The financial metric that sorts through the hype: The public relations-to-earnings ratio
Posted by: in Stocks Money NewsFiled under: Management, Berkshire Hathaway (BRK.A), Marketing and advertising, Market matters, Columns
One of the hardest things to do as an investor is sort through the hype: the financial media is a 24-hour operation and, I would argue, almost none of it is relevant to what really drives investment returns over the long run. But shrewd promoters know that, in the short run, hype and fluff can drive stock prices.
To help investors separate the cream from the crap, I’ve developed my own formula for determining how promotional a company’s management is, relative to its fundamental strength. Ladies and gentlemen, I present the E/PR ratio. The formula for calculating it is simple: E/PR= Earnings per year/Press Releases per year.
Let’s look at a couple examples. First, Berkshire Hathaway (NYSE: BRK.A), Warren Buffett’s conglomerate. In 2006, the company put out 16 press releases and earned about $11 billion. So the E/PR ratio is 687.5 million. For every PR the company put out, it earned $687.5 million. The press releases generally concerned major acquisitions, Buffett’s record-breaking pledge to the Gates Foundation, and quarterly reports. That sounds like a business that’s focused on creating value for shareholders through operational success — and letting the story tell itself. So far it’s worked out well for shareholders, as investors who put just a few thousand dollars with Mr. Buffett at the beginning of his career are worth millions.
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