Have you done your homework?
As my last official day at the office draws near, I am delighted with the results we have achieved from combining my approach to quality (The Montgomery Quality Ratings “MQRs”) with Value.able‘s method of calculating intrinsic value. There will always be conjecture and disagreement with these, but that doesn’t matter to me and it shouldn’t bother you either. The market is wide enough and deep enough to cater for us all.
I am very proud of how far you – the Value.able Graduate Class of 2010 – have come and encourage you to continue questioning and challenging the things you read and learn. It was Elbert Hubbard who said “The recipe for perpetual ignorance is: Be satisfied with your opinion and content with your knowledge.”
Some of the most memorable results of 2010 for me where the gains in Matrix, Decmil and Forge, as well as the gains in Acrux, Thorn, Fleetwood, MMS, Data#3, and Oroton. I was also delighted to have left QR National alone – missing out on an 11.8% return, but selecting MACA instead, which has produced a 70 per cent return.
Elsewhere, fund managers have reported good results. But as one Graduate noted via email, when some portfolios, filled with debt-laden, low ROE businesses, rise, it is generally a function of a rising tide rather than sound investing principles. Of course when investing the Value.able way, it matters not what anyone else is doing. All that matters is that your analysis is right and that you are consistent.
There have been plenty of questions about the Value.able valuation formula this year and perhaps even a little obsession over the source of, reason for and disagreement with the formula/tables. If that resonates with you, I urge you to re-read pages 193 and 194 and consider the following parallel; In the sport of mountain biking, some riders obsess with the weight of their bicycles. Many shop around for a ceramic or titanium rear derailleur pulley so that they might save as few as 5 grams! Paying thousands for their obsession, they fail to realise that the weight of their fettucini carbonara the night before, the water bottle they carry with them and the mud that sticks to their tyres is far greater than the savings they make and that strength, fitness, endurance and momentum are all far more important. Don’t become too obsessed by the math when its the competitive advantage that is more important and, in any case, value slaps you in the face when it is obvious.
There are very good reasons why my valuations have differed from those you have produced, and I explain a major source of the difference on pages 193 and 194.
Far more important is that you are now carrying out your own analysis and focusing your attention on high quality companies, sustainable competitive advantages and intrinsic value. I believe you will continue to do well – as so many of you have shared with our community – if you stick to the disciplines outlined in Value.able. And if you haven’t purchased your copy yet, do it now!
Before I leave for the annual Montgomery family holiday, I promised to give you some homework. There are three tasks with a total of two challenges. You can choose those you’d like to complete. You are under no pressure to complete them all. It is the holidays after all!
Challenge 1, Task 1
The first task is to print out the Notes to the Financial Statements: Contributed Equity for the number of shares on issue, Balance Sheet, Profit and Loss statement and Statement of Changes in Equity for The Reject Shop for 2010. Links to the statements are below:
Notes to the Financial Reports: Contributed Equity for the Number of Shares on Issue – click here
Balance Sheet – click here
Profit and Loss – click here
Statement of Change in Equity (Dividends) – click here
Using the numbers circled on each of the statements and a Required Return of 11%, try your hand at calculating The Reject Shop’s 2010 Value.able Intrinsic Value. Follow Steps A through D on page 195 of Value.able. Be sure to list your outputs for Equity per Share, Return on Equity and Payout Ratio. Click here to download my Value.able Valuation Worksheet. Ken has also provided a great list of guidelines – click here.
Challenge 1, Task 2
If you want to obtain extra marks you can have a go at also calculating the 2010 cash flow for The Reject Shop using the method I outline in Value.able on page 152.
If you haven’t purchased Value.able, don’t worry. My website will continue to accept your orders and my distribution house is working through the holiday season.
Challenge 1, Task 3
The final task involves completing one or both challenges on the Christmas Holiday Spreadsheet. The first challenge is for Value.able Undergrads. Use the worksheet to fill out the spreadsheet, then rank the companies by their Safety Margin. The spreadsheet will download automatically to your computer. When I return in late January I will publish my table and we can compare results.
Challenge 2
The second challenge is for the Value.able Graduate Class of 2010 (and any Undergrads that fancy a challenge). Your task is to calculate the historical change in intrinsic value and price over the last ten years.
Don’t worry. You don’t have to calculate ten intrinsic values, just two. Estimate the intrinsic value a decade ago (2001) and compare it to the 2011 intrinsic value. To make things a little less onerous, maintain the same RR for a company for the two years. You can then rank the five companies by their rate of change and you can use the following formula in excel if you like:
((IVn/IVn-10)^(1/10))-1
Where, IVn is Intrinsic value for 2011 and IVn-10 is Intrinsic Value for 2001 and ^(1/10) is ‘to the power of 1/10’.
I expect it will take a few weeks for you to get all the your submissions and I will consider some form of recognition for the winners. In the meantime enjoy a peaceful and Value.able Christmas and all the very best to you and your loved ones.
Posted by Roger Montgomery, 22 December 2010
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Markus T
:
I am late with my homework.
I don’t understand why so many are using ENDING equity per share at 1.98 for the final IV calculation. Am I missing something big?? I used average equity and get 1.77 Equity per share, and get IV of $13.93 (Two others got identical but most mid $15’s). or do you use average equity for ROE calc and ending equity for IV calc? – The book does not say to do this! Can one of the nerds of the class explain?
shirley
:
sorry, the BGE should be GBE
Ron F
:
Hi again Roger
Listed is my answer for Challenge 2 – Rank by IV change over 10 years – or less when relative.
I consider myself only an undergraduate, but I thought I would have ago and learn my mistakes.
After searching for a while I found the old annual reports.
It was difficult to ascertain the dividends paid on the old reports, so I used Commsec’s payout ratio.
Another problem was the variations between Commsec and Yahoo for every companies’ closing prices for the last trading day of June prior to the beginning of the starting financial year that I went back to. I have used Yahoo Prices.
Only Gunns & Transurban go back ten years, the others first listed late in a financial year, I used the following Financial Year to start from.
With no access to the original prospectus I used conservative ROE’s instead of their actual ROE, and also for Gunns
The ROE I used to calculate the beginning years are (denotes actual) TPI 15% (22%) GNS 12.5% (15% 01 & 18% 2000) ELD 5.0% (8.5%) AAC 7.5% (10.5%) PGA 5% (7%)
As previously stated I used Commsec payout ratios except for TPI, actual was % used 40% and Elders actual 127% used 100%
Code IV 2011 MOS I V & YR IV Change Price Ch Yrs.
TPI $0.06 -2,120% $0.67-05 -1020% -123% 6
GNS $0.10 -535% $2.02-01 -1920% -51% 10
ELD $0.00 -59,900% $0.44-02 -1460% -2160% 9
AAC $0.00 -137,900% $0.45-02 -45000% 109% 9
PGA $0.00 -6,600% $0.48-05 -48000% -3840% 6
AIO $0.00 -159,900% $0.00-08 – -42% 3
TCL $0.00 -523,900% $0.00-01 – 23% 10
Thanks again Roger for the homework and giving us chance to a have insight into those rubbish companies who seem to only exist by the charity of shareholders, as you noted in your book there are many listed on the share market, or were and ended up in the graveyard.
Regards Ron F
Ron F
:
Sorry, I inadvertently put a hyphen in front of TCL’s 10 year price change, it should be 23%. My apologies again.
ROn F
Ron F
:
Hi Roger,
Thanks for providing the homework. My answers are as follows.
