Posts Tagged ‘Stock market’

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Congratulations, FB, and good luck

May 17, 2012

Facebook pulled it off.

- The New York Times “DealBook” site, May 17, 2012

A nice summary by NYT “DealBook” writers Evelyn Rusli and Peter Eavis. Facebook did pull off the IPO of the year, pricing at $38 a share for a total sale of $16 billion. The market initially valued the company at $104 billion.

Congratulations, FB!

There is a sense of relief, after the IPO with more media hype than any in recent memory, in seeing it priced and starting to trade. Following a few more days of craziness, no doubt, investors can settle down and begin looking at Facebook as they would view any other public company.

Here are a few bits of information for the curious investor relations pro:

Being public will impose a new sort of discipline on Facebook the company. Thinking about disclosure vs. trial balloons and leaks. Telling investors the basics like revenue and earnings. Meeting quarterly expectations or taking a beating. Perhaps a future day when hedge funds and analysts call for a new CEO.

I’m not going to second-guess the valuation, roughly 100 times trailing 12-month earnings. Or $115 for each of those ballyhooed 900 million users. Enough market gurus already are opining on FB, and people were willing to pay the $38.

Rather, I’m looking forward to watching the biggest social network as it grows and matures in the coming months and years. The “DealBook” writers comment:

The question is whether the company’s management will make it work.

Facebook, in many ways, is like a mining company sitting on valuable deposits that are hard to dig up and refine. At a market value of $104 billion, investors believe Facebook is sitting on gold. But the share price could tumble at any sign that Facebook’s management can’t unearth it.

© 2012 Johnson Strategic Communications Inc.

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The public markets’ competitor

May 11, 2012

Q: Do you ever wish you were publicly traded?

A: Oh God, no. I have the greatest job in the world, because I work for a guy who runs the company for the next 20 years, not the next 90 days. It’s tough being a public company, and I wouldn’t wish that on anyone.

 –  Steve Feilmeier, executive VP & CFO
Koch Industries, Inc.

As investor relations people, we rub elbows mostly with publicly traded companies. We think about how to get our message out to the capital markets in competition with other public companies, especially our peers within narrow industry sectors.

But a whole other class of competitors exists in a parallel universe – competitors for capital and, in our businesses, for customers. Maybe we ought to pay attention.

What started me thinking was Steve Feilmeier, CFO of Koch Industries, who spoke this morning to the Kansas City chapter of Association for Corporate Growth. Known to outsiders mostly for media attention in political controversies, on the business side Koch is a $125 billion company with 67,000 employees – the No. 2 privately held business in America. No. 1 in profitability, Feilmeier hastens to add.

Right at the start, Feilmeier says being privately held is a competitive advantage:

We benefit from not having to report earnings every 90 days. All of our decisions are based on, How is this going to work out in the next 10 years?

And it’s working out just fine for Koch (sounds like “coke”). The firm is doubling revenue every five or six years with a dozen operating companies in agriculture, energy and manufacturing. Although Koch doesn’t report publicly, Feilmeier makes it clear those businesses are delivering even better growth in EBITDA (slides here).

An example of Koch’s presence: AngelSoft, its toilet tissue brand, is the No. 1 SKU in Walmart stores. No. 1. Feilmeier says 60 truckloads a day leave Koch’s Georgia-Pacific subsidiary loaded just with AngelSoft four-packs bound for Walmarts.

The ongoing shift in institutional investor preferences among asset classes is the other thing that got me thinking. I keep hearing about pension funds, endowments and real people putting more money into alternative investments – capital that isn’t flowing to publicly held companies represented by IR pros.

Consider these stats: In 2001 U.S. pension funds held 65% of assets in equities, but that dropped to 44% by 2011, according to the Towers Watson Global Pension Assets Study 2012. in those 10 years, the “Other” category in asset allocation – real estate, private equity and hedge funds – quintupled from 5% to 25%. Apply those changes to $16 trillion in U.S. pension assets and you’re talking real money.

Without getting in over my head further on macro views of the capital markets, my point is that public companies ought to think strategically about their investors. Institutions and individuals don’t have to invest in any particular public company. They might even flee the stock market, with some of their funds, for “alternatives.”

