What a breath of fresh air. Most chief executives are more than ready to tell the market that their companies are not correctly valued – in nearly all cases to moan about undervaluation. It is rare indeed for any corporate leader to stand up and tell investors that they believe their company is too highly valued.
Indeed, Sony’s president, Nobuyuki Idei, should be applauded for attempting to bring a touch of reality back to his company’s valuation. He welcomed in the new year by telling Reuters that the electronics giant was significantly overvalued. ‘When our earnings levels are considered, the appropriate [share] price would be about ¥20,000. Above that would be a bubble,’ Idei told the newswire. Sure enough, investors immediately reacted by shaving a couple of thousand yen off Sony’s share price, bringing it down to ¥25,700 the day after his comments.
Of course, the notion of standing up and telling investors that they are placing too high a value on their company would have most chief executives rolling in the aisles. ‘Tell them what? You must be joking!’
But if investor relations is about managing expectations then there should be a downside just as much as an upside. And it shouldn’t just apply to earnings expectations, either. A few timely warnings about inflated market capitalizations from a few more chief executives could do a lot to pre-empt the far more damaging effect of a market crash.
Some may argue that good management of earnings expectations will have the desired effect. Fair enough. But inflated market expectations can often mean that valuations have little to do with the reality of earnings. Just look at internet and other tech stocks in recent months. Sometimes nothing short of a hammer blow from on high will have the desired effect. Cue Idei.
Far from lambasting Sony for its president’s comments, the market welcomed the guidance. Investors and analysts have been united in praising the company for its consistent approach to investor communications and lack of surprises.
In fact, the only surprise may be that this open approach to IR has come from a Japanese company, most of which are hardly renowned for transparency. But Sony has built up a strong following for good disclosure, way beyond many of its national peers. Blue chips around the globe would do well to sit up and take notice. Some may find they could do with a bit of bubble bursting themselves.
