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Saturday, April 17, 2010

Get the Stock Price Up! But, Wait - Managing for Shareholder Value Trumps Price

We previously mentioned Michael Mauboussin in our November post, Mediasite Franchise Value Remains Unrecognized by Market. Mr. Mauboussin is the Chief Investment Strategist of Legg Mason Capital Management and has authored a number of insightful books/articles through the years. He, as well as Bill Miller of Legg Mason, encourage a multidisciplinary approach to investing that is logical and works (e.g. be contrarian - look beyond main street and your comfort zone to find ideas).

We thought we'd briefly relay an important message from one of his articles published last August in the Financial Times regarding senior executives managing a business for stock price versus managing for shareholder value - Talking head: Managing for shareholder value is still key. FT log in is required (free), but here are some highlights directly from the article:
  • The core of the problem is what managing for shareholder value means. Messrs Welch, Martin and others imply it is about maximising the short-term stock price. Companies that manage for shareholder value, the thinking goes, do whatever it takes to engineer an ever-higher market price. That is a profound misunderstanding.
  • Executives create shareholder value when they allocate capital so as to maximise the present value of long-term free cash flows. These decisions include investments in capital spending, mergers and acquisitions and share repurchases. The premise is that if a company builds value, the stock price will eventually reflect that value. Executives adhering to shareholder value principles manage for value, not price.
  • In an attempt to increase their company’s stock price executives typically focus on three levers; earnings per share management, equity-based compensation, and investor communications. Take EPS management. When surveyed, a vast majority of executives cite EPS as the most important measure they report. But the link between EPS and value is at best tenuous, and there is a wide range of corporate decisions that can increase earnings but decrease value.
We strive to seek ownership positions in companies where senior executives work for us -- the owners -- always managing for shareholder value over the long-term. We believe this is the case in our small-cap holdings, Sonic Foundry (SOFO) and 1-800-Flowers.com (FLWS), to our large-cap holdings, eBay (EBAY) and Yahoo! (YHOO).

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO, FLWS, EBAY, YHOO.

© 2010 Jeffrey Walkenhorst
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