Should (sunny) weather be considered in a valuation exercise?
August 20, 2024
There are macro factors and mega macro factors which need to be thought about in a company valuation
As I gaze out of my window at blue skies and the sun shining, it made me think that we don’t often talk about whether the weather matters when thinking about a company valuation.
Given that climate factors are a major factor when it comes to the value of physical assets, it’s obvious that they should also matter when it comes to businesses and their shareholdings.
Now I think about it, it’s a pretty big topic. So let’s try to summarise the issues.
- Some companies thrive when the weather is bad or when it is good. For some it does not matter. But I heard a great story the other day about how the weather can actually help to predict future commercial performance. It was from a company involved in construction which mentioned that 18 months after a serious drought the problems that manifest around subsidence appear and work picks up accordingly. Food for thought methinks when examining a company’s forecasts upon which we are relying to perform a valuation.
As my colleague David Livesley said when I mentioned I was writing about this:
“I love the US markets in fruit and nut futures. “
Orange juice futures — which allow industry players to hedge against swings in prices — have been on a tear since the end of 2022 when a hurricane, then a cold snap, devastated acres of orange groves in Florida, the main growing region in the US, the world’s second-biggest producer. But the rally has accelerated sharply this month as the prospect of a dismal harvest in Brazil has panicked the market.”
https://www.ft.com/content/31400087-5749-4cbe-94ee-5ad87b1bb9aa”
There are lots of clues in data readily available to understand whether a company’s value should be enhanced or impaired.
- Energy: I do not need to go over well trodden ground about Net Zero Goals et al. But for companies where energy usage is an issue, this impact on costs and that impacts on profits and therefore valuations.
- ESG: too often the E, S and G are lumped together. We think Governance comes first, because if that is done correctly everything else will follow. In some companies we discover that the governance over environmental factors could be better. Perhaps this is a clue about the values of the senior leadership team?
- Regulation and reporting: If it has not already arrived in relation to the environment, we all know the direction of travel, we need to consider what impact compliance with the regs has on not just profitability (the £ and time costs of compliance) but also how it might impact more widely on the company’s ability to perform against its peers. Does being a B Corp command a premium multiple?
- Insurance. If a company needs weather related insurance it should have it. If the insurance is missing and the risk is high, we need to impair for at least the cost of buying the insurance cover.
We all know about macro and geopolitical factors such as inflation, interest rates and geopolitical risks. Could it be that “the weather” is actually a macro macro factor?
Whilst we continue to noodle the issue and apply analysis of the risks and opportunities to a valuation exercise, we hope you will be enjoying the sunny weather wherever you are in the world right now. And I hope for many of you, you will be soaking up the sun somewhere nice on holiday.
