Why Puig Brands' post-IPO performance shows confidence must take precedence over the stock price

The greatest asset for any listed company is investor confidence. It is the fundamental pillar that encourages fund managers to invest their money.

But companies often believe that their best asset is to keep the share price as high as possible. This is a mistake, because the stock price is the consequence of many factors that are outside companies’ control – from regulatory risks to geopolitical factors and interest rate levels.

Confidence, however, has a direct impact on a company’s ability to access markets and obtain financing. Confidence impacts the cost of financing, the share price, stock liquidity, volatility and the market value of companies. It affects above all the propensity to invest and take risks. The greater the distrust, the lower the investment.

Early-stage trust

Building trust is a process that starts even before going public – something we have seen play out in recent months.

Puig Brands was the largest IPO in Europe in 2024 so far. This multinational company, operating in the fashion and beauty sectors, delivered a good communication campaign throughout the IPO process that made it a ‘must have’ stock.  

It was a large placement, which made it a candidate to join the IBEX 35 index. Its size ensured the liquidity needed by large funds to be able to buy and sell without significantly altering the price. The family-controlled company was placed in May at the maximum price of the valuation range. A few weeks later, it was included in the IBEX 35, which automatically generates an additional demand for shares that helps to maintain or increase the share price in the short – or rather very short – term.

Then came its first post-IPO reporting, where net result fell by 26.5 percent compared to the previous year, in part due to the IPO expenses themselves. In the best tradition of bad stock market stories, the share price fell by 13.65 percent that day. The exit of investors and the poorer outlook for the business led to a further decline to €18 ($19.61) compared to a listing price of €24.5 – down almost 25 percent. A 10 percent surge after the company reported third-quarter sales is an example of share price volatility – a factor that scares away quality investors.

Confidence is a long-term game

Puig is listed in a luxury sector that features peers such as LVMH, which includes brands including Louis Vuitton, Christian Dior and Givenchy and is a giant among European listed firms. Puig and its sector are highly visible and well-followed by investors. And in going public it enjoyed a lot of freedoms, including shares with different voting rights.

What the company needs now is to be as active in explaining the business as it was in placing at its shares at the maximum price. At the end of the day, investors put money in and only ask for answers. If there are no answers, investors will sell and they will not come back to the company for years – if ever - because trust is like a China jar that is easily broken and almost impossible to mend.

A boom-and-dip trend

There have been many cases of companies whose results after their IPO have been below expectations. Ferrovial, like Puig, is a family-controlled company. It listed a few years ago at the maximum price and with a slowing business and immediately joined the IBEX 35. Like Puig, its first half-year results disappointed the market: fall was followed by fall and it took four years for the share price to recover to its starting price.

The quality of its assets, a clear commitment to transparency in financial information and a very proactive investor relations program allowed it to finally turn positive and be considered a reliable company, business performance aside. The value of the company has increased tenfold but it is an exception.

Companies such as Gestamp (which went public in 2017), one of the world's best-known suppliers in the manufacture of metal components for automobiles, or Prosegur Cash (2017) never recovered their IPO prices after publishing disappointing first results following the IPO.

Some companies undermine trust without ever completing an IPO. Europastry is a leader in the frozen bakery dough sector and made a first attempt at a listing in the summer, with a valuation expectation that was seen as demanding in a difficult environment.

It tried again in October with adjusted multiples and it seemed to find investors. Given the interest at a certain multiple, it is tempting to present a range to see where the interest is if the valuation is stretched upwards but this conveys a perception of ‘greed’, which is very negative for investors. On the other hand, in indebted companies, investors are generally only willing to participate in capital increases where money comes into the company. They avoid participating in secondary transactions, where the company's balance sheet is not strengthened, but the money is taken by the selling shareholder, another transaction often perceived as greed, even if it is legitimate.

Europastry finally cancelled its IPO for the second time this year. The result is that any investor who has spent time with the company is unlikely to participate in the future, unless the multiple continues to fall.

The knock-on effect of disappointment

Companies can bet on high earnings expectations, allowing them to go public at a low multiple for a given valuation at the risk of disappointment if results are not achieved. Alternatively, they can give lower earnings expectations, implying a high valuation multiple that investors are not buying today. This is a difficult balance to achieve.

For investors, buying shares in an IPO is a risky decision. They are buying companies for which they only have past data and do not know how they will manage in the future. That is why they are asking for significant discounts on initial valuations. A double-digit drop, as in the case of Puig, affects the profitability of their entire portfolio and discourages them from investing in other IPOs.

Whether trust is built or destroyed depends on the company. In the words of Warren Buffet, it takes 20 years to build trust that can be destroyed in 20 minutes. If it is destroyed, forget about the share price for a long time and forget about having long-term shareholders. 

They will sell their shares and will not be replaced by the arrival of new investors. 

Neither Puig Brands nor Europastry immediately returned a request for comment.