Valuation experts advise investor relations officers: Context matters

As the primary point of contact with investors, the IRO is in the best position, day to day, to help investors understand the real value of the company. In order to be most effective, IROs need to get inside the mind of the buy side to understand how their companies are being valued and think about valuation in both a historical context and across peer groups to gauge how investors are judging their stock.

In a recent webinar,‘Valuation 2.0: Understanding valuation from the buy-side perspective’ Jonathan Greenberg, CFA, manager of Bloomberg’s equity screening and analytics workflow solutions, and Nicholas Melhuish, head of global equities at Amundi discussed how IROs can better understand value drivers and levers.

Adding context to valuations

In order to add the most value, IROs must first understand how the buy side looks at valuation. Greenberg showcased the insight gained from Bloomberg’s Equity Relative Valuation analytics  (EQRV <GO>) that harnesses today’s computing power to provide greater context around different common valuation ratios such as P/E, EV/Ebitda, EV/Ebit, EV/REV and P/BV.

‘The absolute level of a valuation metric is less relevant than where it stands vis-à-vis its own history and its peers,’ Greenberg explained. ‘Static valuation snapshots and comparisons of the past are no longer sufficient’ when looking at valuation.

Melhuish declared that ‘the IRO is incredibly important in helping investors determine what a company is worth.’ But he cautioned against company management telling investors why it thinks a stock is undervalued. ‘That tends to backfire,’ he warned. Instead, Melhuish advised IROs to focus on what the drivers of valuation are and the levers the company has to influence those drivers.

As part of the presentation, Greenberg demonstrated how the EQRV tool reveals where a company’s current valuation stands compared with its historical averages over periods ranging from three months up to five years. The analysis then compares the company’s valuation range with its peers over the same time periods, revealing whether it is trading outside its historic relative range. In each case, EQRV shows the implied stock price based on historic valuation ranges.

The analysis then looks at relative valuations from the perspective of each member of the peer group, displayed together, allowing easy comparison to see which stocks are trading at the largest relative discounts or premiums to their historic relative ranges. ‘That is the way the buy side looks at it,’ Greenberg told the audience.

The role of investor relations

IROs need to come to the conversation informed about both their company’s relative valuation and the particular metrics important to the investor they are talking to, Melhuish also. If margins are below a company’s peers, for example, management should communicate in as much detail as it can about how the company’s strategy is addressing that gap. ‘Help investors understand the company better so they can understand its real value,’ Melhuish recommended.

As part of that process, he advised IROs not to assume that investors have the same deep understanding of industry norms or company attributes that IR professionals do. IROs should point out competitive differentiators that make a company unique. ‘Remember, what you take for granted, the analyst might not be aware of,’ he said. ‘Your role is to help bridge the left brain and the right brain of analysts’ so they understand both the fundamentals of the business and the numbers.