Perspectives on the Sell-Side

An Examination of the Evolving Priorities and Needs of Sell-Side Analysts

© 2008 Rivel Research Group. All rights reserved.

The material contained in this presentation is part of a published report and the sole property of Rivel Research Group. No part of this presentation may be reproduced in any form or by any means, without permission in writing from Rivel.

Presented by:

Brian Rivel, President, Rivel Research Group

Gene Rubin, Vice President, Rivel Research Group

Webcast for NIRI Chicago Chapter

April 3rd, 2008

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Established in 1991

One core competency – marketing research

A unique specialty – investment community research

Thousands of interviews with investment professionals every year

Clients include one third of the S&P 500

Rivel Research Group

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Broad-based, nationally representative studies

Provide context for investor communications strategy

Monitor attitudes and behaviors of vital IR constituencies

Track key trends and developing issues among sell-side analysts, buy-side professionals, IROs and CEOs

Perspectives on the Buy-Side

Perspectives on Investor Communications

Perspectives from the CEO

Perspectives on the Sell-Side

Rivel’s Perspectives Research Series

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Profile today’s sell-side

Clarify chief motivations/priorities

Ascertain what prompts coverage decisions

Identify drivers of sell/buy recommendations

Prioritize most valued information resources

Measure the impact of investor relations

Implications for investor communications

Study Objectives

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Methodology

251 sell-side analysts

+/- 6% margin of error on total US data, the focus of this presentation

230 US interviews

Additional context provided by 21 Canadian interviews

Mid Sept. to Mid Nov. 2007

In-depth telephone interviews, split in US as follows:

77 Large Institutions (over 50 analysts), 61 Medium (20 to 50 analysts), 92 Small (5 to 19 analysts)

51 Bulge Bracket, 57 National, 42 Regional, 57 Specialty/Boutique, 32 Independent

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Key Takeaways

Providing management access a top goal

Significant hedge fund clientele

Decisions hinge on same criteria as buy-side

Investor communications have definitive impact

Intangible: management credibility, business strategy

Tangible: free cash flow, revenue growth, earnings growth

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How Brokerage Firms Judge Performance of Their Analysts(Aided)

7%

8%

16%

38%

47%

48%

56%

High Institutional Investor magazine ratings

Facilitating investment banking business

Managing investor conferences

Trading volume generated

Thorough/ comprehensive research reports

Accurate stock recommendations

Providing client access to corporate management

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Trading Volume Accounted for by Hedge Funds(Among analysts able to make an estimate)

Note: 50% unable to estimate

15%

21%

64%

Median = 50%

Fifty percent or more

One-third to 49%

1% to one-third

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Triggering the Recommendation

Management credibility – 83%

Effective business strategy – 82%

Attractive growth in EPS – 75%

At the bottom of the list …

What factors drive sell-side decisions? A mixture of tangible and intangible items...

Prospects of LBO/being acquired – 8%

Attractive dividend – 5%

Social responsibility – 3%

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87% need to meet with a firm’s top management before they will initiate coverage

One in three say twice or more

Face-to-face is most direct and tangible, thus impactful

How Are Intangibles Communicated?

As with the buy-side, management needs to show progress versus goals to be credible.

Senior executives must be on the road communicating:

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Which Tangible Metrics Lead the Way?

Free cash flow – 59%

Revenue growth – 52%

Operating margins – 47%

Earnings per share – 47%

ROIC – 45%

EBITDA – 43%

While free cash flow dominates when buy-siders are asked this question, sell-side analysts are more apt to give equal billing to revenue growth

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Focus on Communications

Three critical stages of involvement with a stock

Making the Radar Screen

Influencing Buy/Sell Recommendations

Sustaining the Relationship

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Making the Radar Screen

Buy-side professionals – 89%

Meetings with senior corporate executives – 88%

Business/trade press articles – 79%

Industry experts – 73%

Communications from IR executives – 68%

How do you make it to the radar screen?

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Be visible/management access – 30%

Show tangible growth potential – 24%

Outreach/be proactive – 20%

Have compelling story – 20%

Demonstrate management/strategy effectiveness – 16%

Get bigger, larger market cap – 10%

Making the Radar Screen

What if we are a small-cap company?

When the buy-side has been asked this question, it’s all about getting bigger and financial performance.

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Influencing Decisions to Recommend

Senior management meetings – 95%

Quarterly conference calls – 91%

SEC filings – 91%

Corporate websites – 81%

Communications from IR executives – 79%

We made it to the radar screen, how can we best reach the next stage? What resources are key?

All cited more often among sell-side than on the buy-side (who again give top priority to in-house research)

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Senior management meetings – 96%

SEC filings – 96%

Quarterly conference calls – 96%

Communications for IR executives – 83%

Corporate websites – 80%

Most helpful communications after coverage initiated?

Again, the sell-side relies on these resources to a greater extent than the buy-side (especially IROs and the website).

Sustaining the Relationship

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Insufficient disclosure/transparency – 44%

Poor guidance/management of expectations – 31%

Too promotional – 29%

Disingenuous/withholding information – 29%

Lack of communications/under-communicate – 10%

Insufficient management visibility - 8%

Sustaining the Relationship

Where do companies go wrong? What are the biggest mistakes made when communicating with the investment community?

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Does IR Affect Valuation?

Question: In your opinion, does good investor relations affect a company’s valuation?

Yes – 82%

No – 15%

Premium for “superb IR” – 10% (median)

Discount for “poor” IR – 18% (median)

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How IROs Can Enhance Their Value (A sell-side view)

9%

10%

14%

19%

19%

25%

30%

40%

Be in the strategic loop/ have seat at the table

Convey company message clearly

Be communicative/ proactive

Provide access to management

Be accessible/ available

Be more responsive

Increase company/ strategic knowledge

Work to increase disclosure/ transparency

* Multiple responses

Views often parallel those expressed by CEOs in 2006

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Believes effective investor communications impacts valuation.

More often relies on IROs and company-supplied info for insight.

Hangs hat on info and access disseminated/managed by IROs.

Covets similar drivers/messages as buy-side.

Is a bridge to hedge funds (whose views often mirror those of traditional buy-siders).

Often is a company’s only constant spectator over the long term.

Sell-side’s importance is evolving and moving toward playing more of a facilitator’s role.

Yet, our buy-side studies consistently confirm its ongoing relevance. And, the question most often asked of sell-siders is … “Should I buy/sell the stock?”

Sell-side still holds immense promise as an investor communications tool:

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Even if their end goal is facilitating access, it’s obviously crucial that the facilitator be well acquainted with the story and a supporter.

As with the buy-side, management needs to be on the road talking about strategy, setting goals, meeting them and reminding people they have been attained, which leads to credibility.