Investor Relations - A Practical Guide - Investis

Because analysts normally differ in their opinion on
a company’s future performance, there exists a
range of forecasts. By taking an average of all the
analysts’ forecasts on a particular stock, a
‘consensus’ forecast can be reached. Analysts will
compare their forecasts to the consensus number,
particularly when they change their forecasts and
either bring them more in to line, or diverge further
from the consensus number.
Different analysts also focus on different aspects of
a company’s performance. For example, some
analysts will place more emphasis on the gross
profit than operating or post tax profit of a company.
Also certain figures will be more relevant depending
on the sector, such as the sales density figure for
the retail sector. The treatment of specific items
such as goodwill, share-based payments and
pension interest also frequently differs between
analysts, which means that there may be some
judgement required in arriving at the true consensus
figure. This complicates the calculation of
consensus figures, as do out-of-date forecasts
which can distort the situation, causing outliers.
Research notes are targeted mainly at institutional
fund managers and hedge funds, who use the notes
to help guide their investment decisions. Often they
will use a wide variety of brokers’ reports to get the
full spectrum of market opinion on a company and
also challenge their own views. Fund managers
inevitably have particular analysts who they trust
and rate more highly than others and will put greater
weighting on their opinions, models and forecasts.
The companies covered also review the research
written on them and often this is used as a gauge
by management as to whether the wider market
opinion is supportive of their particular strategy.
‘Management of analysts’ expectations’ is therefore
an important element of effective investor relations.
Analyst coverage
Many factors influence the analyst’s decision to
initiate research. It is expected for the house broker
to write research on all of their corporate stocks.
The majority of analysts have a sector focus and
therefore need to cover a good number of
companies within that sector in order to speak with
authority and understand the sector dynamics. The
decision will also depend on a company’s market
capitalisation, daily average trading volumes and the
stock’s overall liquidity. For example, if a company
has a small number of tightly held institutional
holders or a limited number of shares readily
available, it would be difficult for the broker to
monetise its research.
Companies with a market capitalisation below
£100m tend to enjoy coverage from between one
and four analysts. Those companies with a market
capitalisation between £100m and £1bn may be
covered by up to 10 analysts and for companies
with market capitalisations above £1bn, as many as
30 analysts might provide coverage. Above a
market capitalisation of c.£1bn, it is usual for a
company to have a dedicated investor relations
team to interface with buy and sell-side analysts.
Below £500m it is often the Finance Director’s
responsibility to communicate directly with the
analysts.
The very largest investment banks invariably have
global operations. Such banks will organise their
research on a global basis with a sectorised
top-down approach. Their focus is on maintaining
coverage of all the key companies quoted on the
major global markets.
In the mid-market, investment banks employ a
different focus, primarily looking at companies
quoted and headquartered in the bank’s own
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What Investor Relations is and who it is aimed at