Challenge 1 – Task 1 (TRS IV)
($1,000)
NPAT 23.351
Equity 51.543 & 40.528
= Average Equity 45.986
Dividends 16.103
= PR 69%
Shares (1,000) 16.103
EQPS = $1.9845
ROE = 50.8%
Selected Equity 50%
RR 11%
Step 1: $1.9845 x 4.545 = $9.02036
Step 2: $1.9845 x 15.263 = $30.2891
Step 3:
Income $9.02036 x 69% = $6.22405
Growth $30.2891 x 31% = $9.38962
Intrinsic Value for TRS = $15.61
Challenge 1 – Task 2 (TRS 2010 Cashflow)
($1,000) 2009 2010
Cash 0.865 – 4.339 = 3.474 (begin)
Borrowings 14.375 – 31.327 = -16.952 (less)
Share Capital 3.336 – 3.336 = 0.000 (less)
Dividends Paid 16.103 (add)
Total Cashflow for TRS = 2.625
Challenge 1 – Task 3
Before listing my ranking by MOS, I have written some comments on the relative companies.
PGA, ELD, AAC, AIO, all had a loss. In my opinion, companies who make a loss are only entitled to a zero value for value investing assessment. Even though, they have assets they won’t be worth hardly anything, if they keep making loses and go into liquidation.
I didn’t value TCL because it was their first profit in ten years and it would have to be the worst and the most irresponsible of them all. They have had only one profit year in ten years and carry massive debt, but they have paid out immense dividends every year, except the first year. It is an example of what Roger pointed out in his book of companies like this paying out dividends obviously hoping to support their share price by so called income share market investors who have no regard to capital gain to the extent of the risk of losing of all their money in it.
GNS & TPI both had both had positive cash flows, albeit ROE was lower than 5%
I believe it is a waste of time valuing companies with ROE lower than 5%. Better off having money invested in cash – An example, a Commsec trading account currently it is 5.5% P.A. (daily compounding). You can earn this without risk while waiting to invest in companies when the value opportunities arise.
But I thought for the sake of this exercise I would calculate a value for GNS and TPI. Figures used are as follows,
GNS
($000)
NPAT: 28.498, Equity: 1492.891 & 1321.896 = Av. Equity 1407.394
Shares: 806.735 (1,000) EQPS: $1.85, PR: 70% (same as FY10)
RR: 14% (I would require a higher RR)
ROE: Actual for FY 10 was 2%, but I used 1% to compensate for a higher RR
IV = $0.10
TPI
($000)
NPAT: 72.376, Equity: 1943.284 & 1088.822 = Av. Equity 1516.053
Shares: 960.639 (1,000) EQPS: $2.02, PR: 0% (actual last 2 yrs 0%)
RR 14%
ROE: Actual for FY 10 was 4.8%, but I used 1.5% for the same reasons as GNS
IV = $0.06
Companies rank by MOS
GNS -535%
TPI -2,120%
PGA -6,600%
ELD -59,900%
AAC -137,900%
AIO -159,900%
TCL -523,900%
Challenge 2 follows in the next post
Regards Ron F
bhardwaj.tushar
:
Hi Ron, can you please share with me how did you arrive at the growth multiple and what if in case the growth is more than the one’s mentioned in the book.
Steve
:
Challenge 1, Task 1
TRS
EQPS: $1.98
ROE: 50%
POR: 70%
2010 IV: $15.36
Challenge 1, Task 2
While I found the first task relatively simple thanks to the helpful links with the exact parts we needed circled (it was a good reminder of exactly which inputs we should be using when trying to value stocks), I had a little more trouble with the cashflow task. After re-reading page 152 I still wasn’t able to pinpoint exactly which inputs we needed to use ie. what part of the current assets section to use (seems obvious now I know), whether to add the current and non-current liabilities and also where to find the ‘change in share capital’ (now I know it’s called contributed equity). It seems that no one else was having trouble with this so basically I just looked at everyone’s answers and worked backwards to find the correct inputs ;)
TRS cashflow 2010: $2,625,000
Challenge 1, Task 3
I used a RR of 11% for all companies for the sake of the exercise and to be consistent with the first challenge. I started by coming up with 2010 valuations for each company and then used the analyst forecast EPS and DPS figures in Etrade to create 2011 valuations. I found it was difficult to get all the required info out of some of the annual reports and had to do a bit of digging. Each company also uses different terminology and layouts for the various inputs. They don’t make it easy! I’m also hopeless at maths so took a while to figure out how to calculate the MOS (thanks to my partner who is a lot better at maths for the help)…
PGA 2011 IV: $0.08 MOS: 7.5%
AIO 2011 IV: $0.64 MOS: -144%
TPI 2011 IV: $0.52 MOS: -146%
ELD 2011 IV: $0.02 MOS: -2600%
GNS 2011 IV: $0.02 MOS: -2900%
TCL 2011 IV: $0.03 MOS: -17,233%
AAC 2011 IV: $0 MOS: N/A
RobertD
:
Hi,
I have been looking at my brokers web site and they quote Cash Flow (cents) for per share. The value for TRS is 123.6 cents per Share.
Presumably dividing the TRS cashflow from this exercise $2625 divided by outstanding shares (25.97) should equate to the same as the brokers site, but it doesn’t – I get ~101.07.
Does anyone know how brokers calculate the cashflow (cents), and is it a reliable metric for understanding cashflow or do you need to always go to the annual reports to get the metrics and manually calculate it yourself?
Cheers
Robert
RobertD
:
In case anyone is interested – I emailed my broker – the equation they use to calculate cashflow(cent) per share is:
Cash Flow Per Share = (Operating CashFlow – Prefferred Dividends) / Common Outstanding Shares
Obviously the CFPS is missing any investing cashflow and financing cashflow information – so looks like I have to manually work out the cashflows. I was hoping I could expediate the process rather than manually going through past annual reports to extract the information.
Does anyone have a method of automating this?
Rod
:
TRS
Shares on Issue million 25,937,070
Profit 23,351,000
Shareholders’ Equity million 51,543,000 (40,428,000)
Return on Equity per cent 57.75% (of beginning equity as on p.195)
Earnings Per Share 0.90
Dividends Per Share $1.163
Investor’s Required Return 11%
(also called Discount Rate)
Equity Per Share $ 1.984
Payout Ratio per cent 69%
Return per cent 11%
Applying the Multipliers to the Equity
Equity Per Share x Multiplier = $
Step 1: $ 1.984 x 5.227 = $10.37
Step 2: $ 1.984 x 19.629 = $38.94
Step 3: Apply the Payout Ratio
Multiplier x Payout Ratio = Value
Income Multiplier: $10.37 x 69% = $ 7.16
Growth Multiplier: $ 38.94 x 31% = $12.07
Estimated Intrinsic Value*
Income + Growth = Estimated Intrinsic Value
7.16 + 12.07 = $ 19.23
Have not tried it yet with a lower ROE – just followed instructions :-).
Rod
Kev Sep
:
Another great training exercise provided by Roger.
Even though I have not worked through all of the exercise – I was interested in comparing values from the exercise’s provided data (TRS annual report extract ) and what I am provided with from Aspect for a small subscription fee.
As pointed outout in the reference (http://rogermontgomery.com/how-do-your-value-able-valuations-compare/#comment-6865) you need to be careful of your data source.
I use the data download as a screen and accept that it may need fine tuning.(check figures with company reports)
For the TRS exercise – Aspect data gives a consolidated equity of 39458(000) as total equity for 2009. This also shows in the etrade data (which I understand comes from Aspect). I also looked at the 2009 annual report from Reject shops web site and the same figure is given (associated with a different reported “deferred tax assets”). I did not find an amendment to explain the difference.
The next difference is the DIV. payout ratio. Aspect / etrade gives 75.2%
Email extract from aspect helpdesk.
Begin extract
Payout ratio in our database has the following formula:
Payout ratio = Cumulative dilute * (Total DPS/(100* EPS before abnormals))
If EPS before abnormals <= 0 then Payout ratio is null
For TRS, payout ratio = 1*(67/(100*0.891)) = 0.752
The difference is that we use the total dividend announced for the year instead of the total dividend paid. End extract.
