Succeeding with Wall Street, A Guide for The C-Suite and Board of Directors

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?

Most Companies Do Little to
Help Answer the 1st* Question
* Will the stock make me money?

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
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

8
Needles in a Haystack:
Developing Awareness
and Understanding
©2010 Cindy Shaw, CFA. All rights reserved.

Know Your Product and Customer

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

Analysts Recommend, PMs Decide

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

Sell-Side Research Funding
Then Now
Investment
Banking
Client
Trades

Investors Get Information From
  Sell-Side Analysts
  Competitors, Customers and Suppliers
  The Media
  The Company

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

Working with Investors
Elevator Summary
Facilitate Fast, Easy Research
Be Prudent, Transparent & Credible

17
Will the Stock be a
Moneymaker?

Investors Evaluate:
18
Sentiment
Fundamentals
Valuation

Sentiment: “Tao Jones” Index
~ 50% Macro
~ 35% Sector
~ 15% Stock

Fundamental Strategies
 Increase revenue
 New customers / products / geographies
 Raise prices?
 Divest or fix a weak operation
 Reduce share count
 Cut costs

Valuation Varies — A Lot
Source: Seeking Alpha, 4/23/10 market close
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

Market Factors
  Price
  Liquidity & Market Cap
  Research / Trading Coverage
  Pure Play Opportunities
  Simplicity of the Investment
  Interest Rates / Outlook

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

Operational Factors
  Quality and Depth of the Management
  Visibility (Orders, Guidance)
  Consistency of Performance
  Global Reach
  Market Share Gains
  Breadth of Product Lines

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

Investor Rules of Thumb
  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

Develop Awareness & Understanding
  Elevator Summary
  Facilitate Fast, Easy Research
  Be Prudent, Transparent & Credible
Deliver
29

Discuss the Outlook and Its Drivers

Make It Easy to Learn and Explain Why
Your Stock Could be a Moneymaker


Appendix
32
Cindy Shaw, CFA
shaw@stanfordalumni.org
LinkedIn: www.linkedin.com/in/CindyShawCFA

HAPPY MAD
MAD
REAL
MAD
SELLBUY
Right
Wrong
Company and Long Investor Perspective

~65% Buy
~30% Hold
~5% Sell
HAPPY MAD
MAD REAL
MAD
SELLBUY
Right
Wrong
Therefore

The Power of a 1% Cost Cut
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%

Succeeding with Wall Street, A Guide for The C-Suite and Board of Directors

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