Horsefed valuations in investor relations materials
Horsefed valuations in investor relations materials
Trusting management teams to do your job for you
A few weeks ago I tweeted about a commonplace problem for equity analysts: what do you do when the management team at a prospective portfolio company does your homework for you? I included a slide from CoreCivic’s recent investor deck showing their estimate of equity value of $29/share (CoreCivic trades at ~$9-$10/share currently):
The impetus for this post was Humana’s recent investor presentation, where on slide 3 of their investor presentation they abruptly and somewhat comically show their EPS CAGR and bridge for the next 3 years:
This is a phenomenon that exists ubiquitously in private markets. Companies with a limited public comp set or early on in their life provide private markets investors an illustrative example of how things could go and how much money they could make. It’s a sales pitch, it’s a genuine estimate in the eyes of management (even if it might be embellished “it’s not a lie if you believe it”) and prospective investors are easily enticed by big return expectations in new and exciting industries.
It’s bizarre to see it in public companies. The explanation is that it is probably a positive expected value decision for a CEO’s personal wealth to hire an investor relations professional from the sellside to “communicate the story to the buyside” if it means 1-2 turns added to the companies trading multiple. But markets are unironically incredibly efficient and can generally see through management bullshit styled as truth. There are many examples of obvious market inefficiency; this belies the incredible accuracy at which most prices in public markets are set. Anytime you are told that the market is behaving irrationally you should question the person telling you this more so than the observed price in the market.
Said another way, if a management team tells you their stock price is dramatically incorrect in a given direction, they are wrong and the market is right. Does this signal incompetence? Indirectly yes: there are concrete actions a management team can take to properly advantage themselves and ongoing shareholders if they believe their stock to be mispriced. In fact, if a management team believes their shares to be materially undervalued, isn’t a lack of share repurchase activity a breach of fiduciary duty?
Of course most of the time management teams believe their stock is undervalued and rarely are management teams wont to call out their stock as overvalued (notable exceptions: the famous Sun Microsystems 10x sales quote, Tesla saying “it’s not crazy to be short the stock” etc.). “It’s not a lie if you believe it”; trust the market and not your management team.