As posted replies to this exercise have demonstrated – people for various reasons choose or use slight variations to Rogers published formula and other sources of data (eg etrade) and end up with different IV results.
I agree with Andrews results posted 23rd December – which was a good check on my automated screening process.
Is the Australian superannuation industry a large Ponzi type scheme where fund managers speculate with clients funds? If super funds are purchasing shares above IV what happens to the average returns for many Australians? Roger would this be a good discussion on one of your future interview?
Matthew R
:
Hey Kev – great contribution, the thoughtful discussion has really been impressive over the christmas break
The big super funds use fundamental analysis in the main but no matter how good they are at it, in aggregate they are destined to provide about average returns. If only the prospects were the same for their customers…
Michael P
:
Challenge 1 Task 1 :
My calculation for TRS (numbers from AR year ended 30 June 2010)
#Shares 25.973 m
Equity 51.543 m end ; 40.428 m start
Average equity = 45.985 m
NPAT 23.351 m
EPS NPAT 23.351 / #shares 25.973 = .899
DPS 16.103 m / 25.973 m = .6199 = .62
Payout ratio = DPS/EPS = .62 / .899 = .6896 = .69
My calculation with regard to the p.188 comment “ROE should be calculated by comparing NPAT to beginning equity, or average equity, but not ending equity”.
Avg equity per share = 45.985 / 25.973 = 1.77
ROE = EPS / Avg Equity per share = .899 / 1.77 = 50.79
For 11% RR and ROE of 50%
Equity per share x multiplier (p.183, 184)
Income 1.985 x 4.545 = 9.02
Growth 1.985 x 15.263 = 30.30
Intrinsic value 2010
Income x Payout ratio : 9.02 x .69 =$ 6.22
Growth x (1 – payout ratio) : 30.30 x .31 =$ 9.39
Total IV $15.59
Challenge 1 Task 2 :
Cashflow TRS 2010
Change in Cash = 3474 (2010: 4339 ; 2009: 865)
Change in borrowings = 16952 (2010: 14149+17178; 2009: 11379+2996)
Change in share capital= 0 (2010 & 2009 : 3366)
Dividends paid = 16103 (2010)
Total entity cashflow = +2625
Challenge 1 Task 3 : Christmas Holiday spreadsheet
Company IV Margin of Safety
AAC $- -100%
TCL $- -100%
ELD $- -100%
PGA $- -100%
AIO $0.26 -84%
TPI $0.58 -56%
GNS $1.85 192%
But I don’t understand how these get a C4 or C5 rating, the scale may need extending to D99.
Davey W
:
Thanks for putting in all of your calculations Michael, it has made it much easier for a novice like me to figure out how to find Intrinsic Value!
RobertD
:
Hi,
I have re-done my home work on the TRS task :-) Am I allowed to do that……
Anyhow I have come up with an IV of $14.26 also.
What is also interesting regarding TRS is the debt/equity ratio which I calculate to be 60.8% for 2010. This is seemingly high and I would assume Roger would not this of the short-list as a good investment?
Looking back in history it appears the company debt/equity ratios are increasing over time 2007 – 23.1%, 2008 – 38.8%, 2009 – 36.4% and now 2010 – 60.8%. Also interestingly the forecasted EPS for 2011 drops to 84.2 from 64.4. I wonder if any of the retained earnings will be kept to pay down debt?
From what I understand about TRS, while it has an attractive ROE, to does have quite a bit of debt with a trend of increasing and for this reason it would be an investment I would steer clear of.
What do others think?
RobertD
Ash Little
:
Yep RobertD.
I am a former shareholder of TRS. But I did not like the half yearly report issued in early 2010 and it was at a premium so I said goodbye to it.
When Debt is going up and ROE is flat or declining then this is a sign that all the easy profits for the business have been made. The business started out opening stores where it could make the most profits. Debt increasing and or ROE declining is a sign that all the good sites have been opened and the future stores will not be as profitable.
This is something to consider for all the ORL shareholders (Including myself). Debt was up a far bit in the last set of accounts……and ROE from memory was flat…..
This means less profitabiable stores were opened in 2010….. This may reverse next year as the new stores get a following and start making good profits (ORL probably still have more low hanging fruit than TRS regarding store openings)…..That said never a good sign having debt up and ROE flat or declining.
Debt has got on the high side for TRS but if retained earnings are used to pay off debt then ROE will decline further. This is because ROE is say 40% and the Interest saving on paying down the debt is say 10%.This will affect ROE
Andrew
:
I agree about ORL, my scoring system actually saw it move down a level from some of the previous years mainly due to the increase in debt. This is something i would like to keep an eye on before jumping in. I also have fears that it may soon reach saturation point in Australia. The key will be the Asian expansion. I can see a few new routes for them to go but obviously this is riskier and i am sure they have weighed them up already as they are pretty obvious channels.
I have to say too, there is an Oroton store in Pitt Street mall next to ballys which i think they would be best getting rid of or moving. Pitt Street mall rents are usually huge but everytime i walk past there is next to no-one in it as they seem to go to the QVB stroe (this is usually packed). This is also usually staffed by at least 2 people. My thinking is that this store must be making a loss.
What Ashley said is all the more reason to look at these companies more than just whether they are at a premium or discount to IV. And as i have said, worry about the IV last.
Joab Soh
:
Challenge 1, Task 1: Intrinsic Value Calculation
Earnings per share: 89.9 cts
Dividends per share: 62 cts
EQPS 1.9845
Payout Ratio 69%
ROE: 51%
RR 11%
IV $15.62
There are some discussion on ROE calculation and the use of Average Equity. I would like to dig deeper to suggest that no. of shares used for ROE can be based on weighted average number of shares 25,950,189 shares (found in Note 31, page 59). Since we are using Average Equity, it makes sense to use average number of shares to be consistent. In this case, impact to IV is insignificant and the increase complexity is not worth it. That said, if we were looking at a company that had several occasions of shares issued within the year, it could be an easier method rather than trying to figure it out ourselves.
It be also be worth considering whether ROE should be impacted by dilution of options and performance rights to employees. In the scheme of things, it’s probably easier to keep things simple and ignore it.
Challenge 1, Task 2: Understanding Cash flows
(hopefully the alignment works)
FY10 FY09 Change
$’000 $,000 $’000
Change in cash 4,339 865 3,474
Change in borrowing 31,327 14,375 (16,952)
Change in share capital 3,366 3,366 0
Dividends paid 16,103
Total entity cash flow 2,625
For those interested, in the cash flow statement, cash flow from operating activities $32,396 less cash flow from investing activities $29,771 = $2.625.
To be continued…
Ash Little
:
Hi Joab,
Thanks mate but with your skills you should be going straight to the post grad stuff I think….. Keep posting mate we all apreciate your very valuable thoughts.
Matthew R
:
Hey Joab,
It is good to have all of these ideas thrown around – everyone is thinking the process through which is great.
No matter which way you do it, best to always be conservative and consistent
Who said “If you swing at every ball you will never run out of balls, but you may run out of swings?”
Joab Soh
:
Hi Ashley and Matthew R,
Thanks for the encouraging words. You both are too kind.
And thank you both for helping everyone in our investing community throughout this Christmas break with your fantastic responses.
Joab Soh
:
This task is abit tricky, mainly due to deciding on the appropriate multiplier since ROE in these companies are “not appropriate measures”. Following the theme of conservatism, my IV of 4 out of 5 companies are zero (ROE < 5%). However, I have valued them as $0.001 in order to illustrate the huge negative margin of safety.
Accordingly, my ranking is shown below.
