Management teams often hear this advice when communicating with Wall Street — under promise, over deliver. While under promising and over delivering is one of the most effective ways your company can build trust and credibility with the Street, it is much easier said than done.
Why are trust and credibility so important? In large part, the long-term value of your stock hinges on how Wall Street feels about your company and how much they can trust what your management team says. Yet building trust doesn’t come easily, and promising more than can be delivered happens to companies of all sizes and stature.
What does it really mean, though, to under promise and over deliver?
When I explain what it means to clients, I tell them to think of their investors (who buy their stock) like they think of their customers (who buy their products). Just as they have to manage their customers’ expectations, they have to manage investors’ expectations.
For example, would a company promise its customers the release of a new product by a certain date, when clinical trials are far from finished? In the same way, companies shouldn’t make projections to investors that they aren’t confident they can achieve.
Why companies over promise
Despite best intentions, over promising can (and does) happen for a variety of reasons. Often, management teams are simply too optimistic about their expected results, which can happen when they attempt to live up to unrealistic expectations that exist on the Street. Sometimes, factors out of a management team’s control impact expected results, and occasionally, boards push management teams to set aspirational guidance in an attempt to convey enthusiasm about the business.
Many of the metrics and milestones in the healthcare services, medical device, and biotech industries are time-related. Regulatory approvals and product launch dates, for instance, are incredibly difficult to predict and can take far longer than a company realizes — I’ve seen CEOs burn bridges with the Street by overhyping their ability to get a product through the FDA. It’s better to err on the side of caution with your projections, and keep in mind that glitches and setbacks are inevitable.
Over promising also occurs in companies’ revenue and earnings guidance to investors. Done well, guidance properly set and met can build credibility and increase your transparency among shareholders and analysts. Done poorly, it can raise eyebrows and shatter the Street’s trust.
As we’ve discussed before on this blog, guidance takes a great deal of time and brainpower, and when a company can effectively report how it will grow, and then execute predictably, that company has the greatest potential to earn higher-than-average valuations over the long term.
This doesn’t mean, though, that you need to resort to severe sandbagging. What you need is to set guidance that is realistic and achievable.
How the Street reacts
Analysts and investors love companies that are reliable, consistent performers. What they don’t love are companies that are unpredictable — and that make promises that are too good to be true. This can lead to a loss of credibility. When credibility is lost, everything you communicate (your market size estimates, revenue estimates, product launch estimates, and so on) is called into question and doubted, leading investors and analysts to discount your projections and thus your stock price.
Once trust with the Street is broken, it’s hard to rebuild. I won’t say there are no second chances, but your company may not get one unless you’ve built confidence among investors over time. While every company will, at some point, fumble, investors are far more likely to give you the benefit of the doubt if you have a reputation for candor, transparency, and reliability.
So remember: a premium valuation is earned over time, and up to 20 percent of a stock’s value can be attributed to investor perceptions. Proper communication with the Street through the lens of under promise and under deliver will make a positive impact on how the Street sees you.
At Westwicke, we help healthcare companies build or maintain trust with shareholders and analysts every day. Contact us to start a conversation about how we can help you.