More Caution, Less Optimism: How to Hold onto Investors Amidst Continued Uncertainty.
Volume 1: Issue 4
Welcome to the fourth issue of Compass for the Chaos – Weber Shandwick’s monthly newsletter highlighting recent trends and topics affecting the global organizations we counsel. In this issue, we address how companies can better manage their stakeholders, especially when reporting quarterly earnings, announcing future transactions, or navigating proxy season. Are you prepared to preempt the demands of activist investors? Are you positioned to make positive headlines even as revenues fall and growth stalls?
Because with the 3.5% inflation reported in March, prevailing wisdom is that the Fed is not going to ease monetary policy anytime soon. Companies that need to raise funds or refinance their costs of capital will be forced to take on more expensive debt. Others will be obliged to backburner their growth plans, redirect investment, or find ways to cut costs.
The outlook isn’t all bad, of course. Earnings continue to demonstrate surprising resilience: S&P 500 companies reported nearly 4% earnings growth in Q4 2023 compared to the same period in 2022. Recent data from FactSet points to positive surprises in earnings per share (EPS) and revenue for Q1 2024, with 74% and 58% of S&P 500 companies that have reported thus far coming in above estimates, respectively. Capital markets transactions seem to be recovering, led by record-level investment-grade debt issuance as U.S. investors rushed to lock in yields prior to any rate cut while issuers sought to remove funding volatility. The IPO market is likewise looking robust, with U.S. stock exchanges listing 63 offerings (up from 59 at this time in 2023) and global exchanges listing 290. And while the number of M&A deals have yet to exceed pre-pandemic levels, transaction values are higher this year than last, according to data from S&P Global Market Intelligence.
Yet as long as inflation stays sticky and interest rates remain high, we’re in for a bumpy ride. Time to fasten your seat belts—and take measures to cushion your investors.
Best,
Peter Duda, President, Global Corporate Crisis and Issues at Weber Shandwick
Marc Drechsler, Global Head of Capital Markets at Myriant, a Weber Shandwick company
Lucia Domville, Executive Vice President of Capital Markets at Myriant, a Weber Shandwick company.
On your next earnings call, instill investor confidence
Making positive headlines is easy when you’ve got great numbers to share. During Amazon’s April 30th earnings call, executives had the enviable task of reporting that Q1 revenues exceeded investor expectations, Q2 spending was slated to increase, and the long-term growth horizon looked rosy. A lay-up.
But when the numbers are bad or the news is likely to disappoint, the right communications strategy is critical to protect management credibility and investor confidence. And with looming questions around the state of the economy, escalating geopolitical tensions, and the US entering a polarized election season, this can be more important than ever.
Here’s how to ace the earnings call, whatever the news you’re reporting:
Don’t bury the lede. If you’ve got good news, lead with it. Witness how the market soured on Meta after CEO Mark Zuckerberg elected to lead the Q1 earnings call with a discussion of those areas where the company doesn’t currently make money (glasses, mixed reality) instead of trumpeting the company’s positive financial performance. Investors, and analysts, seek reassurance within the first minute of the call. Don’t waste that precious window.
Offer clear and comprehensive guidance. Spell out your growth strategy. Specify your capital allocation priorities. Explain how earnings performance aligns with long-term value creation. Above all, tell investors exactly how you plan to deliver consistent returns and steward company finances, especially amidst roiling markets and global conflict (Jamie Dimon mentions the Middle East no less than eight times in his 2023 letter to shareholders). By providing guidance that aligns with market expectations and by clarifying future initiatives, investments, and growth trajectories, you maintain investor confidence even as market conditions deteriorate.
When in doubt, disclose. Opaque communications destroy credibility and, consequently, tarnish your brand. Don't make the mistake of massaging financial results or downplaying potential risks. Instead, telegraph your respect for investors by sharing—as Amazon recently did—insights into growth-driving business segments so that investors have the information they need to reach their own conclusions about the company’s performance and growth prospects. Counterintuitively, disclosure enhances investors’ confidence in your management.
Demonstrate you’re super-attuned to investor needs and market conditions. Earnings calls that are tone-deaf to current conditions signal that you’re asleep at the switch. Tackle what’s top of mind for investors, as Elon Musk did on Tesla’s Q1 earnings call. Despite reporting a decline in first-quarter revenue and missing analysts' estimates, Tesla's CEO left investors feeling optimistic by sharing his plans to accelerate the production of affordable new EV models and beef up investment in the company's artificial intelligence infrastructure. Pivoting on strategy in response to market challenges demonstrates adaptability and resilience—exactly what investors want to see in uncertain times.
Differentiate your value proposition. Can you articulate your company’s competitive advantage in the marketplace? Do so on your next earnings call and you may see share prices surge. Snapchat's shares increased by 28% on the heels of its Q1 report, not only because sales and user numbers exceeded analysts' estimates, but also because CEO Evan Spiegel used the opportunity to remind investors how and why Snapchat is unique in the social-media industry: it prioritizes user engagement and provides advertisers with highly effective, direct-response advertising solutions. Investors came away confident that Snapchat can maintain its competitive edge and deliver long-term value.
Before announcing a major transaction, learn what investors want most from it
With higher cost of capital here to stay, investors will be scrutinizing your transactions with one question in mind: How will it advance the company’s growth profile and strategic goals?
You can hardly blame them. Last year, 21 companies that had gone public via SPACs, including WeWork and Lordstown Motors, went belly up. Ease of access to stock-market listing allowed many SPACs to get in front of eager investors before they’d firmed up their businesses. When the funding environment changed, the curtain went up to reveal flimsy fundamentals, leaving investors holding the bag on $46 billion of lost equity.