Code / Price / Value / Safety Margin / Change in Value / Change in Price / No of years
TCL / $5.24 / $0.00 / -523900% / 0% / 2% / 10 years
AIO / $1.60 / $0.00 / -159900% / 0% / -42% / 3 years
AAC / $1.38 / $0.00 / -137900% / 0% / -65% / 4% / 8 years
TPI / $1.33 / $0.00 / -132900% / -74% / -15% / 6 years
ELD / $0.60 / $0.00 / -59900% / -67% / -27% / 9 years
PGA / $0.07 . $0.00 / -6600% / -74% / -52% / 6 years
GNS / $0.64 / $1.33 / 52% / 5% / -4% / 6 years
Some thoughts from Christmas homework:
– Source directly from Annual Report: As some of the fellow graduates has mentioned, sourcing financial information from online brokers has its limitations because there could be slight alterations to their numbers which we don't know unless you work it through.
– Being conservative is better than being precise: Since our strategy is to buy good quality business at a discount to IV, the more conservative, the better. That said, this is a double edged sword since good opportunities may slip due to me being overly conservative.
– IV is only a starting point to the investment decision: From everyone contribution, we do have slight differences in our IV (considering the inputs are all provided by Roger). No doubt, we probably can reach a value.able graduate class consensus (haha.. "Class Consensus") on IV through time, it does show that IV is an estimation and that there's probably a range of IV, especially when we start looking to forecast IV.
Rod
:
My first try – I think I got the ROE wrong (57.7%), and finished with an IV of 19.23. But, speaking as an arithmetical idiot, I’m quite pleased with this, since most other figures seem to agree more or less! :-)
Andrew
:
Hi Rod, post your inputs up and someone will be able to let you know how you went. I got a lower figure for both.
Not sure until i see your inputs but i think you might have worked out your ROE purely on the beginning years equity and not the average over the beginning and ending as i and others do.
Steve B
:
Hello Roger,
I feel very excited about the contents of your book and have already had some success applying its principles, Thank you.
It seems like i’m just repeating the above, but here is some of the homework anyway.
Challenge 1, Task 1
(The Reject Shop)
Shares: 25,973,070
TY 51,543,000
LY 40,428,000
AVG 45,985,500
NPAT 23,351,000
Dividends 16,103,000
EPS 0.90
DPS 0.62
Step A 1.98
Step B 69%
Step C 50%
Step D 11%
Step 1 1.98*4.545= 8.9991
Step 2 1.98*15.263=30.2207
Step 3 8.9991*.69=6.209
30.2207*1-.69=9.368
Step 4 6.209+9.368=
IV $15.577
Challenge 1, Task 2
(Cash diff.) 3,414,000 – Borrowings (diff. )16,952,000- (Share capital) 0+(Dividends) 16,103,000=
2,625,000
Great exercise, i love it, Thanks again roger and to everyone else who contributes here
Steve B
:
A little late, but here’s the next task (Challenge1, Task3).
Even-though only one company had a ROE >5% (AIO),8%), i used 5% ROE & 14% RR in the tables.
Code / Price / MOS / IV
TCL / $5.24 /682% / $-0.9
PGA / $0.067 / 69% / $0.22
ELD / $0.60 / -71% / $0.35
GNS / $0.635 / -176% / $0.23
TPI / $1.33 / -258% / $0.37
AAC / $1.38 / -263% / $0.38
AIO / $1.60 / -290% / $0.41
After completing this task i realized i might not be forecasting ROE properly. For current ROE i use average equity, this years & last years, but when forecasting i average this years equity / share & future equity / share. Not sure whether this is right. I think thats what its saying on page 189.
Time to have a go at the next challenge, not sure whether I’II have it finished by January end.
Steve B
:
Finally, Challenge 2.
I’m a bit of a spreadsheet moron, so i had difficulty working your formula. In the end i completed it by hand (MOS formula), though uncertain of my results.
IV change/ Price change/ Year
TCL / 91% / 20% / 2001
ELD / 16% / -97% / 2001
PGA / -35% / -96% / 2004
AAC / -55% / 45% / 2002
GNS / -84% / -47% / 2002
TPI / -88% / -47% / 2006
AIO / -93% / -70% / 2008
Just noticed a mistake in last entry, “I think thats what its saying on page 189,” it should read, doe’s it make any difference calculating this way.
Thanks
Manny
:
Just managed to get to the challenge as was busy with the holidays. Happy New Year all.
Challenge 1 Task 1 (i.e. IV for TRS based on 2010 results)
Cur Eq – 51.54m
Prev Eq – 40.428
Current Shares – 25.97m
Reported NPAT – 23.351m
DPS – 61.99 cents
ROE – 50.78 %, used 50%
RR – used 11 as per instruction
IV – $15.62 (ANSWER)
Alhough not part of the task I checked the guidance/profit-downgrade presented in Dec to estimated 21m NPAT for 2011FY, I calculated IV for 2011 based on two criteria’s.
1. Same Dividend (61.99 cents) ROE 37.5% , RR 11 – IV comes to $10.31 only
2. Reduced the dividend but kept the same POR (used dividend 56cents) – IV comes to $11.53
So by no means a bargain as IV is substantially coming down unless the next guidance/update is more positive and things could again look rosy (maybe!!).
Challenge 1 Task 2
Cash Diff – 3474000
borrowing difference – 16952000
share capital difference – 0
dividends paid – 16100000
CASH FLOW (ANSWER) – 2622000
On to the rest of the questions..
Cheers
Manny
Ash Little
:
Nice Manny,
Well though out I think
Simon Anthony
:
Question: Did QR National factor in the recent flooding in their prospectus? No good having train tracks that are 15 feet underwater now is it?
Matthew R
:
No, it is not!
I imagine a bit of unexpected capex might be required as well – oh well, at least the investors were prepared for that
Andrew
:
I am not sure but i would doubt it as consensus seems to be that their forecasts were already very optimistic. Needless to say it might be interesting to see the fallout if they manage to fall well short of the forecasts.
However, i think the shareholder base is very much like a transurban where they will stick with the company (not sure about the nature of the hedge funds and their plans on the register). Their appears to be a veiw like toll roads that due to the nature of the business they cannot be valued like another company and that is why they said overseas investors were more receptive to the float then the aussie based ones as they have more experience overseas of valuing train companies.
Ash Little
:
Hi Andrew,
Nice Thoughts Mate,
Everyone here remember,
1) There is nothing new under the sun.
2) Rogers valuation theory goes back to the 1950’s and beyond
3) Nothing has changed…..Over the long term it is never different this time
4) Price follows value….This may take 2 months or 20 years but eventually price follows value.
5) TCL & QRL et.al are not immune from the above laws.
Ash Little
:
Sorry Mean QRN,
QRL makes me wish for the rugby league season which may erase the dreaful cricket memories that I have
Andrew
:
Nonsense Ashley, as a vlaue.able graduate this is the time to start getting excited about the cricket team.
The young guys will get more experience and start to get better there for increasing the performance and the returns (wins) whilst setting a good base for future growth.
My forecast intrinsic value is higher than the current price for the cricket team and if we can find some bowlers who can do something other than just bowl fast and god forbid build pressure, swing and seam that value will rise even more.
Hopefully management make some tough calls and does away with various consultants who are not helping the current performance. Start with the selectors, coach and bowling coach.
Although, unlike many i am actually happy with the new CEO M.Clarke and feel he will regain his previous form of 2008 and 09 as well as being the perfect leader for the new phase of the team with the younger players.
Ash Little
:
LOL Andrew,
Very funny,
Not sure I agree with you view of M Clarke though.
After all he is not a Queenslander.
