamond, a managing partner in the Calgary, Alta., office of National Public Relations, a Montreal-based public-relations firm. NIRI reports that 87% of its members have investor-relations Web sites, with another 10% scheduled to come online by yearend. More than two-thirds of analysts say they use Web sites to get information. "The Web is totally transforming communications," says Rob Adler, president of CCBN, a Boston-based firm that designs and builds investor-relations Web sites. "Investor relations, at its core, is a communications business." The discipline of targeting investors also has grown more sophisticated. Some companies tackle this on their own, while others turn to outsiders. To help find likely investors, James Yntema, director of research with the Financial Relations Board, examines the client company as an investor would. For example, hell check for sales growth, improving margins, or rising productivity, as well as other financial drivers. From there, Yntema searches for other companies with similar characteristics. Then its a matter of figuring out which investors are holding the other companies, but not his client. While the process involves a fair amount of analysis and number-crunching, in the end, says Yntema, "Theres a match for everyone." Of course, even as the communications and technologies get more sophisticated, an old-fashioned ability to figure out what people need and then provide it still has value. MDU Resources Group Inc., a $607 million Bismarck, N. Dak., energy company, wanted investors and analysts to know it was more than just a regulated utility company. However, thats sometimes easier said than done. "The investment community is very segmented," says Jake Matyas, senior vice president with Thompson Investor Relations Strategic Consulting Group, Chicago. "If youre pegged in one segment, its tough to make the transition to another." To change investors perceptions, Warren Robinson, MDU treasurer and chief financial officer, showed them the companys performance results by segment -- something a lot of companies fail to do, say analysts. As a result, investors could see that nearly half of the companys earnings were coming from nonregulated areas, such as coal mining and construction materials. In 18 months, MDUs market value doubled. The stock recently was trading at about $26, compared with a split-adjusted price of $14.50 when the program began. "Basically, were exactly the same company we were two years ago, but are telling the story in a different way," says Robinson. Other trends are evident. The use of "whisper" forecasts is growing. These are announcements of estimated quarterly earnings that come out before actual results are released. The trend is growing because investors perceptions of what constitutes a material change from expectations continue to shrink. "If the Street expects earnings of 25 cents, and theyll be 23 cents, put out a release," advises NIRIs Thompson. More companies are merging their communications efforts, so that investor and public relations, as well as employee communications, are one function. The trend is intended to ensure that a single, cohesive message is presented, says Francis Holman, vice president and secretary with Manufacturers Alliance, Arlington, Va. One thing that isnt changing is the value of a good rapport with Wall Street. "If you have an empowered, informed spokesperson, the result should be an increased valuation of the company," EMCs Pearson says.

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