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Insights on how to work with Wall Street to achieve fair value for a company’s stock price.
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Succeeding with Wall Street A Guide for the C-Suite and Board
Cindy Shaw, CFA May 2010
WIIFM?* Investors Want to Know:
©2010 Cindy Shaw, CFA. All rights reserved. 2 * What’s In It For Me?
Will the stock make me money?
What are the risks?
©2010 Cindy Shaw, CFA. All rights reserved. 3
Most Companies Do Little to Help Answer the 1st* Question
* Will the stock make me money?
©2010 Cindy Shaw, CFA. All rights reserved. 4
What We Have Here is Failure to Communicate the Right Information
IBM Communicates the Right Stuff
2010 – 2015 EPS CAGR of ~14% due to:
Margin expansion (mix shift to software)
Mid-single digit revenue growth
Share buybacks
Source: IBM at its May 2010 Analyst Day; many supporting details were also provided.
5 ©2010 Cindy Shaw, CFA. All rights reserved.
5000+ Stocks Trade on US Markets
6 ©2010 Cindy Shaw, CFA. All rights reserved.
Help investors find a needle in the haystack (your company’s stock).
Stocks are Products
The Three Key Reasons Products Fail Are:
Poor Awareness
Poor Understanding of its Benefits
Failure to Deliver the Benefits
Source: “New Product Marketing”, a graduate-level course at The Wharton School at the Univ. of Pennsylvania 7 ©2010 Cindy Shaw, CFA. All rights reserved.
8
Needles in a Haystack: Developing Awareness
and Understanding
©2010 Cindy Shaw, CFA. All rights reserved.
Know Your Product and Customer
9 ©2010 Cindy Shaw, CFA. All rights reserved.
Wall Street’s “Sides”
BUY-SIDE SELL-SIDE
Business Investing Transactions & advice
Win By Gathering, making & preserving money
Trading & transactions (indirectly: being listened to)
Clients Pensions, endowments, 401k plans, mutual fund investors
BUY-SIDE and individual (“retail”) investors
Examples Fidelity, American Funds, Dodge & Cox, Vanguard,
PIMCO, BlackRock, Franklin
Morgan Stanley, Goldman, JP Morgan, Merrill (BofA), Pacific Crest, Piper J., Jeffries, JMP
Per Analyst 25 - 200+ stocks 12 - 18 stocks
Other Financial background common
Valued for access to management, industry
contacts and unique info 10 ©2010 Cindy Shaw, CFA. All rights reserved.
Analysts Recommend, PMs Decide
©2010 Cindy Shaw, CFA. All rights reserved. 11
Portfolio Manager
(“PM”)
Sell-Side Analyst
Buy-Side Analyst
Where Did All the Sell-Side Analysts Go?
2,600
2000 2009
16,200
12 Sources: Ernst & Young, Tabb Group and Meet the Street ©2010 Cindy Shaw, CFA. All rights reserved.
Sell-Side Research Funding
Then Now
Investment Banking
Client Trades
13 ©2010 Cindy Shaw, CFA. All rights reserved.
Investors Get Information From
Sell-Side Analysts
Competitors, Customers and Suppliers
The Media
The Company
14 ©2010 Cindy Shaw, CFA. All rights reserved.
Understanding Wall Street
Their Strengths:
Access to info
See the big picture
Smart, educated
Have seen many investment theses play out… or not
Their Challenges:
Perform or out
Nowhere else to go
Highly competitive
Typically no industry experience
Need to decide now
Time management 15 ©2010 Cindy Shaw, CFA. All rights reserved.
Working with Investors
Elevator Summary
Facilitate Fast, Easy Research
Be Prudent, Transparent & Credible
16 ©2010 Cindy Shaw, CFA. All rights reserved.
17
Will the Stock be a Moneymaker?
©2010 Cindy Shaw, CFA. All rights reserved.
Investors Evaluate:
18
Sentiment
Fundamentals
Valuation
©2010 Cindy Shaw, CFA. All rights reserved.