Jonesy
:
Challenge 1, Task 1
Hmmm, hate to be the Christmas Grinch, but my valuation comes out lower. From my understanding of what Roger has been preaching, we want to be buying great companies, at significant discount to intrinsic value, AND rising at a good clip. Using the following inputs, my first attempt at estimating intrinsic value came out as:
Equity per share – $1.9845
Return on Equity – 50.8%
Payout ratio – 69%
Required return – 11%
Intrinsic value – $15.98
However, this is based on 50% ROE and forecast earnings / ROE are not expected to be this high in 2011 – 2013 (ranging from 40%-45%). Therefore, being more conservative, and using a ROE of 45% would give a current IV of $13.38. Using a ROE of 40% would give an IV of $11.27
Future Intrinsic value based on current analyst forecasts are
2011 – $11.47
2012 – $14.60
2013 – $18.72
If we use an intrinsic value of $15.98, based on ROE of 50% then the estimated rise in intrinsic value would be 5.4% per year. However, using a current intrinsic value of $11.27 would have this intrinsic value rising 18.4% annually. I would think that compounding at 18.4% would classify as “a good clip”!
Challenge 1, Task 2
Cashflow
= Increase in cash – Increase in debt – Increase in issued capital + Dividends
= 3.474 – 16.952 – 0 + 16.103
= $2.625m
Now onto the other challenges…
Jonesy
:
OK Roger, in a way I feel I’ve had an afternoon of futility. Partly wondering why I’ve wasted a good few hours looking at such terribly managed companies but just realized that the point of the exercise is to realize that you’re not going to find out how well run an A1 company is unless you have something like this to compare it to. Difficult to find any kind of “intrinsic value” in these companies as many of them are making losses and therefore have negative return on equity. What I have found is that some of the companies do have a fair amount of equity and therefore may be better value if the company was liquidated. I got as far as looking at the first 3 companies but soon became overpowered by an extreme sense of despair, not sure that this is what you were trying to induce, I’ve included my calculations so far and may get onto the rest of the companies but not before I’ve had a few Red Bulls, and even then, it’ll be a push!
Challenge 1, Task 3
AAC – Market price $1.38 / RR 14% / ROE -16.6% therefore current IV is negative. Margin of safety – not even worth considering. Equity per share is $2.44 (with $2.42 of NTA) therefore at current ROE, company would be worth more if liquidated.
TCL – Market price $5.24 / RR 14% / ROE 1.48% / Payout ratio 100% / IV $0.31 / Margin of safety -1576%. Equity per share is $2.95, BUT intangible assets of $5.43 leaving NTA of -$2.48
ELD – Market price $0.60 / RR 14% / ROE -26% therefore current IV is negative. Margin of safety – not even worth considering. Equity per share is $1.55 ($0.97 NTA)
Challenge 2
AAC – On listing in 2001, NPAT 0, ROE 0%, Intrinsic value therefore $0.00 or close to it. 8 year IV change negligible (and irrelevant). Listing price in 2001 $0.99, current price $1.38. Annual change – 3.8%
TCL – June 2000 NPAT -$105.2m, ROE -45%, Instrinsic value therefore $0.00 or close to it. 10 year IV change negligible (and irrelevant). Price in 2000 $3.76, current price $5.24. Annual change 3.4%
ELD – couldn’t find the archived annual reports and after half an hour a searching, wondered why I was bothering as I’m sure I’d not find anything that stimulating. Looks like you have me beaten. All I have to say is:
“Short term the market is a voting machine, long term it’s a weighing machine” – if this is the case, it looks like the market needs to get it’s scales fixed!
Graeme
:
Here are my results for Challenge 1 Task 1
NPAT – 23.351
Equity – 45.986
No of Shares – 25.973
Equity per share – 1.77
ROE – 50.8%
Div Payout Ratio – 69%
Required Return – 11%
IV – $14.26
Challenge 1 Task 2
Change in cash -3474
Change in borrowings -16952
Change in share capital – 0
Dividends paid -16103
Total entity cash flow -2625
Thanks Graeme
Michael H
:
Roger,
Here is my result from Challenge 1, Task 2.
Cashflow for TRS
All values are 000’s
2009 2010 Diff
Cash: 865 4339 3474 begin
Borrowings: 14375 31327 16952 less
Share Capital: 3366 3366 0 less
Dividends Paid: 16103 16103 add
Cashflow: 2625
Matty
:
Challenge 1 Task 1
TRS 2010
TYE 51.54
LYE 40.53
Shares 25.97
EqPS 1.98
NPAT 23.35
DIV 16.1
ROE 50.8%
ROES 50%
RR 11%
IV $15.62
Challenge 1 Task 2
TRS Cash flow analysis ($’000)
Change in cash 3474
Change in borrowings 16952
Change in share capital 0
Dividends paid 16103
Total entity cash flow 2625
Challenge 1 TRS Future Value
TRS 2011 Value using 11%RR and 40%ROE Based on EPS$0.84 TRS_IV(2011)=$12.43
Challenge 1 Task 3 and Challenge 2
IV 2011 MOS IV Change/Yr Price chg/Yr Actual years
PGA 0.14 52% -21.8% -39.3% 6.67
ELD 0.39 -53% -9.3% -28.8% 10
GNS 0.31 -104% -23.8% 0.1% 10
AAC 0.42 -228% -7.5% 4.0% 9.4
TPI 0.41 -224% -24% -7.7% 5.67
AIO 0.25 -540% -60% -37% 3.57
TCL 0 -infinity 0% 1.9% 10
Ok there was alot of fudging there to squeeze out any sort of value from some of these companies and maybe based on some optimistic return to profit forecasts. I also chose 5% ROE even though some companies are only earning 1-2% ROE. Not prepared to optimise my spreadsheet for these low-life entities. Bit worried that I actually got a margin of safety for PGA. I hope you all forgive me. Not prepared to take another look at them to see where I went wrong. My wife is asking me when I get my Roger guru graduation certificate……Hmmm some more important things to do around the house right now……
P.S.I would be interested to see more future IV’s for TRS, because I am not sure I am doing this correctly.
Ash Little
:
Hi Matty,
I think you can tell your wife you are a graduate. Nice work and thinking about TRS.. I have a lower valuation but not much….This is largely on the basis of a higher RR.
What I what do is put some thoughts out their for everyone to think about.
You have used the 2011 forecast to get your 2011 valuation but I have a different view.
If I am siting on lets say in the case of TRS of $1.98 EQPS on 30 June 2010 I would value that by what I can make out of it in the future……So to get the 2010 Valuation I would use forecasts and best estimates of future earnings Not the historical ones…………To me this makes sense……If you have $100 in a bank account on 30 June 2010 and the interest rate was 10% and your required return was 10% then you would end up with $110 in your bank account on 30 June 2010 but the IV is $100 on 30 june 2010.
I still call it my 2011 IV on my spreadsheets but in reality it is my 2010 Valuations…I am aware of this and make decisions accordingly.
Based on this these are my TRS IV’s
TRS 2011 11.42
TRS 2012 13.13
TRS 2013 18.84
So for all years just subtract a year so $11.40 is actually my 2010 valuation.
To get a actual valuation on 2010 I would go back to the EQPS in 2009 and see what my return actual was.
This brings in TRS IV at to about $14.00 for 2010
This is a bit different to how we are all thinking but it makes sense to me.
Just thought I would throw this out their for people to think about.
Matty
:
Hi Ash,
If I use 2011 forecast EPS $0.84 (DPS $0.64) and I use a June 2010 EQPS of $1.98 I get a value of $11.04 @ 12%. This is what I mean when I say I have a 2011 value, but I know where you are coming from. This you would consider a 2010 value even though we are now in 2011. This could get confusing……in the meantime the market is doing its thing and TRS is under $13 again….