And this brings me back to Koch. Feilmeier’s description of why Koch keeps growing at the top line – and especially the bottom line – holds lessons that public companies and IR people might take to heart. A few interesting ideas:

  • Do investors see management-by-quarterly-numbers, or something like Koch’s “patient & disciplined” creation of wealth? How do we discuss performance?
  • Can we demonstrate how our incentive pay turns managers into entrepreneurs, who get paid when they deliver (and not when they don’t)?
  • Do we have real accountability? Koch doesn’t believe in subsidizing any of its businesses, so operating execs are responsible for balance sheets and P&Ls.
  • How do we make decisions? Koch demands rigorous comparison of every capital project with alternatives – will this investment deliver the best return?

Koch, of course, is a giant company. There are well-managed and poorly managed firms of every size in both the public and private arenas. But the principles Feilmeier discussed are common private-equity approaches to driving performance.

Private vs. public is a common debate among CEOs and finance folks. Some private companies long for public status – and a fortunate few make it through the IPO process to get listed. On the other hand some micro-cap and even mid-cap public companies wish they were private, to escape the hassles of quarterly reporting.

Whether public or private, maybe we need to get back to basics of running companies by rigorous disciplines of wealth creation. And public companies need to communicate how those disciplines create real shareholder value.

What do you think?

© 2012 Johnson Strategic Communications Inc.

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Posted in Capital markets & IR | 1 Comment »

Facebook IPO: Should we “Like” it?

February 5, 2012

Yes, I know, investor relations people should be thrilled to see life returning to the IPO market in 2012 – and here comes Facebook, the biggest Internet IPO of all, to stir up interest in public markets. But I’m wavering on whether to click “Like” or “Not-so-much.”

I can’t help feeling that all the hoopla around the social media giant’s pending public-company status may be a sign of a frothy top in the stock market. I hope not – and I do wish Facebook success in its IPO. It’s a wonderful growth story.

The stock market has had a good run recently, despite some nervous days. The S&P 500 is up 110% since about this time in 2009. The Nasdaq Composite has reached a level it hasn’t seen since 2000, not the top of the dot-com bubble but the time when prices were still deflating. And the market may keep rising for now.

Two things bother me a bit about the Facebook IPO:

Valuation. The prices being bantered about seem a little unhinged from reality. Andrew Bary’s commentary this weekend in Barron’s is interesting:

The best businesses can be poor investments, if you pay the wrong price. That’s worth considering as Facebook readies the most closely watched initial public offering in years—a deal that could value the seven-year-old company at $100 billion. …

Assume Facebook comes public at around $40, a slight premium to its private-market price. That would value the company at $92 billion, based on 2.3 billion shares outstanding. At $40, Facebook would trade for 93 times trailing earnings and 25 times 2011 revenue of $3.7 billion. … If Facebook’s profit doubles in 2012, topping the 65% gain in 2011, it would earn 86 cents and trade for nearly 50 times earnings.

The FB offering brings back “eyeballs” as a major performance metric – in this case, Facebook’s 845 million users and the assumption that there simply must be ways to make lots and lots of money off of all those eyeballs.

Exuberance. That gee-whiz enthusiasm, built on a rising market and a technology so popular grandmas are using it to follow the kids’ activities online, is just a little scary. The New York Times‘ Jeff Sommer commented this weekend:

THE financial system may not be in great shape, but why dwell on it? Stocks are rising and I.P.O. euphoria is in the air. … Greed in the market is rising, and for some seasoned investors, there is an uneasy sense they’ve read this script before.

“It’s like we’re finally emerging from nuclear winter for I.P.O.’s but we’ve forgotten our history,” said Harold Bradley, chief investment officer for the Kauffman Foundation and a former executive with the American Century mutual funds. “If we don’t start paying attention, we’ll be making the same stupid mistakes all over again.”

If the stock market teaches anything, it is to keep historical perspective, watch the broader context of the economy and markets, and not bet too much on an upward-sloping line you can draw through the past couple of years’ performance.

Good news for investors is that Facebook’s S-1 filing reports five years of rapidly rising revenues and three years of real earnings, also fast-growing. So this isn’t an “idea on a cocktail napkin” IPO from 1999. But neither is it J&J or Procter & Gamble.

