This article was initially published last year. We re-publish it today (with a few minor amendments) as we have seen a few notable instances over the past few months of companies continuing to bury bad news/put a gloss on things, presumably in the (in our view usually mistaken) belief that this is somehow beneficial. Risk and growth are the core fundamental underpinnings of valuation, and we would argue that burying/putting a gloss on bad news talks negatively to risk: can we trust what is being said, does the company fully appreciate the predicament it is in … .
We comment in the ‘Who we can help‘ section of our website (under ‘Investor Relations Professionals’) that ‘What works in other segments of PR does not necessarily work in the City. One obvious example is that burying bad news in the depths of a results release will usually make things worse rather than better …’.
As we travel around, this comment receives pretty much universal approval from investment professionals, particularly analysts, yet when we look at company results announcements, even examining a random selection indicates that this sensitivity is nowhere near being fully appreciated by many quoted companies. In fact, more strikingly, even in many ‘nothing has changed’ results’ announcements it is clear that fairly obvious things that an analyst (sell side and buy side) really needs, and is looking for straight away, often are not immediately there at the head of releases.
Of course, that a company has probably been through numerous rehearsals and drafts to get to this position, points to an obvious need for a company to have strong advisers, and for the company to listen to them, but that is a subject for another day (another example that points to this need, and alluded to elsewhere on our website, is how very obviously over-priced acquisitions, usually spotted as such within minutes of being published to the City, ever get to the stage of being announced without somebody actually pointing out the obvious, or, if somebody does, why management chooses to ignore the advice: possibly a lack of understanding of valuation).
The point we are making with specific reference to results announcements seems similarly obvious and very, very simple (but companies ignoring it causes significant frustration for analysts): analysts need companies to put all of the most relevant information at the top of the results release.
Investment analysts are only human
I am sure that the reality of most high profile professions is far more prosaic than many outsiders imagine. Yes, many investment analysts are very bright and hard-working, but they are all (only) human – faced with impossible tasks or pressure, they react in the same way as most people: exasperation, frustration, anger … !
The practicalities of an investment analyst’s job are definitely less glamorous than might be imagined and this one key aspect of the investment analyst’s job, dealing with the announcement of company results, is worth examining in this context. In this task, investment analysts are under severe time pressure – while the speed with which an experienced analyst deals (has to deal) with results can seem incredible to an outsider (it is amazing how quickly you learn to speed read when faced with the prospect of getting savaged by equity sales people in the morning meeting), anything that gets in the way of that process is very bad news indeed.
Company results are usually announced at 7.00 am. Shortly afterwards, often around 7.30 am, the analyst has to go into the morning meeting to talk about those results to those equity sales people (often done via a conference call). In that very brief period, the analyst has to read and digest the statement, have a good idea what changes to numbers and recommendation to make … .
In that interim period, between the announcement and the morning meeting, an experienced, respected, analyst will be taking calls from sales people and fund managers, and will be starting to write their morning meeting note, for circulation to clients (oh, and many analysts also will want to print results off – you can’t scribble notes and numbers on a screen, or quickly flick back to previous pages – more often than you might imagine, analysts will be struggling to physically print the announcements off because of some glitch with IT, or simply a substantial queue as other analysts from different sectors also try to print off their company results …). Sometimes an analyst will have more than one set of results to deal with on the same day, all announced at 7.00 am.
Equity sales people tend not to be shy and retiring, and their response to an analyst getting caught out is unlikely to be ‘oh dear, never mind’. So, if an analyst has recommended purchasing a stock, and something in the results falls short of expectations, the analyst needs to know the plain truth asap, not hidden on page ten, or dressed up in a flowery fashion. It is bad enough for the analyst that they have got the recommendation wrong – not to realise because they have not spotted relevant information ahead of the morning meeting, and getting caught out by a sales person in that meeting, can be horrendous, particularly for a junior analyst, and they are likely to be ill-disposed towards the announcing company’s management as a result. Quite rightly too from a valuation perspective – any company burying bad news is bound to make investors question the company’s overall integrity, and this is a risk factor that will feed into a company’s share price.
Not surprisingly, our view is very much that all important information, good or bad, should be right at the top of any results statement. We are definitely not saying that companies should go to the opposite extreme (exaggerated pessimism), but that they should paint an objective, realistic portrait of the company’s current position, in words and figures, at the head of any results (or similarly important) statement.