Tag: Capital

The 2 most critical Investment Drivers – and what they mean for CEOs today.

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What really drives the Investment decisions of Buy-Side Analysts? And how should CEOs manage them?

An extraordinary research study among Chief Financial Officers found that ‘78% would “give up economic value” and 55% would cancel a project with a positive net present value—that is, willingly harm their companies—to meet Wall Street’s targets and fulfill its desire for “smooth” earnings’ according to Harvard Business Review.

This is absurd.

It is even more absurd when you read all the recent research into the Investment Drivers of Buy-Side and Sell-Side Analysts.

One of the most recent was released by the world’s leading research company specialising in the Investment Industry.

Rivel Research’s 2015 Global Study of the Buy-Side’s Investment Process was based on extensive interviews with Buy-Side Analysts around the world.

The research is wide-ranging, but deep inside lie some fundamental findings.

And the most fundamental of all was this:

Short-Term Numbers are not the most important drivers of Buy-Side Investment Decisions.

There are two critical influences that are much, much more influential than the Numbers.

I’ll explain what those two influences are in a moment, but first let me share some other important findings:

Big Business Issues Aren’t Necessarily Big Investment Drivers

Interestingly, the research found that many of the most important principles for Business today aren’t particularly important for Buy-Side Analysts:

  1. CSR/Sustainability isn’t important: CSR/Sustainability is clearly the least important of all the 13 Drivers, way down at the bottom of the list, scoring only 22%
  2. Attractive Dividends don’t matter much: They are equally unimportant, right at the bottom, just above CSR, with 30%.
  3. Innovation isn’t fundamental, with ‘Innovative Products/Services’ scoring only 35%.
  4. Corporate Governance isn’t critical: Corporate Governance may be increasingly important within Business today, Buy-Side Analysts don’t see it that way, with Corporate Governance scoring below 50%.

Numbers Count, But They Aren’t The Most Critical

presentation2The most important Financial Measures are  clear:

  1. Cashflow is King; a Strong Balance Sheet is Queen.
  2. Potential Revenue Growth, Sustainable Margins and Prudent Capital Deployment are all important.
  3. Attractive EPS Growth is a little way behind – and Attractive Dividends don’t matter much.

But the two most important Investment Drivers are not Financial.

They are much more important than short-term numbers.

The two most Important Investment Drivers are those that create Investor Confidence and Long-Term Value

The two most important Investment Drivers for Buy-Side Analysts were:

72% Management Credibility

69% Effective Business Strategy

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These findings are consistent with earlier Rivel research among Sell-Side Analysts, which also found that the two most important drivers of Sell-Side motivations were ‘Management Credibility’ and ‘Effective Business Strategy’:

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Rivel’s most recent study includes the findings from their latest Survey of the European Buy-Side.

And in Europe in 2016, ‘Reliable Cashflow’ was this time rated as the No.1 Investment Driver.

But both ‘Management Credibility’ and ‘Effective Business Strategy’ were ranked as equal No.2 – well ahead of ‘Strong Balance Sheet’, ‘Sustainable Margins’, ‘Attractive EPS Growth’ and other Financial Criteria:

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Without question, a Company’s ‘Management Credibility’ and ‘Effective Business Strategy’ are two of the most fundamental influences on all Investment Decisions, for both Buy-Side and Sell-Side.

Which leads to one obvious conclusion:

Listed Corporations must be much more obsessed with creating confidence in their Management Credibility and their Business Strategy than with delivering their Short-Term Numbers.

This raises some interesting questions for most CEOs:

  • How much of your time do you spend building your own Management Credibility and shaping your own Personal Brand?
  • How much of your time do you spend building and communicating your Business Strategy, as opposed to implementing it?
  • How much of your attention in Analyst Meetings and Earnings Calls is devoted to the Numbers, as opposed to the most important Investment Drivers of all: Management Credibility and Effective Business Strategy?

At Reputation, we specialise in helping CEOs of listed Corporations to increase their Market Cap by building their Management Credibility more effectively and communicating their Business Strategy more powerfully.

If you are a CEO of a listed Corporation and you would like to discuss how to influence the Investment Decisions of today’s Buy-Side, and to influence the perceptions of today’s Sell-Side, please get in touch via our website or via email to: Connect@TheReputationPartnership.com – and we will reply in strictest confidence by return.

One thing that Investors can’t measure is worth 34% of the world’s Corporate Value.

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How you manage your Intangible Assets can transform your Market Value.

Last year, Ocean Tomo published an extraordinary analysis which concluded that Intangible Assets accounted for an extraordinary 84% of Market Value on the S&P 500.

Tangible Assets accounted for only 16%.

Yes:

The entire Fixed Assets and Current Assets of the S&P 500 accounted for less than one fifth of Market Capitalisation.

I know that ‘Intangible Assets’ includes a large basket of items, but these numbers are still extraordinary.

IFRS 3 determines that Intangible Assets must be disclosed under five basic categories: Marketing-Related, Customer-Related, Contract-Based, Technology-Based and Artistic-Related.

But what’s even more interesting is this:

According to GIFT 2016, published by Brand Finance in partnership with the Chartered Institute of Management Accountants, the largest proportion of Intangible Assets are not disclosed at all.

They analysed 57,000 companies domiciled across 160+ jurisdictions with a total Enterprise Value of US$89 Trillion.

Their Global Analysis had different results from Ocean Tomo’s, which had been limited to the S&P 500 – but the findings were equally extraordinary.

They found that Net Tangible Assets account for US$46.8 Trillion – or 53% of Total Enterprise Value.

Disclosed Intangible Assets, including Goodwill, accounted for almost US$12 Trillion – or 14% of the world’s Total Enterprise Value.

But ‘Undisclosed Intangible Assets’ accounted for a massive US$30.1 Trillion – or 34% of the world’s entire Enterprise Value.

Let me just confirm what this means:

More than one third of the average Company’s Valuation is created by forces that never appear in their Financial Reporting, and can’t be measured by Market Analysts.

At Reputation, we specialise in advising CEOs of listed Corporations how to increase their Market Capitalisation by managing Investor Perceptions.

If you are a CEO of a listed Corporation, and you would like to discuss how we can help to increase your Market Value, please connect with us via our website or by email to Connect@TheReputationPartnership.com and we will reply, in strictest confidence, by return.