- Stock analysts have tunnel vision.
- Stock analysts are too focused on the financials.
- Analysts are afraid to ask top management the tough questions.
- Conference calls need disrupting.
If there is anything that needs "disrupting" these days, it's the quarterly earnings conference calls held by company management, attended by industry stock analysts. In my opinion, these conference calls have become a wasted opportunity to get to the root of a company's problems or underperformance.
I will use the public weight-loss company calls as an example, since that has been one of my main specialties as an independent market analyst of the weight-loss market for 25 years.
Invariably, after top management presents the performance for the latest quarter, the outlook and guidance for the next quarter and year, there is a question & answer period for the analysts. These so-called very highly paid experts can ask management specific questions. So what types of questions do they ask? 99% of the time, it's financial issues related to: EBIDTA, cost controls, interest payments on debt, capital expenditures, cash flow, SG&A expenses. The problem is, for many industries, like the weight-loss market, the main issues related to underperformance are marketing and competitor related - not financial.
Stock analysts are good at dealing with financial spreadsheets, but few have in-depth skills in marketing. Even if they have an MBA, there is little training in marketing. Wall Street focuses way too much on technical charts, esoteric formulas, market cycles, sectors that are in favor or out of favor, and not enough on company and market fundamentals (common sense, consumer trends and shifting preferences, effect of the overall economy, effect of competitors, advertising, pricing, how well companies execute, company strategies, market niches, new products/services, PR, ad campaign effectiveness, etc.).
Questions I would have asked in the latest Weight Watchers (NYSE:WTW) conference call:
- What's the average age of your 10,000 group leaders, and what percent of them are minorities? (They are aging and not connecting with younger dieters.)
- Why isn't your company pursuing partnerships with more retail-facing partners such as big box retailers and in-store drug chain healthcare mini-clinics? (NutriSystem sells its program via Walmart, QVC channel, Costco, and is testing Target stores.)
- What has been done to increase the street exposure of your 800 leased retail sites (an area that has been targeted for improvement several years ago)?
- Do you have plans to develop any new programs for specific dieter groups, rather than push a one size fits all approach (i.e. plans for seniors, overweight teens, women over 45 with postmenopausal weight gain and hormone imbalance, overweight Black and Hispanic women.)? If not, why not?
- Why do you continue to run operations in countries where there is firmly entrenched stiff competition, rather than untapped new markets? (i.e. the UK where Slimming World is a strong competitor.)
- Did you see any major defections of meeting group leaders as a result of the recent rebellion over low pay? Has this issue been resolved and are the group leaders satisfied and happy with the salary increase? (These leaders are a key asset of the company.)
- Other weight-loss companies are not placing the majority of blame for their lackluster sales on free/low-cost weight-loss and fitness apps. Do you really think this is the major problem and reason for your slow growth lately? Why? Do you have any solid research data, polls or focus group results to prove it?
- Why aren't you allocating part of your $300 million annual marketing/advertising budget to the development of new programs and services?
- Why doesn't your ad agency produce commercials with different spokespersons other than Jessica Simpson and Jennifer Hudson? What about regular person testimonials. Why don't you use radio station DJs (like NutriSystem did very effectively in the 1980s)?
NO, you will never hear the analysts pose these questions. Why? Is it because they don't take them into account (their lack of marketing training), or is it because they are afraid they will be viewed as a pest or will rub management the wrong way and be shut out of future conference calls?
So, YOU, the investor, wind up hearing only half the story. You do not get the whole picture and don't get to the root of the company's real problems. And this is a disservice. The company, if it's truly transparent, should be able to answer these questions.
The financials don't drive performance in a sector such as weight-loss programs. Vice versa. Marketing and advertising and good execution, having the right price for the right customers, and having multiple channels of distribution is what makes it in the weight-loss market - not EBIDTA. If a company has the right programs, a good ad campaign, a good reputation and executes well, the top-line sales will show it, and it will flow through to the bottom line, assuming that operating costs are within reason. Yet, the stock analysts seem to think the reverse.
Oh, and by the way, a "junior" analyst typically makes $100,000 to $200,000 per year (total compensation including salary + bonuses) and a senior analyst can make $600,000 or more for their services. Are we really getting our money's worth?
So, in conclusion, I feel that someone needs to "disrupt" the way stock analysts critique a company, and teach them that financial ratios are not the only criteria by which to judge a company's performance and future outlook.
If you agree, let's hear some ideas.