At the end of the day, investors are the owners of the business, so treat them accordingly, anticipating as well as addressing their concerns in every communication you share—especially those leading up to a major transaction. Here are some pointers:
Gather and leverage investor insights. Find out what investors care about before alerting them to a major deal. Perception surveys are a great tool to give you an early, unbiased read on what investors are looking for and which aspects of the deal might provoke push-back. Keep your finger on their pulse; after announcing the deal, find out what resonated well with investors, which can minimize the need for future updates. Ongoing insight into investors’ thinking allows you to continually tweak your messaging so that, after the deal closes, it ladders up to the overall strategy.
State your transaction thesis simply and clearly. Prepare for broadcast interviews by drafting talking points that convey in a sentence your business model, your competitive advantage, and your growth strategy. Give some thought to analogies, as these can dramatically simplify technical explanations. Astera Labs CEO Jitendra Mohan, for example, managed to stay well within his three-minute window with Bloomberg journalists by comparing what his company does (Astera Labs facilitates CPU and GPU communication to deliver search-engine results in nanoseconds) to relay-race runners.
Prepare for the best messaging and delivery. Preparing through practice is always a good idea, especially in the current market environment where investors scrutinize your story through an ever-more fundamental lens. Practice, above all, articulating the transaction rationale, so that when you get in front of journalists you can make a compelling case for why the transaction will generate superior return over dividend or share buyback and practice delivering it. (This new IPO’s co-founders could have benefited from more practice before joining Squawk on the Street to discuss the software company’s IPO.)
During proxy season, get out in front of activists
Macy’s, the storied department-store chain, illustrates why shareholder activism is something every executive hopes to avoid this proxy season.
The first salvo hit the bow last December with an unsolicited $21-per-share bid from Arkhouse Management. Macy’s rejected it. Then, in February, Arkhouse launched a proxy fight, offering nine new board directors for shareholder consideration at the next annual meeting (eventually scheduled for May). In April, ahead of that meeting, Macy's settled the proxy battle by adding two of the nine directors Arkhouse had nominated. Macy's side-stepped a shareholder showdown. But, by increasing Arkhouse’s influence on the board, the settlement advanced the activist’s agenda of taking the retailer private.
Activism comes down to valuation: if an activist believes your shares don’t reflect the value of your company, you’re going to be a target. But if you can’t avoid being a target, you can at least avoid the damage incurred by a drawn-out battle and shareholder vote. Here’s how:
Assess the initial proposals. As proposals come in, make sure you know which ones are likely to make waves.
Get the jump on your activists. Knowing what shareholders are up to—we rely on S&P Global Market Intelligence for activism surveillance—buys you time to think through countermeasures and prepare your response. Forewarned is forearmed.
Pressure-test your strategy. How will your tactics play out? How might markets respond? Much as fire drills prepare everyone to remain calm in an emergency, coming up with different activist scenarios and practicing your response to each (simulation drill role-playing that feels real with a tool called Firebell) can give you a sense of control no matter how hot the proxy battle becomes.
According to S&P Global Market Intelligence’s recent Activist Heatmap Campaign Analysis (March 2024), activist campaigns have increased 45.1% in the last twelve months compared to the prior twelve months and increases have been significant in the Consumer Discretionary and Financials Sectors.
S&P Global Market Intelligence Activist Capital Trends Report March 2024
Trends you can’t afford to ignore
Along with AI-powered mis- and disinformation campaigns, the 2024 U.S. presidential race will introduce massive uncertainty into capital markets. Investors have to ponder, for starters, post-election shifts in fiscal policy and taxation. Policy-driven sectors such as healthcare, defense, and energy regulation are most at risk for market turbulence. But as partisan divides deepen and polling margins shrink, market dynamics could dramatically shift in the run-up to the election. Historical data suggests that stocks perform above average during re-election bids; seasonal patterns hint at heightened volatility prior to Election Day. Will the broader economic cycle prevail, as it usually does, over election-induced fluctuations? If you’re wondering how to gauge the potential impact of the U.S. presidential race and communicate it to shareholders, we’ve got the intel to guide you.
Newly mandated climate-impact disclosure rules will disrupt financial reporting. In March, the Securities and Exchange Commission approved new rules aimed at bolstering and standardizing climate-related disclosures by public companies and in public offerings. These regulations respond to investor demands for consistent and reliable information regarding the financial risks posed by climate change. Specifically, the SEC requires companies to disclose climate-related risks and their potential impact on business strategy, operations, financial health, and company mitigation/adaptation efforts. The regulations aim to enhance investor decision-making through transparency. Their effect on companies’ risk management strategy and financial reporting is less clear. Let us help you chart a course. #earningsseason
One great listen
Even though we’re industry experts, we love getting Matt Levine’s take on the markets and all things financial in Money Stuff, his opinion column on Bloomberg. Matt is one of the few journalists who can make capital markets and corporate finance seem ... fun? You be the judge of that. Sign up here and say Cristiana sent you.
And a big thanks
For their insight and counsel, we’re indebted to team members Cristiana Kamais (capital markets), Milan Khatami (earnings), Shiwei Yin (capital market transactions), Christine Beggan (proxy season and shareholder activism), and our colleagues at S&P Global Market Intelligence.
ABOUT THE CAPITAL MARKETS TEAM
Myriant, a management consultancy within The Weber Shandwick Collective, applies a stakeholder lens to business decisions, leveraging industry exclusive, AI-backed analytics and insights to help leaders address issues and opportunities. Check out our website for more information including news and insights: Myriant.