Financial Marketing, the View of a Long Term Investor
In general, I find that the majority of financial marketing is done reasonably well in Europe, press releases are timely and include the salient information for that moment while company accounts provide me with a greater amount of detail. The weak point tends to be the financial presentation.
Conceptually, I would see the three (press release, accounts and presentation) as being complimentary, the press release is now, the accounts are the numbers in greater detail and the presentation a broader, longer term view, both forward and back in time. And if that means only doing a presentation once a year or even once every two years, then so be it.
Time is money and with presentations being a time-consuming exercise—both for the company as well as for analysts—their focus should be on being as productive, useful and efficient as possible. Those that don’t follow this guideline risk becoming an unfruitful event, especially annoying if I have physically gone to the venue. Financial presentations play such a useful role in creating a dialogue between the company and analysts that it is best to keep prepared remarks by the former to a minimum so as to leave more precious time for active engagement. Although with a conference call, I avoid moving around, I still often feel that too much time is taken up by going through results which the audience should have read beforehand. Too often, I feel that the CEO at the presentation is bound by determined statements and that event overly focuses on the now. So here are my thoughts on what can be done to improve presentations.
What to include in the presentation. This is biased by my way of thinking and the fact I am generally a long term buyside analyst so don’t need to generate excitement amongst clients but profits for my investors. But, given I am writing this piece ostensibly for the infrastructure sector, then I might not be thinking long term enough, only years down the line instead of decades. Given the accounts provide most of the numbers and the detail, I would like to see presentations focus on the strategic and what the trends are which affect the company and what these trends are doing or have been doing, what can be done to influence them and counter them when necessary. Which should give me a sense that management is thinking, and far enough down the line to be aware of what road bumps there might be. A company’s strategy cannot change much in a quarter. The market may change but this would be a result of previous strategic decisions and/or just sometimes things happen but 3 months is generally just going to be slightly noisy anyway.
It is best to concentrate the relevant material as much as possible and the quote of the Ancient Roman poet Horace “Whatever advice you give, be brief” (“Quidquid praecipies, esto brevis”) may come in handy. How many trends of major import are there going to be which will alter the company’s future and how much internal change can here need to be, some details and examples are necessary but nothing overly long. The analyst is participating at the presentation because he/she wants to learn more, get a better grip and discover further details of the company so as to provide a better analysis. Please remember that my time is valuable and if you are the CEO of a company, then yours is even more so. Quarterly results, for instance, do not need the CEO to be presenting since investor relations would do fine.
As for numbers in a presentation, I would like to see presentations focus more on free cash flow and the return on invested capital the company is making rather than just the profit and loss. The focus on cash is because cash is king. Net profit can be artificially over-stated, or less frequently under-stated, for years but the cash flow statement provides the ultimate reconciliation of whether more money is coming into the company than going out.
This decides whether the company will be able to fund its investments as it wants without having to ask for money from banks, the bond market or shareholders and whether it will be able to pay out the excess in the form of dividends to its shareholders. The focus on the return on invested capital is because only a company which is earning more than its cost of invested capital can afford to adequately remunerate its debt and shareholders over the long term. If a company, financed 50% by debt and 50% by equity, has a cost of debt at 5% and cost of equity at 9% but only makes a return on invested capital of 5% then the equity holders will not get 9% long term but 5%. This is particularly relevant when a company is making a lot of acquisitions. The earnings per share may increase because of the acquisition but, if the return on invested capital doesn’t, the shareholders’ long term returns will be lower because the company will not be able to fund its investments and have any excess return to pay out.
As something of an aside, to return to the point about the relationship between the corporate accounts and the presentation, the two should be coherent and one should not get a wildly different view of the company from looking at one as opposed to the other. It is generally a sign that management don’t know what they are doing or are trying to hide something.
Every so often, I think it is useful to look at some past presentations and ask what could have been cut and no-one would have cared in the future. And how long into the future. If the information becomes stale and no longer pertinent after 3-6 months, then as above, it’s not really necessary to include it or comment on it but it can be noted somewhere. One-time items, for example, I largely skip over because they are noisy and uncertain by definition. Or rather they should be, continually coming up with one-time items makes me suspicious. But looking back at a presentation from 3 years ago, I would say that, whilst great importance was attached to the 10 basis point change in the operating margin in the 2nd quarter, 3 years down the line no-one will really care. The trend is important but the trend is much longer than just one quarter and needs to be appreciated after taking a step back and not extrapolated.
So, in an ideal world, I am looking for something short which complements the accounts in a coherent fashion and gives me, every so often, an easy to understand view of the long term nature of the company which I can then look at more in detail through the company accounts.