If I were the IRO for Facebook, I would be emphasizing three messages to investors:

  1. Revenue and earnings. We have ‘em, and here’s why they are sustainable. Investors should understand the varied revenue streams and their profitability. The IR story is about financial returns, not the social mission.
  2. Value for customers. Not the 845 million – users are essential but aren’t the ones who pay Facebook. The business is selling access to FB’s users to advertisers, application developers and the like. How much value does Facebook deliver to these customers – now and over the next few years?
  3. Durability. Investors must be concerned about what happens if Facebook’s “cool factor” wears off and users start taking photos and events and friends to newer, cooler platforms. Facebook needs to communicate its strategies for sustaining the dominant position in social media.

A friend tells me his worst investment decision ever was Apple: He bought AAPL at $15 a share and sold when it hit $35 – and he’s been kicking himself all the way up to $450. I must admit my investing instincts run in that same vein. Apple is a great example of “cool” staying cool – for consumers and shareholders. So Facebook may soar in its IPO – and continue to fly in the years to come.

What are your thoughts on the Facebook IPO?

© 2012 Johnson Strategic Communications Inc.

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Posted in Capital markets & IR | 1 Comment »

Shareholders & ‘the ADD society’

October 14, 2011

Andrew Ross Sorkin, the New York Times M&A columnist, CNBC “Squawk Box” co-host and author of Too Big to Fail, says we’re kidding ourselves when we say we want corporate leaders to think long-term. The problem, he says, is all of us.

“We are the ultimate ADD society,” Sorkin said today in a speech to the Association for Corporate Growth Kansas City chapter. Patience is nowhere to be found, and that goes for the stock market and demands it places on managements, he said:

We keep saying we want more shareholder democracy because we want executives to think long-term. The problem is not that the people in power are short-termists, it’s that we are short-term thinkers.

As Exhibit A, Sorkin cited the statistic that the average shareholder holds onto a stock for only 2.8 months. Less than one quarter. Of course, high-frequency automated trading turns stocks over in milliseconds, and multiple times every day. But even individual investors can be fast-moving and fickle:

I would love to find a way to get our country back to being an investing society, not a trading society.

Sorkin acknowledged there’s no sign of that happening anytime soon. (Coverage of the rest of what Sorkin had to say is here or here.)

The investor relations person in search of a patient investor, in this environment, is something like a mythical but tragic hero. Solutions, anyone?

© 2011 Johnson Strategic Communications Inc.

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Five stages of grief

September 15, 2011

I hate to go all morose and contrarian on another “up” day in the markets, but …

Jerome Booth, research director of London-based emerging markets specialist Ashmore Investment Management, makes an interesting point in a Sept. 14 Financial Times column. He posits that global markets are moving, slogging really, through the classic five stages of grief. When we lose a loved one, we follow a pattern described by psychiatrist Elisabeth Kübler-Ross as the five-step model of grief: denial … anger … bargaining … depression … and, finally, acceptance.

Booth applies this to global markets.

As investor relations people making our rounds with investors, we might probe what stage the patient is in, on any particular day, before launching into our story.

What has died, Booth writes, is our complacence in using debt to meet all needs:

Western Europe and the US now face years of painful deleveraging. The loss they feel is the death of the levered model enabling them to live beyond their means, plus a loss of prestige as their economic models have failed.

As an EM guy, Booth says we’ll have to adjust to kowtowing a bit to emerging markets. In the West right now, he writes, we’re in denial:

When faced with a truly awful prospect we explore and then cling to any theory or hope that reality may be different. Even where political leaders understand the immensity of their loss, the denial of their electorates constrains their action.

There are examples of anger – riots in Greece and other nations over economics. And of bargaining to delay unpleasant consequences or sweep them under the rug. Still ahead, perhaps, is the loss of hope a patient feels as depression. And we haven’t seen many signs yet that our leaders – or we the people – have moved on to acceptance of realities so we can deal with what needs to be done.

