Many companies that report impressive revenue and earnings are still valued lower than their peers. Dev Patnaik outlines how leaders must think beyond current performance, articulate a clear vision for the future, and be rewarded in turn by the market.
It’s earnings season — the shareholder’s version of report card day. By and large, it seems like companies are doing well. We managed to fend off a recession and businesses ran tighter ships, resulting in better earnings — some exceptional. Yet, even with this great overall picture, there’s more to the story. Many companies that are churning profit are still valued lower than some of their peers.
Because now, more than ever, investors are looking beyond earnings to whether your business has a future. Consider McDonald’s, which reported a 14% growth in profit over last year. They’re doing really well! But then there’s Shake Shack – trading at a market cap around 42x earnings while McDonald’s trades at 16x earnings.
Unfortunately, this is the thing that most savvy investors obsess over but many business managers forget to pay attention to. Although revenue and earnings are a great reflection of current performance, it’s the multiples that often reflect a company’s true prospects for growth.
So, yes, McDonald’s is doing great. But with a McDonald’s on every corner and its bloated menu falling out of favor with customers, how much more can it grow? At around 400 locations to McDonald’s 40,000, and marketing and menus that appeal to a demographic of younger, more affluent customers, Shake Shack looks like it has more room to grow.
Does that mean if you’re already a bigger, more mature company that you’ll always have a lower multiple? No. What matters more is whether a company is built for the major shifts — even those not yet identified — that will happen over the next 5-10 years. Companies are rewarded based on how future-focused they are.
You Can’t Predict the Future, but You Can Get Ready for It
Let’s compare two automotive juggernauts: Ford and Tesla. Ford enjoyed solid profits in Q2 selling a lot of gas-powered pickup trucks. But Ford’s price to earnings ratio of 12 is dwarfed by Tesla’s famously high 70.
The consensus is that gas-powered pickup trucks aren’t the future. Ultimately, people think that Tesla, having gone all-in on electrification and other pioneering technologies, is on the right side of history. And the market doesn’t believe Ford will catch up, at least not fast enough.
To be sure, the market isn’t always right. We’ve enjoyed a colorful history of getting into a mob mentality and creating stock market bubbles. It’s impossible to predict the future.
However, what you can do is pay attention to the 3 kinds of major shifts that your business will need to navigate: cultural, technological, and market. You have to be future-focused.
Read full article on Forbes.
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