Analysts are an important group of individuals who do the heavy lift work of interpreting the information that you, the management, release to the investor community. Since UK quoted companies do publish earnings guidance it is the job of the analyst to create forecasts and these will be used to set expectations.

 

Sell side  analysts, employed by investment banks, will publish their forecasts and will be responsible for setting the expectations of the market. Buy side analysts work for specific institutions and their forecasts and recommendations will be used internally by that organisation. Paid-for research describes the publication of research which is paid for by the listed company being covered. This latter style of research is increasingly important because it is available to all potential investors, and not just clients of the investment bank that employs the writing analyst.

 

If a company expects its performance to differ materially from market expectations then it must inform the investment community via an earnings upgrade release, or a profit warning. As a result it is important that the company maintains a dialogue with analysts in order that analysts understand the company and the environment in which it operates, and management understands what analysts are guiding the market to expect.

 

The investor relations department has several responsibilities relating to analysts:

  • Gathering forecasts to create the consensus forecast data and then communicating this back out
  • Explaining strategy and changes to the business
  • Organising site visits or access to management
  • Correcting factual errors in draft research when given the opportunity
  • Explaining the accounting treatment of certain issues such as pension and goodwill

The number of analysts covering a company varies with size, from 25+ for a £10bn market capitalisation company to one or two for a £50m company. A general trend is that as investment banks and fund management institutions cut back their cost base, the number of analysts covering each company is reducing and in the micro-cap arena this has lead to many companies being completely uncovered.

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