Stock Picking Is Back: What that Means for Q3 Earnings Communications

Last week, the Bureau of Labor Statistics released the September jobs report, which crushed expectations along with any chance of the Fed reducing interest rates by the end of the year. However, our early read on the third quarter earnings season suggests one of the most challenging reporting periods – across sectors – in recent history. With higher costs of borrowing likely to persist at least in the short-term, companies will have to continue sustaining through a somewhat negative business cycle for a while longer. At the same time, with third-quarter earnings getting underway, CFOS and IROs need to carefully consider long-term-oriented portfolio managers’ mindset when crafting the financial narrative. Like everyone else, PMs are nervous about the prolonged economic downturn. But they are also actively looking for the best value stories to emerge.

As more and more investors shift back to the fundamentals of good stock picking, portfolio managers will be diving into the nuances of narratives with renewed intensity. Specifically, they will be keeping an eye and ear out for hidden assets, undervalued business models, and any pertinent details they may have previously overlooked or misunderstood about a company’s story or demand dynamics.

Companies that lead with these messages when announcing third-quarter results will have the best chance at capturing stock pickers’ attention and, ultimately, their investments. Here is a five-step formula for framing up the story in the most compelling way:

1. Reinforce the longer-term value of the company

A down market is the perfect time to convincingly communicate the longer-term value story. Highlight the growth potential and trajectory over the next several years including specific and less obvious growth drivers that add credence to why the company is a good long-term investment. Discuss the strategic investments the company is making in talent, operations, or technology today that will lead to greater efficiencies and enhanced growth opportunities down the road.

2. Convince the Street that short-term dynamics are ringfenced

Rising interest rates, inflation, global supply chain disruptions, labor shortages, and other short-term dynamics continue to disrupt the market. Now is a great time to show the Street that all these factors are under control.

Discuss how any mitigating actions taken to protect profitability are paying off, such as efforts made to offset surging raw material costs, introduce stabilization into the supply chain, or improve talent recruiting and retention. Specifically, companies that are, or have proactively become, more insulated from economic distress or exposure to China should highlight this in their strategic communications. Investors need to know that the company can perform through a difficult cycle by effectively and efficiently implementing strategic measures when and where they are needed.

3. Focus on 2024 value drivers including those investors who may be overlooking

Investors need to understand what will drive value in the coming quarters even if the results are not yet in the financials. Consider giving guideposts to help investors better track the forthcoming rebound and gain more insight into what’s on the CEO’s dashboard and in the pipeline that will ultimately drive future value. This could include discussion of sales meetings on the calendar, new partnership discussions in the works, or even successes at pushing through pricing increases to more customers.

Other drivers to speak to may include:

• Rebound in end markets. Include commentary on what is driving the recovery. Companies can elaborate on innovation, next-generation technologies, and increasing expectations around safety, health, and the environment as key demand drivers in 2024.
• Supply chain risk mitigation efforts. Now is the time to share results and/or the company’s improved risk profile resulting from supply chain optimization efforts and sourcing initiatives put in place over the last several quarters.
• Reduced operating costs. Companies should highlight why employee costs are down and how raw material costs are stabilizing. Speak to efficiencies and permanent changes, such as outsourcing certain functions, shutting down unnecessary or unprofitable equipment, or exiting an underperforming business segment or division so that investors are aware of how to model costs moving forward.
• Declining M&A or investment costs. M&A pipelines are starting to swell again as the cost of deals decreases, helping to offset higher interest rates. Companies should speak to how these trends will allow them to be more aggressive in acquiring innovation or ancillary businesses.

4. Introduce key operational leaders

Consider leveraging upcoming earnings communications to spotlight operational leaders who oversee important parts of the business and who are expected to meaningfully contribute in 2024. Scheduling a dedicated intra-quarter call, for example, provides an opportunity for investors to learn more about key or less-understood business segments and connect with the leaders behind those parts of the business. Ideally, the agenda for such a call will be part educational and part motivational to maximize both the relevancy and impact of the communication.

5. Continue to emphasize financial flexibility

Companies with healthy cash flow and plenty of dry powder are in the best position to take advantage of lower M&A valuations, avoid down rounds, and keep near-term borrowing costs low. Keep reinforcing the strength of the balance sheet and how it gives the CFO and company more options for driving the greatest value for their stakeholders in the months and years ahead.

Set the stage without overcommitting to a specific timeframe

While investors will be looking at Q3 results, they will also be looking ahead to 2024 as they continue to search for the best opportunities in today’s volatile business climate. Companies that lead with a clear, compelling, and convincing story of strengthening in the months and years to come do not need to sell the exact timing of these improvements. Rather, it’s more important (and credible) to present a narrative that illustrates how all the elements are in place for a successful 2024.

Need help thinking through your investor narrative? Reach out to the strategic communications experts at Riveron for comprehensive advice and hands-on assistance. We can help you take a proactive approach to surfacing and effectively messaging the misunderstood or overlooked demand drivers and elements of your business that are critical for investors to understand now.