Sentiment: “Tao Jones” Index
~ 50% Macro
~ 35% Sector
~ 15% Stock
19 ©2010 Cindy Shaw, CFA. All rights reserved.
Fundamental Strategies
Increase revenue New customers / products / geographies Raise prices?
Divest or fix a weak operation
Reduce share count
Cut costs
20 ©2010 Cindy Shaw, CFA. All rights reserved.
Valuation Varies — A Lot
Source: Seeking Alpha, 4/23/10 market close 21 ©2010 Cindy Shaw, CFA. All rights reserved.
13 16
24 27 26
17
25
32
0
5
10
15
20
25
30
35 Price-to-Earnings (P/E) Ratio
Valuation Multiple Determinants
Profit Expectations
Prospects (Strategy / Market / Position)
Execution (History / Consistency)
Risk (Credibility / Transparency / Visibility)
Market Factors
Investor Awareness and Understanding
22 ©2010 Cindy Shaw, CFA. All rights reserved.
Market Factors
Price
Liquidity & Market Cap
Research / Trading Coverage
Pure Play Opportunities
Simplicity of the Investment
Interest Rates / Outlook
23 ©2010 Cindy Shaw, CFA. All rights reserved.
Strategic Factors
The Usual: 5 Forces, SWOT, Life Cycle, 7S, Boston Box and Value Chain
Size / Growth of the Market
Industry / Market Position
Barriers to Entry
First Mover Advantage
Law of Large #s
24 ©2010 Cindy Shaw, CFA. All rights reserved.
Operational Factors
Quality and Depth of the Management
Visibility (Orders, Guidance)
Consistency of Performance
Global Reach
Market Share Gains
Breadth of Product Lines
25 ©2010 Cindy Shaw, CFA. All rights reserved.
Financial Factors
Earnings Per Share Growth Quality of Earnings Revenue Growth Margin Levels and Trends
Free Cash Flow Economies of Scale Operating Leverage Strong Balance Sheet
26 ©2010 Cindy Shaw, CFA. All rights reserved.
Investor Rules of Thumb
27 ©2010 Cindy Shaw, CFA. All rights reserved.
Beware declining margins and slowing revenue growth
Analysts never forget
Portfolio Managers have better memories than analysts
“Accretive acquisition” is an oxymoron
Turnarounds often don’t
Events happen in trilogies
Fixes take time
Recommendations
28 ©2010 Cindy Shaw, CFA. All rights reserved.
Develop Awareness & Understanding
Elevator Summary
Facilitate Fast, Easy Research
Be Prudent, Transparent & Credible
Deliver
29 ©2010 Cindy Shaw, CFA. All rights reserved.
Discuss the Outlook and Its Drivers
©2010 Cindy Shaw, CFA. All rights reserved. 30
Make It Easy to Learn and Explain Why Your Stock Could be a Moneymaker
©2010 Cindy Shaw, CFA. All rights reserved. 31
Appendix
32
Cindy Shaw, CFA [email protected]
LinkedIn: www.linkedin.com/in/CindyShawCFA
©2010 Cindy Shaw, CFA. All rights reserved.
HAPPY MAD
MAD REAL MAD
SELL BUY
Right
Wrong
Company and Long Investor Perspective
33 ©2010 Cindy Shaw, CFA. All rights reserved.
~65% Buy
~30% Hold
~5% Sell
HAPPY MAD
MAD REAL MAD
SELL BUY
Right
Wrong
Therefore
34 ©2010 Cindy Shaw, CFA. All rights reserved.
The Power of a 1% Cost Cut
35 ©2010 Cindy Shaw, CFA. All rights reserved.
Cost Cut
STARTING Margin
ENDING Margin
% Profit Increase
1% + 1% = 2% 100%
1% + 2% = 3% 50%
1% + 5% = 6% 20%
1% + 10% = 11% 10%
1% + 20% = 21% 5%
1% + 30% = 31% 3.3%