Basic Principles of Investor Relations. Joseph Hassett

Transcription

1 Basic Principles of Investor Relations Joseph Hassett

2 Tying Investor Relations to Value Creation Investor Relations Helps Enable a Company to Achieve Fair Value. Providing Highest-Quality Information Is the Path to Achieving Fair Value. It Makes Sense for the Investor Relations Officer to Lead the Value Creation Team. Management Must Have Confidence and Trust in the IRO to Fill That Vital Role. 2

3 Primary Qualifications of an Effective IRO Be an Expert on Market Behavior. Know Your Company, Industry and Competitors Inside and Out. Have the Training and Capabilities to Understand Corporate Finance and Operations and Investment Market Process. Be a Good Communicator Verbal and Written. Have Some Skills of Persuasion. 3

4 Understand the Investment Process and Market Market Determines Stock Price. Prices Are Based on Market Expectations. Current Price Reflects Analysis of Future. Multiple Factors Drive Market Sentiment and Expectations: --Macro --Industry --Company --Competition --Investor Behavior. 4

5 Market Is Highly Complex Numerous Investing Approaches & Styles --Passive/Active. --Quant/Fundamental. --Pattern/Causality. --Top Down/Bottom Up. --Growth/Value. --Contrarian. --Multi-factor. --Behavioral. --Trading. 5

6 Three Primary Market Methods Calculate Intrinsic Worth. Comparables. Trading. 6

7 Most Active Investors Use a Multi-factor Model Models May Use a Handful to Dozens of Factors. Factors Are Weighted by Their Expected Impact. The Goal Is to Create the Best Possible Predictive Model. 7

8 Among the Leading Factors --Size --Cash Plowback --Historical Earnings to Price --Predicted Earnings to Price --Yield (Dividend) --Earnings Momentum --Growth/Value --Dividend Discount --Neglect --Trading Activity --Relative Strength --Residual Reversal --Estimate Revisions/Changes --Cash Flow to Price --Sector Momentum 8

9 Investment Styles Come Into Play Every Professional Investor Has a Fine-tuned Model, Incorporating Various Factors. No Two Are Exactly Alike. Approaches and Styles Are Highly Diverse. Passive (Indexing, Quant). Active (Growth, Value, GARP, Yield). Technical/Behavioral. Trading. 9

10 Summary: Investor Behavior Drives the Market Foundation of Intrinsic Value Analysis, Based on Economics/Cash Flow. Daily Action Is Driven by Thousands of Very Bright People Working Their Models to Try to Outperform the Market and Each Other. Various Financial Metrics Are Used as Key Metrics (Earnings, Cash Flow, Revenues, etc.). Trading Has Become a Major Investment Method Thanks to Technology That Allows Trading Rapidly and Cheaply. These Investors Seek to Capture Short-Term Gains. 10

11 Key for Managements: Optimize Value The Market Will Respond, Then Anticipate and Create a Set of Expectations and Continually Update Them. The Fundamental Driver for Companies is Business Performance. Each Company Has Value Drivers. It Is Vital to Identify, Understand and Optimize Their Performance. What Are Your Company s Value Drivers? 11

12 Investors Also Seek to Quantify The Intangible Value Drivers Key Ones: Vision and Business Strategy; Management Quality and Credibility; Customer Relationships; Market Position (Leadership); Intellectual Capital; Culture/Reputation; Innovation; Employee Productivity; Governance Practices. 12

13 Investor Relations Role Help Management Achieve Fair Value (Close the Information Gap). Identify the Information That Is Most Important to Investors. Identify the Company s Value Drivers. Communicate the Vital Information and Value Drivers Behind the Numbers. 13

14 IR Function and Role: It Is an Information Business Role: Serve as Information Conduit Between Management and the Market. Provide the Best Information Possible to Investors. Bring the Best Information Possible on Market Attitudes and Behavior Toward the Company to Management and the Board. 14

15 Digging Deeper into the IR Role Investor Relations Principles: --IR Is an Integral Part of a Company s Value Creation Proposition. --Its Primary Purpose Is to Help the Company Achieve Fair Value. --At Highest Level, IRO Can Serve as a Strategic Advisor to Management and the Board. 15

16 Role of IR as Strategic Advisor to Management Resident Expert on How the Market Values Your Company. Advisor on: --Valuation Methods at Work in the Stock; --How the Market is Reacting to the Vision, Business Strategy and Key Initiatives. IR Feedback Should Influence Management s Strategies and Initiatives. 16

17 IR Function Can Be Divided Into Two Groups Service. Key Contributor to Company Realizing Intrinsic Value. Most Companies Focus on Service Activities Because They are Basic and Seen as Necessary. IRO and Staff Must Perform Them But They Also Should Rise Above Them to Lead Company in Achieving Fair Value. 17

18 Main Service Function Activities Participate in Preparing Disclosure Materials and Filings. Prepare News Releases on Material and non- Material Events. Participate in Preparing Annual Report, Fact Book and Other Materials. Answer Requests for Information. Provide Market Information to Management and the Board. Maintain IR Website. 18

19 Upgrading the Service Function Arrange Meetings with Analysts and Investors. Upgrade Website. Prepare Presentations for Management. Give the Presentations/Do the Meetings Yourself. Advise Management/Board on Analyst/Investor Attitudes. 19