All this is very global and “macro,” but let’s think about how it applies to IR messages about the businesses we speak for:

  • Above all, are we helping our management teams to avoid living in denial?
  • In offering forward-looking views to investors, do we spell out assumptions on the economic factors that drive our particular businesses?
  • Do we explain how we plan to perform if the economy stays weak for a long time, vs. signing onto consensus hopes for recovery in H2, or H1 2012, or  … ?
  • When our stock is beaten-down, do we listen to see if the investor on the line is in the anger stage or depression – or maybe in a place to hear reality and look forward to ways out of the doldrums?
  • Do we deal with debt and balance sheet metrics, including strategies for managing the balance sheet, in a way that helps investors understand?

Just a handful of thought-starters. I’m not arguing where investors’ sentiment should be – just saying IR people need to pay attention to where it is.

Mainly, I appreciate Booth’s wry insight into the psychology of today’s happy-nervous-elated-terrified-optimistic-not so sure-ever mercurial stock market. I’d love to hear your reactions.

© 2011 Johnson Strategic Communications Inc.

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New IR tactic? Michelle Obama …

October 22, 2010

Well, there it is, in the pages of the Harvard Business Review for November 2010: Finance prof David Yermack of NYU reports in “Vision Statement: How This First Lady Moves Markets” that Michelle Obama’s choice of outfits generates “abnormal returns” for stocks of publicly traded companies behind the fashion brands.

Who’d have thought the First Lady might become a tool for investor relations?

Yermack reports on 189 public appearances by Obama – FLOTUS, not POTUS – in which she wore 245 items of apparel with recognizable brands of 29 public companies. For those 29 companies, her wardrobe choices generated a total value of $2.7 billion, Yermack says. You read it right: $2.7 billion, with a B.

When the First Lady jetted off on a one-week tour of Europe in March-April 2009, for example, her fashion choices were much in the media – and Yermack calculates the stocks of fashion and retail companies whose clothes she wore rose an average of 16.3%, beating the S&P 500 gain of 6.1%. For 18 major appearances, the cumulative abnormal return averaged 2.3%, he says.

A hedge fund could build a trading strategy on this First Lady Fashion Anomaly. The NYU Finance prof observes:

The stock price gains persist days after the outfit is worn and in some cases even trend slightly higher three weeks later. Some companies that sell clothes that Obama frequently wears, such as Saks, have realized long-term gains. Her husband’s approval rating appears to have no effect on the returns.

This is about impact on revenue (and perhaps investors’ perceptions), not some kind of fashion voodoo like the stock market hemline indicator. And her impact exceeds that of other celebrities or models, Yermack says. He explains it this way:

The unparalleled robustness of the Michelle Obama effect results from the confluence of three factors: her personal interest in fashion, recognized by consumers as authentic; her position as First Lady and the intangible value it confers; and the power of the social internet and e-commerce. Descriptions and images of what she’s wearing spread across the social internet in near-real time, and consumers can buy these fashions almost instantly online.

So figure out how to get your product on the First Lady, preferably for a high-profile event like a state dinner or tour of world capitals. IR needs to be creative!

© 2010 Johnson Strategic Communications Inc.

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Funny thing about …

October 1, 2010

October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.

- Mark Twain, American humorist, 1894

At a NIRI meeting last night in Kansas City, I commiserated with a friend over dinner about the state of the economy. It’s like a patient drifting in and out of consciousness in the recovery room – we don’t know whether the surgery was a success until the patient wakes up, smiles and moves a bit. Meanwhile, the job market is lousy. Consumers are cautious. The Fed frets. Companies worry. Waves of regulation and additional costs are looming. And the Nov. 2 election? Bah.

This morning brought a new month and fresh outlook. Hey, let’s have some fun in October – look beyond the macro anxieties – and do some good in investor relations this fall. And the market will do what it will do.

© 2010 Johnson Strategic Communications Inc.

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‘The new normal’ for IR

September 20, 2010

Chatting with colleagues last week, someone tossed out the phrase “the new normal.” And a co-worker shot back: “What is the new normal, anyway?”

Ever so conveniently, then, on Thursday and Friday I attended the client conference of DeMarche Associates, a Kansas City-based investment consultant. The theme: “The New Normal and How It Affects Investment Strategy.” DeMarche’s audience of pension fund managers and other institutional investors came seeking to divine the outlook for their portfolios – and to get ideas on long-term investing strategies.

But the concept has important implications for investor relations people, too.

What is the new normal, anyway?

