Ever wonder what it would be like to do IR for a company in an industry outside the norm? For example, what if your company’s key business driver was death or the product it was selling was extremely controversial – like sex? Or what about IR for ‘sin stocks’ like alcohol, tobacco and gambling?
Well, wonder no more. IR magazine decided to find out for you, and what we discovered was both fascinating and strangely ordinary. IR professionals in the alcohol, tobacco, gambling, death and sex industries not only have typical daily IR demands to worry about, they have to be conscious of social concerns and judgments around their company’s business. If you’re selling a funeral company’s story, for instance, you must communicate the idea that death sells without making your audience uncomfortable. You have to choose your words carefully and turn what may be a touchy subject into a sexy opportunity for investors.
Speaking of which, ‘Sex absolutely sells – and at a very high premium,’ says Andrew Harris, managing director at the Daily Planet, the world’s first publicly-listed bordello. Since its debut on the Australian Stock Exchange on May 2, the company’s stock has doubled in value.
Harris says many of the firm’s stockholders are lured by the possibility of sizeable dividend payouts: ‘We have a lot of retirees who invest. We pay returns around 10.5 percent at the moment.’
Without any peers to refer to, the investment community is still playing with ways to formally measure the brothel business’s financial performance, says Harris. He thinks analysts are paying close attention to the Daily Planet’s cash assets and dividend returns to assess the company’s future potential, however. ‘The sex industry is so high yield, we can get returns of up to 66 percent,’ he reports. ‘This will make us very attractive in the future. We will become very cash rich, so within three years, we will be up around the $100 mn mark.’
A mighty attractive numbers story, indeed. But getting investors on board is a bit more complicated when you’re dealing with prostitution because a lot of people are clearly against it in principle. When out raising capital for the IPO, the most important point to get across to potential investors was that the company does not take money from prostitutes who work at the brothel, reports Harris. The message, according to Harris, was that investors could invest their money in a hotel that provides ‘a safe and healthy environment for prostitutes to work in.’
‘We investigated brothels in Nevada which take all the cash and pay the girls later, and we don’t believe in those ethics,’ says Harris. ‘We believe we set the example for the industry. We operate five-star hotels and take none of the girls’ earnings. We never have and we never will.’
Roll of the dice
When doing IR for an industry plagued with controversy, addressing social concerns related to the business is part of the job description. Robert McIver, IRO at International Game Technology, a Nevada-based company that makes gambling machines, knows this well. He goes as far as discouraging people not to gamble foolishly because it gives the industry bad publicity. ‘It’s fine to lose a little bit of money; that’s like the price of admission. But you don’t want the butter and egg money going down the sewer,’ he says.
‘Gambling is controversial by nature and there are some people who think it’s a sin,’ McIver adds. Every time a state legalizes gambling, people protest. ‘You end up answering a lot of questions about how you can grow your business when there are so many people opposed to the whole concept.’
The ultimate price of widespread opposition is high taxation. But McIver says the combination of controversy and heavy taxation hasn’t stopped the industry from growing. Investing in gambling products is still a good investment, even in a down economy. Gaming resorts like Las Vegas and Atlantic City are some of the cheapest destinations in the US. As McIver points out, ‘Losing a couple of hundred dollars at the casino is compensated by cheap luxury rooms and inexpensive meals.’
Devoted customers
Another controversial and highly taxed industry that still manages to turn a profit (and a high one at that) is tobacco. Stanislas Vrla is vice president of investor relations at Altadis, which was formed out of the merger of Spain’s Tabacalera and France’s Seita. He says the company operates in a growing market even though smoking is going out of fashion.
‘It’s an industry where the economic mechanisms are not exactly standard,’ Vrla explains. ‘In most major industries, competition for consumers drives prices down, but in most of our local markets prices are going up.’
The tobacco industry can hike prices because of a very loyal clientele willing to pay a premium. ‘In a sense, a cigarette pack is very much like your daily coffee or bread; if you are a smoker you go for it – whatever happens,’ notes Vrla.
Vrla highlights for the Street that tobacco is a stable business with strong cash flows. No matter how high prices climb, smokers maintain the organic growth of Altadis’s stock from year to year.