20 More Detail in Basic IR Activity Agenda Build Sell-side Relationships (Analysts). Build Buy-side Relationships (Investors/Portfolio managers). Manage/Participate in Company s Integrated Communications Effort. Manage/Participate in Corporate Governance, Media Relations and Crisis Communications Initiatives. 20

21 Today s Standard Best Practices in Investor Relations IR Role in Value-Creation Framework. Advisor to Management and the Board. Communicating the Value Drivers, Competitive Advantage and Intangible Drivers. Resource to Company and Market. Growing Sell and Buy Side Relationships. Helping Company Achieve Disclosure and Transparency. Role in Implementing Regulations. Managing Technology Platform and Vendors. 21

22 5 Vital Roles in Value Creation Process 1. Help Management Understand Investment Process and Investor Behavior. How: Be the Resident Expert on the Market: --Macro Factors Driving the Market; --Industry Factors; --Company Factors. 22

23 What This Requires Deep Understanding of the Investment Process. Expertise in the Investing Style of Each Institutional Shareholder, Prospect and Analyst. Getting Right Down to the Details of Their Models. 23

24 2. Identify Your Shareholders and Analyze Shareholder Base This is the Basis to Understand Why Each Is a Shareholder. It Helps Determine the Information Important to Each. It Provides the Basis to Compare the Drivers of Value of Their Model with the Drivers of Value Seen by Management. It Enables the Company to Predict Investors Who Will Become Shareholders. It Enables Management to Better Understand the Strategies, Initiatives and Value Drivers the Market Will Support and Will Not Support. 24

25 3. Identify and Provide the Information The Market Needs This is the Information That Enables the Company to Achieve Fair Value. It is the Quality of Information That Matters. IR Is a Never-ending Pursuit to Determine, Update and Maintain the Highest Level of Information Offering the Greatest Value to the Highest Number of Investors, Analysts and the Other Market Players. The Purpose Is to Optimize the IR Role in Helping the Market Fairly Value the Stock. 25

26 4. Help Management Understand How the Market Is Valuing the Company This is the Basis for the Current Stock Price Indicating Whether the Company Is Under, Fairly, or Over Valued. Help Management Identify the Value Drivers. Compare Management View of Value Drivers with the Market as Basis to Reach Agreement on the Key Drivers. Helps Each Group Understand the Other Better. 26

27 5. Serve as Key Participant in the Value Creation Process IROs Have the Opportunity to Lead the Analysis and Calculation of the Company s Intrinsic Value. Intrinsic Value is the Calculated Worth of ALL the Company s Assets. This Incorporates Physical and Intangible Assets. Most Investors Seek an Economic Number (Cash Flow, not Earnings). 27

28 Thus, Intrinsic Value Includes Plant, Property, Equipment. Management and Employee Talents. Scientific/Technology Capabilities. Patents and Licenses. Products, Services and Competitive Positions. New Products and Those in the Pipeline. Plant and Administrative Productivity and Efficiencies. 28

29 More Ingredients of Intrinsic Value Partnerships. Levels of Creativity and Leadership. Social and Environmental Citizenship (Governance). Financial Assets and Capabilities: Revenue and Cash Flow Generation, Profit Margins, Cash Available to Reinvest. 29

30 Subtracting from Value Lawsuits. Regulatory Issues. Environmental and Social Issues. Declining Market Positions. Obsolescence. Fading Markets. Rising/New Competition. 30

31 Study: Half the Companies Are Under and Half Are Over Valued Lesson for Companies Is to Understand Where Your Company Stands. Compare Current Price with Your Calculation of Intrinsic Value. That s What the Market Does. Smart Investors (and Managements) Try to Determine the Inflection Points, Notably When the Price Is Starting to Move Up Toward Intrinsic Value or Slide Down from It. 31

32 What the IRO Can Do Focus Information/Communication on Drivers of Value. Also Provide the Quality Information Sought by Investors and Analysts. Advise/Prepare Management for What Is Likely to Happen to Stock Price: --Higher if Market Perceives Stock to be Under Priced; --Lower if Market Sees Stock as Over Priced. 32

33 Ingredients to Function as an IR All-Star Ability to Blend Being Persuasive with Being Tactful, Assertive, Persistent and Personable. Ability to Build a Strong Network of Contacts Inside and Outside, at all Levels, and Grow Relationships. Ability to Remain Positive and Persistent During Difficult Times. Blend of Financial, Communications and Operational Knowledge and Skills. A Host of Personality Characteristics: Enthusiasm, Curiosity, Aggressiveness, Patience, Ego and Humility, Executive Presence, Intelligence and High Energy. 33

34 It Is the Execution That Matters 2 IR Dimensions: Theory and Practice. Learn the Theory and Keep Up with Developments. Ultimately, the Top IR Professionals Are Built on the Basis of Their Day-to-Day Performance. It is the Way in Which You Do Your Job Each Day That Puts You in the Select Group of Elite IR All- Stars. 34

35 There Are Many Practical Realities and Challenges Lawyers Seeking to Limit Disclosure. Excess Legal/Accounting Language in Disclosure. Turf Issues. Management Issues: --Not Wanting to be Forthcoming; --Need to Improve Their Communications Skills; --Wanting to Control Market Relationships; --Overly Aggressive and Promotional. 35

36 View Them as Opportunities These all Are Opportunities to Use Your Skills to Continuously Make Progress and Eventually Prevail. Staying Enthusiastic, Positive and Persistent Will Get You There. 36