Rivel Research Group 2 Established in 1991 One core competency – marketing research A unique specialty – investment community research Thousands of interviews with investment professionals every year Clients include one third of the S&P 500 Rivel Research Group
Rivel Research Group 3 Broad-based, nationally representative studies Provide context for investor communications strategy Monitor attitudes and behaviors of vital IR constituencies Track key trends and developing issues among sell-side analysts, buy-side professionals, IROs and CEOs Perspectives on the Buy-Side Perspectives on Investor Communications Perspectives from the CEO Perspectives on the Sell-Side Rivels Perspectives Research Series
Rivel Research Group 4 Profile todays sell-side Clarify chief motivations/priorities Ascertain what prompts coverage decisions Identify drivers of sell/buy recommendations Prioritize most valued information resources Measure the impact of investor relations Implications for investor communications Study Objectives
Rivel Research Group 5 Methodology 251 sell-side analysts +/- 6% margin of error on total US data, the focus of this presentation 230 US interviews Additional context provided by 21 Canadian interviews Mid Sept. to Mid Nov. 2007 In-depth telephone interviews, split in US as follows: 77 Large Institutions (over 50 analysts), 61 Medium (20 to 50 analysts), 92 Small (5 to 19 analysts) 51 Bulge Bracket, 57 National, 42 Regional, 57 Specialty/Boutique, 32 Independent
Rivel Research Group 6 Key Takeaways Providing management access a top goal Significant hedge fund clientele Decisions hinge on same criteria as buy-side Investor communications have definitive impact Intangible: management credibility, business strategy Tangible: free cash flow, revenue growth, earnings growth
Rivel Research Group 7 How Brokerage Firms Judge Performance of Their Analysts (Aided) 7% 8% 16% 38% 47% 48% 56% High Institutional Investor magazine ratings Facilitating investment banking business Managing investor conferences Trading volume generated Thorough/ comprehensive research reports Accurate stock recommendations Providing client access to corporate management
Rivel Research Group 8 Trading Volume Accounted for by Hedge Funds (Among analysts able to make an estimate) Note: 50% unable to estimate
Rivel Research Group 9 Triggering the Recommendation Management credibility – 83% Effective business strategy – 82% Attractive growth in EPS – 75% At the bottom of the list … What factors drive sell-side decisions? A mixture of tangible and intangible items... Prospects of LBO/being acquired – 8% Attractive dividend – 5% Social responsibility – 3%
Rivel Research Group 10 87% need to meet with a firms top management before they will initiate coverage One in three say twice or more Face-to-face is most direct and tangible, thus impactful How Are Intangibles Communicated? As with the buy-side, management needs to show progress versus goals to be credible. Senior executives must be on the road communicating:
Rivel Research Group 11 Which Tangible Metrics Lead the Way? Free cash flow – 59% Revenue growth – 52% Operating margins – 47% Earnings per share – 47% ROIC – 45% EBITDA – 43% While free cash flow dominates when buy-siders are asked this question, sell-side analysts are more apt to give equal billing to revenue growth
Rivel Research Group 12 Focus on Communications Three critical stages of involvement with a stock Making the Radar Screen Influencing Buy/Sell Recommendations Sustaining the Relationship
Rivel Research Group 13 Making the Radar Screen Buy-side professionals – 89% Meetings with senior corporate executives – 88% Business/trade press articles – 79% Industry experts – 73% Communications from IR executives – 68% How do you make it to the radar screen?
Rivel Research Group 14 Be visible/management access – 30% Show tangible growth potential – 24% Outreach/be proactive – 20% Have compelling story – 20% Demonstrate management/strategy effectiveness – 16% Get bigger, larger market cap – 10% Making the Radar Screen What if we are a small-cap company? When the buy-side has been asked this question, its all about getting bigger and financial performance.
Rivel Research Group 15 Influencing Decisions to Recommend Senior management meetings – 95% Quarterly conference calls – 91% SEC filings – 91% Corporate websites – 81% Communications from IR executives – 79% We made it to the radar screen, how can we best reach the next stage? What resources are key? All cited more often among sell-side than on the buy- side (who again give top priority to in-house research)
Rivel Research Group 16 Senior management meetings – 96% SEC filings – 96% Quarterly conference calls – 96% Communications for IR executives – 83% Corporate websites – 80% Most helpful communications after coverage initiated? Again, the sell-side relies on these resources to a greater extent than the buy-side (especially IROs and the website). Sustaining the Relationship
Rivel Research Group 17 Insufficient disclosure/transparency – 44% Poor guidance/management of expectations – 31% Too promotional – 29% Disingenuous/withholding information – 29% Lack of communications/under-communicate – 10% Insufficient management visibility - 8% Sustaining the Relationship Where do companies go wrong? What are the biggest mistakes made when communicating with the investment community?
Rivel Research Group 18 Does IR Affect Valuation? Question: In your opinion, does good investor relations affect a companys valuation? Yes – 82% No – 15% Premium for superb IR – 10% (median) Discount for poor IR – 18% (median)
Rivel Research Group 19 How IROs Can Enhance Their Value (A sell-side view) Views often parallel those expressed by CEOs in 2006
Rivel Research Group 20 Believes effective investor communications impacts valuation. More often relies on IROs and company-supplied info for insight. Hangs hat on info and access disseminated/managed by IROs. Covets similar drivers/messages as buy-side. Is a bridge to hedge funds (whose views often mirror those of traditional buy-siders). Often is a companys only constant spectator over the long term. Sell-sides importance is evolving and moving toward playing more of a facilitators role. Yet, our buy-side studies consistently confirm its ongoing relevance. And, the question most often asked of sell-siders is … Should I buy/sell the stock? Sell-side still holds immense promise as an investor communications tool:
Rivel Research Group 21 Even if their end goal is facilitating access, its obviously crucial that the facilitator be well acquainted with the story and a supporter. As with the buy-side, management needs to be on the road talking about strategy, setting goals, meeting them and reminding people they have been attained, which leads to credibility.