I just realised I rushed my final table a bit there and have calculated the MOS incorrectly. It doesn’t really change the conclusion, however, my results should be as follows:
IV 2011 MOS IV Change/Yr Price chg/Yr Actual years
PGA 0.14 109% -21.8% -39.3% 6.67
ELD 0.39 -34% -9.3% -28.8% 10
GNS 0.31 -51% -23.8% 0.1% 10
AAC 0.42 -70% -7.5% 4.0% 9.4
TPI 0.41 -69% -24% -7.7% 5.67
AIO 0.41 -71% -60% -37% 3.57
TCL 0 -100% 0% (Still 0) 1.9% 10
Also bumped up the ROE used on AIO next year to 7.5% from expected 8%. (This is not a recommendation ! ). All future values I assumed 14% RR and the 3 businesses on nearly same estimate of MOS I then ranked based on decreasing IV value change.
Ash Little
:
Hi John,
Great Stuff Mate,
And the really good part about a MOS is that if you buy an A1 with good prospects at half price your return will be significantly higher than 15%.
Buffet has compounded at about 20% since he purchased Berkshire and look at those results.
If you ever start getting impatient your figures and WB’s should stop you in your tracks…..
You are so right…..Just be patient and the opportunities will present themselves
John M
:
Hello fellow Value.able aficionados,
Roger is on a well-deserved break, so I thought I would share my thoughts on a topic that I have been digesting over the festive season.
The concept of Margin of Safety (MOS) is one of the many powerful ideas to be gleaned from Value.able.
One’s investment returns are in part dictated by how big a discount to intrinsic value that top quality shares are purchased at. When a significant MOS is coupled with the concept of the compounding affect over a long period of time, some amazing Investment returns can be achieved.
As an example, using the rule of 72, and trying for a 15% return, and a starting portfolio of $50000, this starting amount would double to $100,000 in 72/15 = 4.8 years. That $100,000 would double again to $200,000 in 4.8 years and so on. After 28.8 years (less than the average time-span of a person’s career) that original $50,000 would have doubled six times and grown to $3.2 million in today’s dollars. That doesn’t even take into account any extra savings going into your investment.
Now compare the above result, with a 10% investment return. The original investment would double every 72/10 = 7.2 years. Over 28.8 years the investment doubles 28.8/7.2= 4 times. So you would now have a total of $800,000 after 28.8 years. So that extra 5% (15%-10%) return over your working career would reap you an extra $2.4 million dollars. This is a very significant difference.
Getting 15% consistent returns is a very hard task. Saying that, having a very clear picture of the long term effects of good investment returns helps to improve my patience and self-discipline, so I am not so eager to purchase a stock until it is at a significant discount to its Intrinsic value. It also means that I try to be fairly conservative when selecting the Required Return when calculating the intrinsic value of a top quality company. Roger advocates that starting at a RR of 12% is a good start, only the best of best companies would receive an RR of less than 12%. A lot of businesses wouldn’t be worthy of 12% so you would probably add a couple of percent or more to less deserving businesses. Refer to Value.able and the blog for a more in depth guide to RR selection.
Always remember that if Roger mentions an A1 or A2 company, this only refers to the quality of the business. It is only a starting point. He is not recommending buying a piece of that company. He is making us all aware of which businesses are investment grade and which ones are dogs. It is essential to do your own due diligence and calculation of Intrinsic value using the tools Roger has taught us on this blog, on TV and radio and in his most excellent book, Value.able.
More importantly before calculating intrinsic value, it is essential to work out if a durable competitive advantage exists and what are the future prospects for the business. I don’t attempt to value companies until all of Rogers Value.able steps are ticked, and after the valuation I wait for a big margin of safety. Waiting for the opportunity of a significant discount is one of the hardest steps of my investment process. That is why I have set up a series of investment goals that I am working towards.
Greater Margin of Safety = possibility of earlier retirement or greater freedom to do or purchase whatever your heart desires.
The two quotes, “Whatever the mind of man (or woman) can conceive and believe, it can achieve” by W.Clement Stone and “Start now” by Roger Montgomery, has lead me to the realisation that I must beef up my investment education and eliminate procrastination so that I am invested for the long term, in order to increase the probability of achieving a significantly higher investment return and thus achieve my dreams.
Angela
:
Intrinsic Value for TRS $18.02. My first go at it. So whats the answer?
John M
:
Hi Angela,
What inputs have you used?
My ROE using average equity is 50.8, so I selected ROE of 50
RR 11
POR 68.96%
Intrinsic Value of $15.62
The intrinsic value is a subjective value, it is what you think that the company is approximately worth. So remember Rogers teaching that we want to buy pieces of great companies at large discounts to what we believe is the Intrinsic value.
For the answer to this exercise, Roger will be back from holidays in late January and will publish the answers then.
Ash Little
:
Hi Angela,
I may be wrong but I think IV is much lower than this.,
Have a look at the other posts but with that figure I would think you are forecasting 2011 figures on the assumption that past performance will continue into the future(Your may be using estimated BV for 2011 of about $2.29)………..According to management past performance will not continue anytime soon … The real IV is much much lower than $18……..If the price gets to $8 I might start getting interested.
Hope this helps
Hope this helps and as an add on if you post your inputs we all will be able to help you more.
Angela
:
OK tried again. Changed the RR to 11% instead of 10%. Made a difference (not sure I really understand why. Will get back to the book). Got $15.64.
Used the same formulas on JBH and got $20.18 (really close to what Roger said in July). I hope I am on the right track.
Ingredients
Shares on Issue 25,973,070
Shareholders’ Equity $ 51,543,000
Return on Equity 50.00%
Earnings per Share $ 0.90
Dividends per share $ 0.62
Investors Required Return 11%
Calculate the Measurements p 195
Step A Calculate the Equity per Share $ 1.98
Step B Calculate the Payout Ratio 69%
Step C Return on Equity (ROE) 50.00%
Step D Choose your Required Return 11%
Step 1 & 2 Applying the Multipliers to the Equity p196
Equity per share x Multiplier = $
Step 1: Table 11.1 p 183 4.545 $ 9.02
Step 2: Table 11.2 p 184 15.263 $ 30.29
Step 3 Apply the Payout Ratio p196
Multiplier x Payout Ratio = Value
Income Multiplier $ 6.21
Growth Multiplier $ 9.42
Step 4: Calculating the Estimated Intrinsice Value
Income + Growth = Estimated Intrinsic Value $ 15.64
John M
:
Hi Angela,
You seem to be using the correct inputs and returning the correct IV from those inputs.
Just to be certain, are you averaging the Current Shareholders equity with Beginning Equity in your calculation of ROE. See Page 188+189 and comments by Matthew R on December 30, 2010 at 1:08 am. in this blog. My calculation for ROE is 50.8% and I have selected 50% for the calculation for the exercise. In reality, I have a spreadsheet and I adjust the ROE for a greater margin of safety if I feel it is warranted. Roger calculates a range of IV’s worked out using various scenario’s .
To get an idea of how changes in the RR affect the intrinsic value, a good place to start is on Page 178 + 179 of Value.able – which explains it in terms of a bank account. Basically, the required rate (or also known as discount rate) is the return you are willing to accept on your investment and is used to work out how much to pay for a business. Roger uses a formula he derived from one of Warren Buffett’s letters to the shareholders of Berkeshire Hathaway :
Intrinsic Value = ROE/RR assuming that all dividends are paid out. So in this formula RR is the divisor, and as the divisor (RR) gets bigger, the intrinsic value decreases and vice versa.
Ash Little
:
Good stuff Angenla,
Now have a think if The ROE you have arrived at is sustainable…..
If you use a 50% ROE and use the tables this assumes that 50% ROE will be done to infinity…………. This is not the case ATM or anytime soon by the look of it.
Most people have arrived at your valuation but I think it is much lower.
Just my thoughts and hope this helps
Rob
:
Hmm…I seem to be somewhat off in my IV for GNS
Based on
Shares on Issue 806.73
Avge Equity 1407.39 (start 1321.9 end 149.9)
NPAT 28.5
Dividend 0
and RR 10%
I get an IV of 10.66 cents which gives a MOS of -508%
Could a grad please check it for me? I’ve been over it a few times and can’t find where I’ve gone wrong.