As with tobacco, the alcohol business thrives on loyal consumers. When Lawson Whiting, director of IR at Kentucky-based Brown-Forman, a wine and spirits company, meets with potential investors, he tells them that alcohol is a ‘pretty defensive sector.’
‘People continue to consume wine and spirits products in just about any type of economic cycle,’ he says. ‘And the reality is that they tend to trade down as the economy gets worse, but they don’t drink less – they just drink worse. We keep investors focused on our operating margins, our returns on invested capital and our pretty consistent growth.’
A big chunk of Brown-Forman’s stock has been family-owned for over a century, which adds another unique element to Whiting’s IR function. With a relatively small float he spends more time talking to existing shareholders than he does targeting new ones.
When Whiting does target new investors, he bypasses sell-side analysts because of the stock’s low liquidity. ‘Even though our market cap is $5 bn, we don’t trade very much every day,’ says Whiting. ‘We may trade 100,000 shares a day, which may be $8-10 mn a day in flow, and that is not enough to get the sell-side guys interested in recommending our stock.’ So far targeting the buy side directly has been a successful strategy, he says.
Pitching death
Benjamin Franklin once wrote, ‘In this world, nothing is certain but death and taxes,’ which is part of the IR pitch for the death care industry. When Debbie Young, director of investor relations at Service Corporation International (SCI), North America’s largest death care provider, meets with potential investors, she highlights the fact that SCI has a stable and predictable business.
‘Obviously we have favorable demographics over the long term,’ says Young. With the baby boomers approaching their 60s and an already significant aged population, ‘We are uniquely positioned to capitalize on those demographics.’
Another trend that makes SCI a good investment is that more people are purchasing funeral services before they die, so investors can better predict future earnings. According to Young, SCI has about $6.5 bn in deferred revenues coming from pre-paid funeral services and cemetery products.
Even though the task of getting investors interested in this industry seems easy, communicating about death can be a bit excruciating. Young has to be very sensitive and detailed when talking about her company to investors. One cannot be ‘comical when describing the death care industry,’ she says. ‘It is obviously a subject matter no one wants to talk about, but it is a business like any other business.’
The other issue, according to Young, is that not many people are familiar with inner workings of the death care industry. ‘Most investors are in their 30s or 20s and haven’t had to arrange a funeral or buy cemetery products, so an IRO in a death care company spends a great deal of time explaining terminology and the different aspects of the industry.’
Perhaps what’s most interesting about IR for what some consider unsavory, controversial or taboo industries is how completely normal it is. Explaining what’s unique about your company’s sector and highlighting the main business drivers are what all IR professionals do whether working for an auto manufacturer or a brothel.
But just in case you ever wondered what it would be like to sell sex, death, gambling or smokes, well, now you know.
Death & taxes, cont’d
In the July 2000 issue of IR magazine, in his column titled ‘Death & taxes’, the Speculator proposed an investment strategy called dialectical binary synergistic investment: extraordinary returns through investing simultaneously in two or more companies whose products enhance the stock value of one other.
The Speculator himself enthusiastically purchased shares in both SCI and Philip Morris. The idea was that Philip Morris would ultimately enhance SCI’s value by providing more funeral home customers. ‘The people who smoke have to smoke and the people who die have to get buried and someone has to pay; there is a compulsive element to it,’ the Speculator speculates.
Three years later, the synergistic strategy is proving very profitable. At the time the article ran, SCI’s stock was at an all-time low of $1.5 per share, mainly due to some ‘poor demographics’, and Philip Morris’s was in the low 20s. Today both have more than doubled, with SCI at $4 and Philip Morris, now Altria Group, at $41 per share.
With the assurance that taboo products are stable and profitable investments, the Speculator is considering a wholly sinful portfolio, perhaps with reference to IR magazine’s Sindexâ„¢, as described in our January 2002 issue. For example, the expansion of the Daily Planet, an Australian bordello, will no doubt boost sales for sex toys sold by Europe’s largest porn retailer, Beate Uhse, which listed on the Frankfurt Stock Exchange in 1999. And since booze and gambling often go along with sinful situations, the combination of all four stocks may constitute a great ‘synergetic basket’.
As the Speculator wrote, ‘You can see the dialectical binary and concatenate synergistic stock picking flows smoothly as a concept. Your investment will flourish in a cycle of heterodyning value.’ Good luck!