The “new normal” is a buzzword current in business and economic discussions. It embraces the outlook that things are not going to get better, at least not much better, for some time. Maybe three, five, eight years. We’ll all come to realize, the narrative goes, that a difficult economic environment has become normal. And if a rapid recovery isn’t going to appear and solve our problems, we need to adapt to hard times and learn to live with lower expectations.

Not everyone believes in the new normal. Pundits seem split 50-50 between those who see a recovery launching us skyward into the upside of a U-shaped cycle and those who see us slogging across the bottom of a flatter, more prolonged U. My intention isn’t to take either side – just to beware of the implications.

DeMarche is in the “new normal” camp. While bullish market gurus pointed the audience to positive signs, DeMarche consultants outlined six “supercycles” since 1890: periods of 15 to 30 years when the market trended strongly up - or down.

Data indicate we’re now in a negative or neutral supercycle that began in 2000, after that lovely 1980 to 2000 period when the Dow soared 1,400%, DeMarche says. The past 10 years have treated long-term equity investors roughly: two bear markets, two bull markets, a lot of pain, volatility and – overall – no gain.

Welcome to the new normal. DeMarche expects this malaise for the stock market and other investments to continue for the next 3 to 5 years. DeMarche analysts list five trends as defining the new normal:

  • Slow economic growth - a weak recovery with GDP rising 1% to 3% a year, lacking the oomph to support robust sales and earnings growth
  • Consumer angst and frugality - consumers, who make up 70% of the economy, remaining cautious while struggling with debt and job fears
  • Declining corporate profit estimates - earnings tending to disappoint if market expectations are based on a strong recovery that doesn’t appear
  • Sideway grinding market for years - stocks trading up or down, not unlike the past decade, but without “a rising tide that lifts all boats”
  • Volatile bull and bear cycles - within a broader overall trend, markets still experiencing bull/bear cycles and recessions

Bob Marchesi, chairman & CEO of DeMarche, said the market today reflects an expectation of stronger recovery with no fear of a double-dip recession. Equity prices haven’t factored in a slow-growth scenario with a challenged consumer sector, he said. That leads him to expect a near-term correction, followed by lower average returns for equities over the next several years.

Why should IR care? What should we do?

Taking DeMarche’s prognostications for institutional investors and viewing the implications from a corporate perspective, here’s a new normal primer for IR. (Blame me for these ideas, not DeMarche, as they weren’t discussing IR.)

  • “Buy and hold” will be less common as an investment strategy. IR has to get used to it. Speaking to an audience of mostly pension fund managers, with very long investment horizons of the kind IR people love, DeMarche is recommending “dynamic” strategies and “tactical asset allocation.” Instead of buying a stock forever, investors may shift money in and out of asset classes based on valuation and changing investment characteristics. IR needs to think tactically, as well, adjusting to changing investor outlooks.
  • Hedge funds won’t be fading from the investment scene – probably the opposite. As institutions look to protect assets and wring some return out of up or down markets, DeMarche has dropped the “Alternative investments” label on hedge funds and the like. Institutions may de-emphasize the stigma and allocate more money to managers with nimble market strategies. Hedge funds come in all shapes and sizes, but we shouldn’t exclude them from IR.
  • Expect drama, up and down. In the 1930s, the US experienced three bear markets – and three of the best years of the stock market. In a negative or neutral supercycle, DeMarch says, equities may be “churning sideways” for a few years but it may feel like a rough roller coaster. When the market goes up (2009-10?) we shouldn’t break out the champagne and sing “Let the good times roll.” The new normal calls for a restrained tone in IR.
  • Consumers may not drive economic expansion of the kind we saw in the post-World War II era. The aging of Baby Boomers, pullback in spending and slowing of population growth will be a demographic drag on the economy for the next 20 years or so, DeMarche believes. One question for IR: What do demographics say about your products and markets?
  • No one has a crystal ball – so IR should communicate both the risks and our strategies for thriving in up or down times. If GDP grows 4%, revenue and earnings may boom … but what if GDP grows 1%? What if the economy goes negative and we get that double-dip?  While DeMarche’s prediction of disappointing earnings focuses on the S&P 500 as an aggregate, it’s a cautionary note for IR at individual companies.
  • Political winds are blowing in a direction more favorable to business – for the moment. But public opinion shifts rapidly. Even a “pro-business” outcome in this fall’s Congressional elections would leave a government facing high debt, on the prowl for tax revenues, and prone to regulatory solutions. The financial consequences may not seem like a tea party.