Cheers
Rob
John M
:
G’day Rob,
I have used the same figures as you from the 2010 annual report for GNS.
The only difference that I have to you is that I personally would select a lot higher RR for this company so my IV comes in less than yours. Otherwise, using the inputs you have used you have come up with the correct IV figure and MOS.
My 2011 forecast for IV comes in at even less then for the 2010 IV, using the Commsec forecast consensus EPS and DPS numbers.
Ash Little
:
Hi Rob,
I can see where you get your figures from and all said you have done a good job. Can I suggest two improvements for future valuations.
1) We have been asked to forecast 2011 valuations and the forecast for 2011 is a ROE of about 1 % climbing to a massive 2% in 2012…. As a result you may want to look at the return on equity figure you are using.
2) You have used a 10% RR figure. Lets be honest mate this is a total shocker of a business and your RR should be substantially higher. I will be using 20%. The only business in Australia that I would have a 10% RR on is WOW
My IV for GNS is 1c
Matthew R
:
Hey Ashley – just a note that the book only goes up to a required return of 14%
I agree wholeheartedly with Ashley but for those starting out just stay on the table and go for 14% for those companies you have no confidence in for now
FYI, I use 14% for lots of companies, MCE, FGE etc – anything with a quite uncertain future that is out of their control
Ash Little
:
Hi Matt,
My copy of Value.able has been borrowed and yet to be returned.
LOL I have purchased 3 copies and have none to lay my hands on.. All gifted or loaned out
I have forgotten that the tables only go up to 14%.
The main reason for this is that all the other info in the book would not even get you to the valuation stage on these type of companies.
Matt if you are usinf 14%
Ash Little
:
LOL sorry pressed the wrong button
Meant to say,
Matt if you are using 14% for MCE(which is approximately what I use)
.
Then GNS would be much higher.
Roger should have given us new tables for these companies.
I agree with you Matt, Too many people are blindly using 10% RR
Matthew R
:
Hey, I hope your loaned book isn’t under water!
Good to see you back on the blog, I figured you might have lost your internet
I thought to myself the other day that you could coin a new saying:
“I like to buy businesses such that I would still be happy if my home, my town and most of my state were flooded and I couldn’t access the market for a few years”
Ash Little
:
LOL Matt Too Funny,
Water Water everywhere and not a drop to drink
The water treatment plant has been taken out by the flood and they wont be able to fix it untill the river goes down.( At least a week they say)
Raining again so act 3 is coming soon I think.
We need businesses that build and repair Infrastructure……………They will do well out of this.
Does anyone know of any high quality buisnesses that are trading a big discounts in this field?
Loads of Govy grants as well so being the heathen that I am we all should work out if we can make some money out of this.
SWL comes to mind but it is no longer a bargain.
Anyone else have a view?
Andrew
:
I agree, i only have two companies on ten percent and these are CBA and WOW. The rest are 11 or 12 percent (i also have only a few on my list so far and mostly are good retailers like JB Hi-Fi, David Jones and Oroton, the rest are market leading internet list sites like REA and SEK).
Very few companies would fit on 10% or below.
I would agree that companies like MCE should even be higher, i just at the moment am not up to those companies yet as my new system which i am working on is pretty extensive and didn’t get up to them on my old valuation system.
In fact on my new system i only have Oroton and have only got as far as 2006. (i intend to go back to 2001)
Ash Little
:
LOL Andrew,
I like your rating system very much.
If it is not Diamond, Platinum or Gold it is Trash.
Still laughing at that
Great Stuff and very true
Roger Montgomery
:
Guys,
If you are needing to use RR’s greater than 14% – you are looking at the wrong companies and your need to “put a number’ on it has usurped the real reason for all of this activity. And if you are using more than 60% ROE then you are in very real danger of being profitlessly optimistic.
Matt
:
I thought this was really interesting since WOW receives a pretty good MQR of B1.
As an exercise I went and looked at some companies I have as 10% using Roger’s MQR of either A1 or A2 and an average ROE > 25% for the last 2 years.
CPU, JBH, MIN, MND, PTM, NVT, SEK, WAN.
There’s only a few on this list “around” the 2011 IV interestingly.
Matt
:
Just read the later posts here, we’ll leave the trash out for others to collect!
If I apply debt/equity and cashflow/equity filters I get JBH, MND, PTM, NVT, SEK.
Ash Little
:
Hi Matt,
I got a bit carried away I would use 10% RR on PTM and COH as well as WOW….
The Blog has had many discussions on the selected RR in the past….. To me (and lots of people disagree with me) one of the determining factors in the selected RR is the stability of earning…. WOW has possibly to most predictible earnings of any company on the ASX hence the lower RR…… BHP’s earnings are based on the price of commodities and hence its earnings are much harder to predict……. Generally the Banks earnings can be guessed within a very small range so most people use a low RR….I don’t do this as Banks are very exposed to an economic shock so their RR should be higher than something like WOW
Nice to get your thoughts
Alan Moore
:
Ash,
Just read your post about using RR. How do you calculate IV using 20% on table 11.1?
Rob
:
Hi Ash,
Thanks for your help. I don’t know where I got the idea but I thought it said somewhere in the homework to use a 10% RR for all the companies.
Realistically these are not companies for which any RR would be suitable.
I’m assuming that’s why Roger’s tables only go up to 14%.
Anything beyond that he probably considers too risky.
I have created a spreadsheet that uses both the tables and formulas to calculate IV. I only do this so I can see how my answers compare to others on the blog.
Thanks again for your help, I’ll redo it with an RR of 14% (that’s as high as the book goes).
Cheers and thanks again
Rob
Ash Little
:
Yes Sorry Rob,
Please read above. I had forget that the tables only go to 14%
Steve B
:
Why are we forecasting 2011 valuations and not using 2010? (Challenge1,task3) I cant seem to find any reference to it, but I’ll keep looking. Initially i was going to use 2010, then noticed Ash’s comment above.
Please excuse the stupid question
Thanks,
Steve
Ray Walsh
:
Hi Rob,
NPAT for 2010 was 28.5 as you stated but there were abnormals which dropped the profit considerably compared to previous years. I didn’t go as far as looking at the Annual report for the reasons as the ROE was too low for me to buy this company anyhow.
As Roger asked for the 2011 IV, I averaged out the last two years ROE stated by Westac which gave me a forcasted 7.5% for 2011. I had a f/casted EQPS of $1.86.
Not sure if this is the right thing to do but I am personally comfortable with my decision at this stage, however would most welcome some feedback on other viewpoints.
Regards
Ray
Ray Walsh
:
Please ignore my last post.
After reading your comments Ash I have found where I am going wrong in all my forecasting. I have now got the same forecasted returns as you for 2011 and 2012 for GNS.
It is certainly worthwhile following these posts and execises as I would have carried this mistake throughout all future calculations.
Thanks
Ray
Ash Little
:
Hi Ray,
Glad we can help.
Remember that the forecasts particularly this far out tend to be overly opptimistic.
The solution is to do one of the following:
1) Reduce analyst forecasts
2) Increasse RR
3) Increase MOS
4) Any combination of the above.
No prefect solution but as long as you are consistent things will work out fine
Ray Walsh
:
My answers are the same as a few of you at IV of $15.60 for the first task and cash flow of $2625M for the second task.
In Task 3 the only company worth looking at is GNS.
I have the 2011 forecasted IV at $1.86 which gives a MOS of 290% at the current price of 0.64 per share.
F/casted Eq per share 2011 $1.86
Fcasted ROE 7.5%
Fcasted POR 0%
RR 10%
My 2002 IV was $2.59 so this has slipped over the last 9 years.
The ROE over the last 5 years would still prevent me from buying this.
