Why does consensus management matter? The short answer is because a lot is at stake for your company. And more often than not, the consequences and implications of not having a well-planned consensus management process are overlooked. When it comes to near-term financial results and longer-term outlook, a proactive and regular dialogue with analysts can be extremely effective in managing market expectations.
In the case of near-term financial results, such as upcoming quarterly results, it is advisable to connect with the analysts who cover your shares – as well as your key buy-side analysts – a few weeks before announcing your company’s results. The purpose of this is to steer the narrative and guide their thinking in the right direction on how you think performance may likely trend, without disclosing any material, non-public information.
Tools at your disposal include industry-specific indicators such as quoted commodity price indices and market demand trends, previously communicated guidance and competitors’ and/or your subsidiaries’ results (in the case that they are publicly traded and have already announced their results).
Typically, analysts independently verify your feedback and then refine their estimates for the upcoming quarter into a hopefully narrower range that is more reflective of actual performance trends. Once you have a full set of estimates, sharing the key statistics with analysts would ensure that in their reports, they reference company-compiled estimates as opposed to database-compiled ones that are often outdated.
This approach will help you to significantly limit or completely avoid substantially missing – or beating – earnings. Earnings misses are often perceived negatively by the market and may have an undesirable impact on the share price almost immediately. Similarly, significant positive earnings surprises may prove negative for share price performance in the long term if the drivers of the underlying financial performance were temporary or non-recurring. Investors and analysts are not big fans of surprises.
The longer-term view
Looking past near-term results, tracking analysts’ valuations, price targets and multi-year forecasts has clear benefits for issuers. Firstly, comparing market forecasts with your own business plan will often reveal areas of substantial deviation.
Is the market less or more optimistic than the company about the outlook? Is the company’s strategy unclear or perhaps too complicated? Is it the right strategy for the company? Should the company revisit its own assumptions? Is there enough confidence in management’s ability to deliver? Should the company provide additional forward-looking guidance or cut back on the level of guidance provided? These are some of the tough questions that all issuers, including their boards of directors, need to look into and actively work to resolve for the ultimate benefit of maximizing shareholder value.
Secondly, tracking changes in estimates, valuations and price targets over time gives issuers a clear indication of the change in sentiment. This can be especially constructive following events that are likely to affect issuers such as M&As, changes in strategy, emerging disruptive technology, pandemics, force majeurs or changes in the fiscal regime.
Assuming issuers had already conducted the suitable due diligence, they should be in a position to assess whether the market has overreacted, underreacted or appropriately reacted to the news. Communications programs can then be tailored accordingly. Otherwise, issuers risk a lingering disconnect between actual share price performance and internal aspirations.
Rewarding proactive issuers
There are also many other benefits to consensus management. Some of the analysts who follow your shares may not be experts in your particular industry or not as close to the story as others. In a way, they are likely to be more receptive to your views as you help them navigate through the intricacies of your investment case, strategy and outlook. Last but not least, the process of consensus management allows you to spot factual errors and modeling mistakes that may adversely skew consensus estimates. Promptly addressing these inaccuracies with the concerned analyst(s) can have a positive impact.
In capital markets, both time and capital are scarce resources. When competing for capital, issuers must not overlook the fact that investors have plenty of investment opportunities to evaluate and that sell-side resources are limited. You can almost always be sure that markets reward issuers that are proactive with their investor relations and communications.
Mohamed Zein is partner at Instinctif Partners MENA