The Just Group’s newly appointed managing director, Jason Murray, made some interesting comments to The Australian Financial Review recently. Murray was unhappy with the presence of billionaire rag trader Solly Lew’s percent on the share register, with a 21 percent stake, noting that it was “hindering” the company’s share price.
Murray also claimed that “having Mr Lew sitting on [a] 21 percent [stake] was causing Just Group to trade at a discount [and that] it was hard to get much ‘front’ happening around the share price.
The comments were made as Just Group announced a solid 7.4 percent increase in net profit to $61.4 million.
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Murray’s comments exemplify how many CEOs can be too easily side-tracked by essentially, an irrelevant indicator. That is, the headline share price. Murray is certainly not alone, and it is perhaps unfair to focus on him, but a high share price isn’t necessarily in the long-term interests of shareholders. (If anything, CEOs who focus on the headline share price don’t always do too well. Enron’s Jeff Skilling was obsessed with the former company’s share price, posting it in every corner of Enron’s Houston office. Solution 6’s disgraced former CEO Chris Tyler gloatingly forecasted that Solution 6’s share price would reach $100. The company was taken over a few years later $0.55 per share.)
Warren Buffett actually takes a contrary approach. Buffett will happily talk down Berkshire Hathaway’s share price if he feels that the market capitalization of the company exceeds its ‘intrinsic value’. According to Berkshire Owners’ Manual, Buffett notes that “intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.”
Buffett continues, noting that:
We would like each Berkshire shareholder to record a gain or loss in market value during his period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company during that holding period. For this to come about, the relationship between the intrinsic value and the market price of a Berkshire share would need to remain constant, and by our preferences at 1-to-1. As that implies, we would rather see Berkshire’s stock price at a fair level than a high level… by our policies and communications, we can encourage informed, rational behavior by owners that, in turn, will tend to produce a stock price that is also rational.
Ironically, Buffett’s unwillingness to “talk up” Berkshire’s share price has had quite a contrary result. Since Buffett took control of Berkshire in 1965, its share price has risen from US$18 per share to US$120,000 per share. Had you invested US$20,000 in Berkshire in 1965, it would be worth US$133 million now. That is without any takeover premium (if anything, Berkshire would be trading with a significant anti-takeover premium, with Buffett’s presence creating more value than any potential takeover).
Ultimately, if Murray is able to continue to increase Just’s earnings and cash flows to shareholders, the share price will increase, regardless of the presence of Lew on the share register.