Valuation is in the Eye of the Beholder

By | April 10, 2014

I recently attended the National Investor Relations Institute (NIRI Boston) event, “Valuation is in the Eye of the Beholder.” As you would imagine, the vast majority in attendance were Investor Relations Officers (IROs) whose job is to make sure their company’s valuation appropriately reflects its prospects for returns. And when you look at some of the wild valuations we’ve seen recently, such as that of Nest or WhatsApp, it becomes clear why, every company wants to (and needs to) have a handle on its current value and how investors are coming to that value.

Business-Valuation-2-300x225The well-attended event hosted at the Newton Marriott, was held over an excellent dinner (seared scallops and mushroom risotto to die for!) and featured a panel of three experts:

  • Cherie Whitney, Senior Director, Corporate Development, Mergers & Acquisitions at EMC Corp.
  • Jerry McGuire, Global Equity Strategist at UBS Investment Research
  • Gerald Moore, Partner at CommonAngels (Former Portfolio Manager at Eaton Vance)

Once everyone devoured the meal and we jumped into the meat of the agenda, it became clear that when it comes to valuation, the metrics used to assess a company’s stock can vary. Investors have a specific appetite for how much risk they are willing to take and that can be further complicated when attempting to compare company A to company B since they each may report financials differently. Does the company report adjusted earnings? Does it include amortization? Both can benefit or hurt a corporate valuation. But it is the job of the investor, who assesses and considers input from the IRO, to factor in the many variables and adjust accordingly when valuating.

A few notable takeaways from the event:

  • Look at valuation over time. Look two to five years into the future
  • Use various modeling methods to determine the maximum price at which the company can be valued
  • The discounted cash flow model is the gold standard and deemed most accurate
  • How does the company deal with its cash? Is it shifting money around to better its financial statements?
  • Try to predict the future cash flow of the company
  • Adjusted earnings – Is the company cyclical and does it fail to adjust its cyclical multiples? Companies that report adjusted earnings are at an advantage and will trade at a discount over those that don’t. However, if a company has pages and pages of adjustments on its financial statements, this could raise a red flag and become a disadvantage.
  • Is the company publicly or privately held? Private companies can receive a lower valuation because earnings are not publicly reported making it more risky to investors. Public companies have “real” financials to analyze.

How does this all relate to PR professionals and the perceptions we are charged with creating? We want to believe that perception is everything, and by extension, valuation can be influenced by perception. But the reality is, valuation is rooted in a company’s financial health and stability, not its perception. Or said simply, the numbers don’t lie.

Disclosure:  My colleague and EVP at LPP, Christine Simeone is on the board at the Boston Chapter of NIRI as the Membership Director.  I was not asked to write a blog post based on my attendance, nor did my colleague Christine suggest it.

Tim Brennan (7 Posts)

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