Capital Markets / Investor Relations in Two Minutes or Less
Company Stock Valuation: A Corporate Perspective
For many, the job of Investor Relations is to obtain a full and fair valuation for the underlying stock.
Personally, I have always struggled with this fundamental premise.
The spirit of the rule focuses on an Investor Relations Officer (IRO) obtaining as high a stock price as possible.
However, a full and fair valuation for a stock might be a 50% drop in share price.
My issue with the rule is two-fold:
1. IROs do not put money to work
2. Valuation, from a corporate perspective, represents more art form than science
Can an IRO Directly Impact Stock Valuation?
The only way to directly impact valuation is to put money to work in the stock.
Therefore, only an investor can directly impact the underlying valuation!
An IRO can only indirectly impact a company’s valuation.
How Does an IRO Indirectly Impact Valuation?
From a corporate perspective, valuation represents a function of four variables:
1. Relevant Information
2. Narrative Context
3. Financial Expectations Management
4. Management Execution
The investor then prescribes an appropriate multiple for the strength and soundness of the company across these four variables, or creates an appropriate Discounted Cash Flow (DCF) based on these variables.
The IRO can directly impact the first two variables, often times the third variable, and much less the fourth variable.
Fundamental Question: What Can an IRO Impact that an Investor Cannot?
There are two areas of impact:
1. Relevant Information
2. Narrative Context
The art is avoiding discussions of P/E ratios or EV multiples, as an investor can calculate those, and providing information for the investor to better interpret his or her calculations.
The best IROs understand that the art of full and fair valuation revolves around:
1. Providing context,
2. Providing information, and
3. Providing thoughtful frameworks regarding key debates in the stock
in order to allow investors to fully understand and appreciate the value of the underlying business and purchase the stock.
Investors calculate valuation multiples, and IROs provide context and information to help them better interpret those multiples!
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