How to Think Like a Sell-Side Analyst
I worked on the sell side for seven years and I saw it all the time: Companies issuing material news — sometimes very good news — while failing to appreciate how the announcement would be received by a skeptical investor community.
As an executive, you want to minimize any negative reaction to your company’s latest update. That’s natural. And while there’s certainly nothing wrong with accentuating the positive, it’s important to remember that sell-side analysts are trained to poke holes in your story. That’s their job, and most of them are very good at it.
So when you don’t anticipate what analysts will likely hear when you make certain announcements, you can exacerbate the impact of bad news, dampen the value of good news, and — worst of all — undermine your own long-term credibility. If you want to communicate well with the sell side, you have to learn to think like a sell-side analyst.
Here, then, is my own guide to how analysts tend to view common corporate announcements. Keep these in mind the next time you have important news to share.
When you announce the rollout of a new product or service line…
Analysts will wonder:
- What was wrong with the old line? Were you experiencing a lag in orders?
- Will the new product simply cannibalize orders of your existing products?
- Are your launch timelines realistic?
- And here’s a big one: Does your sales team already know how to sell this new product or service, or will they have to spend time in training? If they do need training, how is that going to affect your revenue, and for how long? I know of one company, for example, whose growth went from 20% to 2% because its entire sales team was being trained on a major new product, leaving them virtually no time to sell.
- How might this affect your sales team’s relationships with their existing customers? This is a particular challenge if the new product or service opens a new market. For example, your sales professionals may have deep relationships with cardiologists in their markets, but if you’re selling the new product to cardiothoracic surgeons, how will they maintain their existing relationships while growing new ones?
- How will you avoid sales reps falling into the Shiny New Thing trap, where they’re so enamored with the new product or service, and with management’s demands that they push it, that they forget about everything else?
When you announce an acquisition…
Analysts will wonder:
- Why do you need to buy growth? Is there something wrong with your internal sales pipeline?
- To what extent will the completion of the acquisition distract management from hitting its targets? Did you overpay? Will this dilute the value of your existing shares?
When you announce changes in expenses…
Analysts will wonder:
- What’s causing increasing expenses? Rising costs may seem worrisome but are sometimes just the natural effect of growth, an expanding sales force, or a new clinical trial — all positive developments.
- What’s causing decreasing expenses? Declining expenses might seem like a sign of careful management, but in fact may signal a failure to invest appropriately in research and development or other areas vital to the future of the business.
- Are you making changes to the way you sell? When analysts see fluctuations in your SG&A — selling, general, and administrative costs — they’ll wonder if it reflects a strategic change in your sales model. If you told your analysts you’d have 60 salespersons by the end of the year, but your SG&A numbers midway through indicate that number will be closer to 40, that’s going to affect your analysts’ revenue estimates for your company. They’ll naturally have questions about that.
When you announce a new commercial awareness or direct-to-consumer (DTC) ad campaign…
Analysts will wonder:
- How will you measure success? I’ve seen several companies that spoke excitedly about a new DTC campaign, only to discover later that the campaign was a rabbit hole. The truth is, patients rarely “ask their doctor” about the drug or device being advertised; more often they trust their physician’s advice.
- How much are you spending? DTC campaigns can be very expensive, so analysts will want details on why you think it’s worth it.
When you announce an expansion of, or initially define, your addressable market…
Analysts will wonder:
- How did you arrive at that number? Analysts look very skeptically at companies’ estimates of their addressable markets. Smart companies make conservative, defensible estimates backed up by plenty of hard data.
- If your addressable market really is as big as you claim, how long will it take (and how much will it cost) for you to ramp up sales and operations to address a market that size? And how will you compete with larger players that are either already in it, or soon will be?
Sell-side analysts can be your greatest asset precisely because they’re independent, tough, and skeptical. When they believe in your story, investors will, too. But don’t expect it to be easy to get there.
Whenever you have news to relay to the analyst community, take some time in advance to try to see your announcement through the eyes of a jaded skeptic who’s seen and heard it all more than once. Craft your message carefully with that in mind, and practice a thorough Q&A that anticipates the “worst-case scenario” questions that you’re likely to get.
With more than 200 years of combined Wall Street experience, Westwicke has helped dozens of companies prepare to face the scrutiny of sell-side analysts. We can help you, too. Feel free to reach out.
ICR Westwicke is the largest healthcare focused investor relations firm in the country. We provide customized investor relations programs and independent capital markets advice to small and mid-cap healthcare companies.
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