INVESTMENT COMMUNITY PERSPECTIVE

Everybody loves to do peer comparisons, and there are all kinds of metrics from which to choose. Do not laugh, but the market is not at all surprised when you use the more favourable comparisons to your peers. We all like to put our best foot forward. But the market typically digests such things with a grain of salt.

Know Your Peers

As an IR practitioner, you have to know your peers; this is an absolute must. In this modern world, this really ought to encompass your global peers, especially if there are only a few industry competitors in Canada. If your company is smaller, with lots of peers in Canada (like in the oil and gas industry), you can break your peers down by regions, but do not lose sight of national and global peer groups. You have to do this because your investors are doing it. If you are not sure who your peers may be, read industry research, talk to research analysts and investors to find out. But know your peers. This means more than just memorizing their names; you have to read their reports, follow their press releases and know their products.

Know Your Industry KPIs

Key Performance Indicators (KPIs) are those measures used by investors and analysts to compare the relative performance of your company and its peers. Every industry has them, and you need to know them – inside out. Understand what the KPIs are attempting to measure, how they are computed, and even how they may tie in to the valuation of your company. Then know your company’s relative score. Keep a spreadsheet of your company and competitor KPIs, maintain a history and, if you need to, live link to stock prices if the KPIs are market driven.

If some companies compute KPIs differently than yours does, understand the differences, and find out from investors and analysts which methods of computation they prefer. It is amazing what you can learn on the Internet today, so you have no excuses; Wikipedia and Investopedia are excellent sources. If there is an industry organization, join it and become a part of any standardization process that may be underway.

Market Valuation Metrics

Apart from KPIs, there are typically standard market valuation measurement tools as well; earnings per share (EPS), debt adjusted cash flow (DACF), earnings before interest, depreciation, depletion and amortization (EBITDA) and a few others. Most measures are expressed as multiples, either to the underlying stock price or of the enterprise value of the business, and these multiples can change daily as the underlying stock price changes, and/or forecast figures (earnings, DACF or EBITDA) change. Rather than dwell on the past, the market tends to look at expected (current year and following year is typical) earnings, DACF or EBITDA of companies.

Where Do I Get Forecast Estimates?

Market feed companies like Bloomberg, Thomson Reuters and FactSet keep consensus estimates for publicly traded companies – globally. You pay for the feed, but you get the consensus data, and a whole lot more. In addition, many services allow you to build screens of your own company and peers and track key valuation metrics (plus provide news feeds) in real time. Even sites like Yahoo! Finance and The Globe and Mail offer some of these services on a time-delayed basis.

What is in a Multiple?

Multiples typically reflect a couple of key components: the underlying growth (or decline) of the business and the underlying cost of capital of the business. When your company’s multiple starts to deviate from those of its peers, there is typically a perception that your company is underperforming or outperforming relative to your peer group. And you had better figure out what it is the market perceives. This will require calls and discussions with informed investors and analysts. Gathering information is not the time to debate points; you need to collect as much information as you can so that your management team can more fully understand the issues. Perhaps a change in marketing and communications is in order, or maybe there is something deeper that management must address.

What Does ‘Growth’ Mean?

It is amazing how often people will look at their business and say, “well, we used to be a billion dollar company and now we are a two billion dollar company, so we have doubled.” The assumption is that the change in size and growth are synonymous. We hear this all the time, but you have to start considering your business from the perspective of the shareholders. In this example, if the doubling in size came as a result of doubling the number of shares outstanding, has the company really ‘grown’ from the investor’s perspective? What if the number of shares outstanding tripled? What if the share count stayed the same but the debt quadrupled? You get the point.

Growth, from a shareholder economic perspective, can be a very different thing. Start looking at your business from the perspective of the shareholders (or bondholders), when you meet with them. Is your business ‘growing’, or merely getting bigger? The market will typically pay for growth, but seldom reward just getting bigger.

What Is the Cost of Capital?

We have talked about this before in Newsline Volume 21 Issue 3, What’s In A Multiple?, but it is a critical concept to understand, and it is really amazing how many people have no concept at all of the cost of equity. The reason is simple; the cost of debt is typically prescribed, but the cost of equity is always implied. Consider that all investors expect to make a return on their investment, but that equity investors will adjust the value of the stock in order to adjust their expected investment returns. There are complex formulas and methodologies to determine the cost of equity, beyond the scope of this article, but this is a good lesson to pursue on your own. And the weighted average cost of capital (WACC) effectively prorates the costs of debt and equity relative to the capital structure of the business.

Ear to the Tracks

The key point is that by understanding your industry and your peers, both locally and globally, you are better able to properly identify and address investor concerns (or accolades) early to determine the appropriate course of action for your department, or the business as a whole. In this way, you can become a better IR professional.