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Learnings… from periodic earnings

On Friday, the investment fraternity was rattled by the news of an untimely demise of the young MD of a listed company belonging to a reputed industrial house. The MD succumbed to a cardiac arrest that evening. While the social media circles got busy mourning the sudden demise, a tweet from an investment manager that evening unintentionally ended up sparking a serious debate on the subject.

The investment manager’s tweet, while informing the demise of the MD, also mentioned about a big fight that the company had, with an analyst, on a post-result conference call held the previous day. This tweet apparently sent an impression, linking the sudden death of the MD to the fight, sparking debates in social media groups with each participant expressing his/her views on the tweet and the subject. While there were some who resented the tweet, terming it as insensitive, there were others who blamed the analyst fraternity for being unreasonable with company managements. Then there were others who called for scrapping the policy of quarterly reporting, proposing to follow the practice either bi-annually or annually so that investment analysts also get time to understand and managements are also not under undue pressure to measure up to quarterly expectations.

And since everyone seems to be having an opinion, and rightly so, I too thought of opining on the subject ;-).

Thankfully, not only has the tweet been deleted (post the debate), but the investment manager has also apologized for the confusion caused by his tweet and clarified that he spoke of both (MD’s death & the fight over the concall) in a separate context. Yes, the unfortunate death of the MD can NOT be linked to the analyst report nor the arguments between them on the conference call. The stressful life that most of us lead today (capital markets and businesses alike), sadly, is the sole reason for most lifestyle related healthcare companies doing extremely well. You get the point.

That said, there are some important takeaways from whatever that has transpired.

In a bid to attract buy side visibility and attention, I have often seen sell side, institutional analysts, scurrying to release their reports. It’s not an uncommon practice for analysts to come up with a 1st cut report (within minutes of the earnings release) circulated on wotsapp or any other medium, then a 2nd cut report (at times, after a couple of hours) and then a detailed note (and better analysed, I presume) after a day or so. Considering the fact that these analysts service institutional investors, I fail to understand the rationale behind this hurry. Institutional investors are (supposedly) expected to be long term in their orientation and supposed to me more analytic in nature as compared to the layman. If this be the case, then why is the sell side in such a hurry to express their views? OR, are they actually merely responding to their client demands? Quite possible. In my little, 2-decade, experience of being on the institutional sell side, I have come across several such immediate-term portfolio managers in the garb of long term managers. They expect to have an immediate analysis (and yes, accurate as well) of each and every event, as soon as the event has transpired. And in some cases, the analysts are also expected to ‘be aware’ even before the event has transpired!!!  The feeling of ‘being ahead of the curve/action’ is exhilarating.

Takeaway / opinion – (a) While analysts should refuse to give in to such pressures, the buy side also needs to change the yardstick with which sell side research is measured. (b) Analysts should rely on their abilities to read beyond the stated and research well. Don’t form opinions from what looks apparent. As the quote goes “Research is to see what everybody else has seen and think what nobody has thought”

The company under discussion had hosted an analyst call, a day before the demise of their MD, to discuss their Q1FY19 results. In the conference call, the analyst of the broking house which apparently issued a sell report (2 months back) was also queued up to ask his question/s. On learning that the same house was asking questions, the management was vocal and reprimanded the concerned analyst, on the open platform, citing their hasty decision of releasing a negative report based on a “lot of nonfactual information”. As also, the sell report was apparently released on the day the board met to declare their quarterly/annual numbers and the management seemed to be curious on how a detailed research could be conducted that quick.

Takeaway / opinion – (a) Analysts should always give unbiased opinions without fearing any backlash from the company on whom they write upon (in the event of a negative report). That said, they should verify their data with the management for any factual errors. Analysis should always be on the basis of factual information only. How to read the factual data and what to infer is then the subject of the analyst. (b) Whether we like it or not, managements of companies (big or small) do keep a tab on developments that impact their stock price. That said, I feel that the management could have handled this differently. Rather than debating on an open platform, they could have discussed the observations of the analyst upon receiving the report. I’m sure they would have received the copy of the report as soon as it was released. What stopped them from calling the analyst, sharing factual data and clarifying his doubts? This probably could have helped alleviate his concerns, prompting him from releasing a fresh report and reversing his sell call. Quite possible, who knows. Why wait for this long and then take it up? (c) In terms of what should the right frequency of such earnings release is completely an individual call. Can anyone state with certainty that annual reporting wouldn’t stress or cause lesser stress to managements? No. Frequent reporting (quarterly) have their own pros and cons just as much as non-frequent reporting (annually). And this can (and will) always be debated.

There’s nothing right or wrong. All of the above are my personal opinions. Please note that i am NOT making any claims about the concerned analyst’s report and have merely used it as an example to explain my point.

I would love to hear your views.

Cheers!!!
Sudhir

image credit: www.careerbuilder.com

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2 thoughts on “Learnings… from periodic earnings

  1. Great observations. My take: companies should also give clear concise reporting; bearing in mind what market blindspots are with regards to their strategy and performance. Not saying they should be reactive but the reports offer great market intelligence because the buy side feeds off them for decision making. You rightfully point out that the onus lies with the company to factually check analyst reports. IR should encourage the analysts to use them for fact checking and be able to give timeouts feedback.

    On timing of reporting, I agree that having worked with companies that report both quarterly and biannualy it’s no one size fits all solution. However, once a year seems a stretch.

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