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A 82% decrease in earnings per share drove a 10% increase in the share price: here is how

A 82% decrease in earnings per share drove a 10% increase in the share price: here is how

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Based in Europe, a world leading group in the metals and mining industry with a market capitalization of around 2 billion euros at the time was about to report quarterly losses for the first time in its history. Although most of these could be attributed to the brutal deterioration of demand in its end markets, in the aftermath of the 2007-2008 global financial crisis, management was extremely worried by three risks:
  • the share price reaction
  • the potentially damaging impact the losses could have on its well-established reputation with the investment community, both domestically and abroad
  • the success of the rights issue that was to be announced at the same time as the quarterly results:
As long-standing Investor Relations advisors to the company, we were already very familiar with the company´s reporting systems. We therefore recommended the CEO, the CFO and the Investor Relations Officer to go beyond the traditional year-on-year comparisons of financial performance: we felt there was untapped value to be realized with a different, and yet complementary approach.

What we did: as always, we started by comparing the quarter´s results with those of the prior year period and identified the factors that had driven net income into the red. Then, we performed a sequential analysis, comparing the first quarter with the fourth, all the way back to the second quarter of the previous financial year. This analysis revealed that the fixed costs savings in the first quarter alone were twice bigger than what had been achieved in the entire previous year. It is worth noting that, even though “fixed costs” is not a line item in the income statement, this is a metric that the company tracks and that is audited. We provided this additional level of granularity and included the amount of fixed costs savings in the press release, recalling what the same amount had been in the previous financial year.

What was the measurable outcome for our client?

  • Upon the announcement, at the market opening, the share price rose by nearly 10%, in spite of a 80% decline in earnings per share.
  • The quarterly announcement gave investors the reassurance they needed to maintain their confidence in the company´s ability to deliver on its long-term value creation promise. As a result, the company was able to raise 250 million euros in a successful capital increase.

Our advice

  • Think like a financial analyst and look at your financial statements differently, trying to anticipate all the questions that could come up. For instance, when you report full year results, what does your second half say about the execution of your strategy? Why does it show an acceleration or a decline compared to the first six months of the year? Can this trend be extrapolated to the coming year?
  • Do not try to hide the bad news, or what you fear could be bad news. It could backfire and hurt your reputation, a major component of your valuation, in a lasting manner.
  • Enrich your regulatory disclosures with performance indicators that reflect your business model, the way you manage your company and that can help investors track progress in the execution of your strategy.
  • It takes time to produce a compelling financial announcement. Make sure you have enough of it ahead of the announcement day. And, if you do not have a lot of time available, create a timeline: You won´t regret it.

Engage the right investors with communications collaterals that articulate your value

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