Any company that finds Wall Street analyst estimates out of line with its own financial projections faces a potentially risky perception problem. How management handles the situation can determine whether they reassure investors or lose credibility with the Street.
If your company discovers this issue, it is important to act quickly. To start, open communications with the analyst or analysts by scheduling a meeting or call to discuss how the disparity happened. In some cases, one analyst might have a misunderstanding or a differing opinion; in other cases, several analysts might be veering off track. Have your investor relations firm run consensus estimates on a regular basis to see if any analysts are straying off course and try to nip misunderstandings in the bud. Once an issue is identified, your next move will depend on the reasons for the off-kilter estimate(s). Here’s how to navigate the issue.
Communicate With Analysts
Talking to analysts not only helps you learn where someone went off track; it also provides an opportunity for you to explain how they should be thinking about the company and your model. This is your chance to step back to basics with analysts and make sure they understand the fundamentals of the story.
If analysts made faulty assumptions based on outside data (perhaps, for example, they misunderstood a market size, or are using incorrect estimate), you can share with them your references and citations (usually from data in company presentations) to help them understand how you derived the company’s numbers.
If analysts misinterpreted a public statement that you made, you can take this opportunity to correct them, pointing out where the misunderstanding arose. Once again, going back to the basics of your growth story can help here.
You might find that a bearish analyst simply doesn’t like your story or doesn’t believe in your opportunity or management team, and has put a negative spin on your prospects. There may be little you can do to change that view immediately, but it’s important to keep communication lines open to see where they’re drawing that sentiment, which allows you to craft a response or rebuttal. This way, you can prepare answers for investors who may be exposed to the bear story from other conversations. Put aside any impulse to freeze out your critics. Instead, keep communication lines open so you can update them on your (hopefully positive) progress.
Make Your Numbers
If you’ve missed revenue projections a few times in a row and the Street has lost confidence in your outlook, you’ll likely have to hit your numbers for a few more quarters to correct analysts’ perceptions. After a few misses, it will take several conversations, paired with solid execution, for analysts to regain confidence in your performance forecasts. Execution is always key, but in this situation, the tolerance for missteps is very low. There isn’t much you can do to alter projections. Keep your heads down and deliver!
Follow Up, and Follow Up Again
You may have to exercise patience, as this could take some time. Analysts generally don’t change overnight from disliking a stock to loving it, even when you’re trying to correct their misperceptions. They tend to take incremental steps, their perceptions changing with consistent execution.
Check in with the analysts, via a meeting or phone call, when you’ve delivered on your goals to make sure they recognize what you’ve accomplished. Sometimes analysts who’ve soured on a story put it aside for a while, so remember to draw their attention back your way.
Correct Overeager Bulls, Too
Bearish analysts don’t present your only peril. A runaway bull analyst can be just as detrimental in terms of investor expectations, sending the consensus estimate higher and exposing you to the risk of disappointing the Street. It’s important to keep conversations going on both ends of the spectrum.
Sometimes analysts simply have different levels of confidence in the same metrics. With open communication, you can work to find out how people at the high and low ends of Street expectations reached their forecasts. Transparency, clear dialogue on your industry and business, and consistent delivery on performance forecasts should help bring analysts’ expectations back in line.
Do you have questions about managing investor expectations and misperceptions? Our healthcare team at Westwicke, an ICR company, brings more than 300 years of combined Wall Street experience to help you navigate the investor community. Please get in touch.