There’s a somber set of thoughts. I hope we’re not in the new normal – but we all need to prepare for that possibility in communicating with the capital markets.

What’s your view?

© 2010 Johnson Strategic Communications Inc.

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It’s not about ‘flash crashes’

May 20, 2010

Well, that kind of day in the market takes your breath away!

The Dow down 3.6%, broader indices like S&P 500, NASDAQ or Russell 3000 off even more. Not much fun today in investor relations – or capital markets as a whole. We’re officially in “correction” territory now, though not a bear market.

The analysts, pundits and politicians will have much to say. Let me just offer this perspective: Life is about the long haul, not the “flash crashes.” I would suggest three applications of a long-term view:

  • The practice of IR has less to do with today’s market price – especially when your company is caught up in a market stampede, up or down – than it has to do with your company’s performance in the next year, or two, or five. Be energized and on top of everything, but keep your eye on the horizon.
  • Investing isn’t really about the short term, either – although some fortunes are no doubt gained or lost on days like today. Investing is still about putting money to work in businesses with the knowhow and guts to create value … long-term. The lemmings are charging headlong one direction or another, but the wiser heads will survive and even thrive in the long run.
  • Regulation of the markets shouldn’t be about a “flash,” either – whether it’s the May 6 “oops” market or the May 20 “we’re really worried” sell-off. Short sellers, or even trading glitches, don’t do much permanent damage – an economy full of fear does. The focus in Washington should be on fostering an environment that encourages the capital formation that, in turn, fuels economic growth. Flogging investment bankers or hauling fat-fingered traders before Congressional committees, while entertaining, doesn’t really help anyone. Ensuring an honest, free, liquid market that enables new and existing companies to raise capital should be the focus of legislation and regulation.

We live in a world dominated by instant media, politicians and analysts eager to jump in front of a TV camera, opinions driven by Internet chatter - so we see a lot of breathless proclamations of one instant “crisis” or another.

Let’s take the long view.

© 2010 Johnson Strategic Communications Inc.

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Posted in My two cents' worth | 1 Comment »

Analysts “still too bullish”

April 21, 2010

Most of us remember a decade ago, when the stock market bubble of the 1990s finished inflating and began to spring leaks. Nasty stories were everywhere of Wall Street analysts overselling the stocks they were paid to peddle to investors.

The bear market of 2000-02 led to legislative and regulatory efforts to “fix” equity research, separate the sell side from – well, selling – and bring trust back into the markets. Alas, that’s probably not something new laws can accomplish.

New evidence from McKinsey & Co. suggests the sell side is “still too bullish,” based on a study of earnings estimates for S&P 500 companies from 1985 to 2009. Somewhere in the DNA of the sell side, it seems, lurks a gene for salemanship.

Only two times over the 25-year period did actual earnings on the S&P 500 beat analyst estimates, three McKinsey consultants write in the Spring 2010 issue of The McKinsey Quarterly. Analysts have been “persistently overoptimistic,” typically forecasting S&P earnings growth of 10-12% a year, nearly twice the actual 6% growth. McKinsey concludes:

Exceptions to the long pattern of excessively optimistic forecasts are rare …. Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught  up with earlier predictions, do forecasts actually hit the mark.

There’s an obvious caveat emptor for investors in data like this. In fact, the market as a whole doesn’t believe the sell side: Actual price-earnings ratios on the S&P 500 are almost always lower than the implied P/E based on analysts’ forecasts, the consultants note.

McKinsey also sounds a cautionary note for corporate staffs: Don’t put too much confidence in the sell side when formulating your own company outlook. Base your outlook on what’s really happening in your business, not so much on Wall Street’s view from a distance:

Executives, as the evidence indicates, ought to base their strategic decisions on what they see happening in their industries rather than respond to the pressures of forecasts, since even the market doesn’t expect them to do so.

Easier said than done, of course. But investor relations professionals ought to keep this advice in mind when serving as a conduit for communications between Wall Street and senior management.

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