IR Monitor – 16th August 2021

This week’s news

Bumper earnings season keeps stocks buoyant

The Wall Street Journal reported last week that the case for stocks has been boosted by a solid corporate earnings season in the US which saw an 18% advance in record closes on the S&P 500, taking the total to 44 this year. Despite significant clouds on the horizon which threaten the medium term economic outlook (notably the Delta variant, sustained price inflation and China’s crackdown on corporations) investors’ moods have been buoyed by a standout earnings season in which the share of big US companies beating profit expectations is on pace for a record. What’s more, companies are turning more of their sales into earnings, keeping profit margins at record highs. Analysts now project that earnings from companies in the S&P 500 will have grown 90% in the second quarter from a year earlier, up from an estimate of 53% growth the day before the quarter’s April kick-off. While some suspect this may be a peak quarter for margins,  investors can still bask in a successful earnings season following the torrid previous year.

Can digitalisation revive shareholder democracy?

Archie Norman, Chairman of Marks and Spencer, called for regulatory change to facilitate more digital communications between companies and their shareholders. He wrote in the Financial Times that the AGM used to be a rowdy affair, with loyal investors trekking the length of the country to attend a two-hour meeting with a cup of tea and a digestive. Those days are behind us, Norman says, and this has seen a weakening of shareholder democracy. Not only are most share registers dominated by institutions, but many of these are trackers or index funds anyway. Virtually none of their representatives attend AGMs and almost all, if they wish, get private access to management. Marks and Spencer has been experimenting with hybrid and fully virtual AGMs since before the pandemic, and the results have been impressive. This year’s digital AGM saw a 200% increase in shareholder involvement. Just 562 shareholders made the trip to Wembley Stadium in 2019, but at this year’s digital AGM 1,650 voted, asked questions or watched live and there were over 2,500 replays afterwards. Norman is calling on the government to enact regulatory change to recognise virtual AGMs as valid, to require shareholders to provide email addresses in the information given to registrars when they buy equity, and to be able to send shareholders a precis of annual reports and publish the full version online. These changes, he claims, will bring back the hustle and bustle of the AGMs of old and give a much-needed boost to shareholder democracy.

AMC doubles down on Reddit investors

Movie theatre company AMC, a favourite of the Reddit retail investor community, generated $444.7 million in revenue in the second quarter of 2021, compared with $148.3 million in the first quarter and $18.9 million in the year-ago quarter. In the company’s earnings call this week, Chief Executive Adam Aron played to his audience, fielding questions from almost a dozen retail investors but only one sell-side analyst. The Wall Street Journal reported that investors showed their approval, lifting the share price 4.6% to $35.36 in after-hours trading. The stock ended last year at $2.12. This comes despite existential threats to the future of the cinema, such as the persistence of Covid-19 and the rise of streaming services, but Aron remained bullish in the face of these challenges. “They say that streaming is going to beat us,” Aron said, citing the history of observers saying that radio, television and DVDs would lead to movie theatres’ demise. “Well, a lot of people mock conventional wisdom because so often it’s just plain wrong.” Whether his confidence is justified remains to be seen; in the second quarter, AMC’s free cash flow was negative $251.7 million, and the company lost $344 million. However, with its embrace of cryptocurrency and a new deal to show Warner Bros’ 2022 releases in its theatres for an exclusive 45-day release window, the injection of Reddit cash certainly seems to have buoyed prospects.

The basics of ESG reporting (IR Society webinar) 

Last Tuesday the IR Society hosted a webinar during which the panellists discussed all things ESG reporting as well as providing some useful advice for companies on best practice for sustainable disclosures. The event was attended by John Gilmore, portfolio manager at Martin Currie; Hendrik Schmidt, senior research analyst for responsible investment at DWS; and Neil Stewart, director of corporate outreach at The Value Reporting Foundation. To begin with, the three panellists disagreed that there was a need for a “universal” ESG disclosure standard, arguing that different reporting standards all fulfilled their own purposes for different audiences and stakeholders. Instead, they would like companies to adopt a few key standards for each purpose, embedding the serious accounting practices with which they treat traditional financial reporting into ESG disclosures. But, they stressed, ESG reporting is not an end in itself; it must be truly integrated alongside all other performance reporting, internalised within the business, aligned with the business strategy and understood seriously by management. Further to this, the panellists agreed that companies should be linking ESG targets to managers’ financial renumeration packages, but said that this was not a one-sized-fits-all solution. For the panellists, there are some longer-term targets where incentives may be inappropriate; and – importantly – targets must incentivise reasonable, credible and material goals – with the reasoning behind them communicated clearly by boards to investors. The panellists also called on companies to provide further “colour”, context and narrative for the data in their ESG disclosures – highlighting BlackRock as a case study to emulate.

SPAC rotten tomatoes

Old school IR managers have come to envy the leeway which the new SPAC managers have in making distant and dubious projections. Robert Cyran, writing for Reuters Breakingviews, has argued that investors should take the optimistic five-year growth plans put forward by debuting SPACs with a pinch a salt. Cyran’s suggestion has been prompted by a number of recent SPAC case studies. Most recently, AppHarvest, a grower of tomatoes and greens, published disappointing second-quarter results, less than seven months after going public. The company came onto the scene promising fast growth from sustainable agriculture, but it has already cut its 2021 sales guidance by nearly two-thirds. Despite this, the company remains confident in its 2025 outlook, projecting $350m to $400m in net sales. Investors disagree: AppHarvest’s market capitalisation has fallen to under $1bn, less than a third of what it was earlier this year. Similar stories can be told of ATI Physical Therapy, which lowered its 2021 guidance in July; Lordstown Motors, which said that it may not remain a going concern in June; and Nikola, which lowered its revenue forecast in August, days after its founder was indicted for fraud. As with AppHarvest, these SPACs all floated with optimistic five-year forecasts.

And finally… Who’s ringing the opening bell?

Matt Levine has written for Bloomberg about how the booming market for initial public offerings in the United States is creating a problem for US stock exchanges, namely, how to please all the companies that want to ring the opening bell. As Levine explains, only two companies can ring the stock exchange opening bell on a given day – one at the New York stock Exchange and one at Nasdaq. In a week where more than 20 companies want to go public, some will necessarily be left scrambling after “bad bells”. One option available to them is the closing bell. This, however, is not very attractive – largely because executives fear an awkward photo op at the end of a disappointing debut. Alternatively, the NYSE and Nasdaq are offering companies consolation bells e.g the ‘first trade celebration’. In this instance, stock market officials provide companies with a small gavel and a big bell, which the CEO or executive rings on the trading floor after the first trade in a company’s stock. We’re not sure this has quite the same ring to it.

Contact Us

To be added to the distribution list for the IR Monitor, or for further information on the dedicated investor relations team at FTI, please contact [email protected].