I am not confident I have done this correctly due to some conflicting values above for GNS so will be interested in seeing some more posts.
My data came from Westpac.
Regards
Ray
Ash Little
:
Hi Ray,
I may be wrong but you may want to relook at your GNS IV…..Based on forecasts the ROE will be way lower than 7.5%……..Also if your book value is $1.86 and you IV is $1.86 that means your required return must but your ROE which is 7.5%…..This might be a tad on the low side given you can nearly get that in a bank account.
Hope this helps
Ray Walsh
:
Hi Ash,
Yes I did make a mistake and wrote down the forecasted Eq per share again rather than the IV. (I hadn’t even started my New Years celebrations either)
The forecasted 2011 IV should have been $1.11 with a MOS at 173%.
Still out compared to others though. I agree that this is not a share I would buy due to low ROE.
Thanks for your comments.
Regards
Ray
Rob
:
Answers for first and second tasks
Shares on Issue 25.973
Shareholder’s Equity 45.9855
ROE 50.78%
EPS $0.899
DPS $0.620
Required Return 11
Step A EQPS $1.984
Step B Payout Ratio $0.690
Step C ROE 50.78%
Step D Required Return 11
Step 1 EQPS x Multiplier(Table 11.1) $9.019
Step 2 EQPS x Multiplier(Table 11.2) $30.289
Step 3 Income Multiplier $6.220
Growth Multiplier $9.402
Step 4 Calculated Intrinsic Value $15.621
and Cashflow
CashFlow from Balance Sheet
2010 2009 Diff
Cash 4339 865 3474
Borr 31327 14375 16952
Share Capital NIL
Divis Pd 16103 16103
2625
PPE 70722 49786 20936
$ 23.561M
If I do the IV calculation in terms of Page 196 (i.e. incorporating generated income and payouts) my IV is $18.08
Now back to the rest of it.
He’s a sick man who gives us homework involving worthless stocks that have no real intrinsic value. I guess he wants to see if we all get divide by zero errors.
The lesson no doubt will be that there are plenty of buyers out there who have owned and sold these stocks and are more than willing to pump cash into them to keep them going. As long as they exist there will always be opportunities for value investors.
Cheers and stop giggling Roger you’re having too much fun.
Rob
Robert Pearson
:
I used e-trade to get the data on shareholders funds etc.
They also include an ROE. In most of the cases required there are problems with the data. E.g AIO earnings -977.7 there is a +ve value before ‘abnormals’
But the tables give an ROE of 4.6 (still very low)
I consider that only data from Gunns can be used to get sensible Answers. Also sensible historical data from e-trade. (max roe 23.7
) The others have very low ROE or -ve, either at the moment or historical. Note that TPI has 27.2 (max) 2.6 (min)
Ash Little
:
Hi Robert
Just a work of advice mate….The Etrade figures are often wrong and the ROE figure is always wrong as it uses ending equity to calculate ROE
Doesn’t matter much with the woofer in task 3 but it will make a difference for the A1….
Just my view and I hope this helps
Rob
:
Hi,
Can a graduate please explain to me why in the first task (TRS) we are using EQPS of $1.98 and not next year’s EQPS of $2.297 as per Step 3 on page 196?
Cheers and thanks again to Roger and all who contribute on this blog.
Rob
Matthew R
:
Hi Rob,
The BNSF calculation was a bit different to the other calculations that he did in the book because of the timing of the bid. Notice that the bid was made just before the end of the Financial Year? The value of the company will have changed since the last reported financial results (Dec ’08).
Roger is making the point there that you should start looking forward once you get to the end of the financial year. Therefore Roger estimated the equity for the upcoming results (Dec ’09) and calculated a value from that.
I don’t think Roger is asking you to estimate the future equity per share for this exercise. Use the average of the current and previous year’s equity circled in the provided balance sheet for TRS to estimate the value.
Regards,
Matt
Rob
:
Thanks for your help Matt. Would you normally use this estimation, since it would be forward looking. Of course you would always be monitoring your stock to see if any changes occur that could affect this estimate.
Cheers
Rob
Matthew R
:
I find it helpful to look at past, current and future valuations all at the same time – this provides a picture of where the value of the company is going and if it has a demonstrated track record of rising value.
The transition from current to future value is one I base on the margin of safety on offer, my confidence in the accuracy of my future value & the time of the year – there is no hard rule
Michael H
:
Hi Roger,
This is my first attempt after reading your book,
2010 IV for TRS
SOI – 25973070
Beg Eq – 40428000
End Eq – 51543000
NPAT – 23351000
Div – 16103000
EPS = NPAT / SOI = $0.90
DPS = DIV / SOI = $0.62
RR – 11%
A. Eq/sh = End Eq / SOI = $1.984
B. Payout Ratio = DPS / EPS = 68.9%
C. ROE = NPAT / Ave(Beg Eq + End Eq) = 50.8%
D. RR = 11%
1. 1.984 x 4.545 = 9.02
2. 1.984 x 15.263 = 30.28
3. Income Multiplier – 9.02 x .689 = 6.21
Growth Multiplier – 30.28 x (1 – .689) = 9.42
4. 2010 IV = $15.63
Roger, Just for interest I also calculated a forecast IV for TRS using the values in the 2010 Edition of shareholder book. The result was that back in January 2010 I would have forecast an IV of $14.34 for TRS.
Ron P
:
Hi,
Really new to this with Rogers Book being the first I have read on about investing in stocks,(couldn’t have picked a better book) and thoroughly enjoy reading all of the blogs. For TRS I get IV 2010 13.38.
SOI – 25 973
EQ – 51543
P Yr EQ – 40 428
NPAT – 23 351
DIV – 16 103
IRR – 11
ROE Selected – 45% (being a bit conservative)
Not sure that near 60% sustainable
Rob Walker
:
Hi Ron P,
When you say “couldn’t have picked a better book”, that would have to be the under statement of the year. I cant believe how lucky your are to read Value-able first. I am looking at small library of Books written about Trading and Investing, after extensive reading and study I wasn’t able to gel with any of them. Then along came Roger’s Book.
For me investing has now become enjoyable, less time consuming which allows me to focus on important things like family, health and friends. I dont worry about the market moves.
Although I am Jealous of you for finding this book so early in your education, I wish you all the best, by the way I have $15.62 for TRS i used 50% Roe
Cheers
Rob W
Ash Little
:
Hi Ron P,
Congratulations on picking up the concepts in Rogers book so quickly……It took me awhile and some people never get it.
I have TRS @ $11.40 for 2011 and $13.15 for 2012 so using the 45% was a good idea….Best to be conservative
Nic Arena
:
Hi Ron,
I have TRS @ 13.85 for 2010, 14.99 for 2011 and 17.80 for 2012. This is a great business just not at a big discount to my IVs yet. But I am definitely watching as the more they talk about people purchasing online (which only makes up 3-4% of all purchases – you would think that Jerry Harvey was lossing 20-25% of his business by the way he is carrying on) the more I think it will make people pull their money out of TRS and JBH. Heres hoping. Later.
Matthew R
:
Hey Nic,
I agree with you
As a Gen Y I buy online all of the time but I don’t buy toothpaste or TVs online.
I buy the small but expensive items online – where the most value for money is.
The way I see it you can ship a box of 1000 tubes of toothpaste to a TRS store and sell it with less individual cost to the buyers than it costs to ship to 1000 individual buyers. The shipping would cost more than the toothpaste. TRS have a home run there.
On the other side, a big TV is quite expensive to ship individually. But put 30 in the back of a truck and all of a sudden it is cheap again. Postal services and couriers have been around a long time and they still haven’t broken the reputation of occasionally breaking something (mostly because they still do with enough regularity), I don’t see that reputation changing soon and while it exists would you trust them with your $3,000 3D LCD? I don’t think so….
The problem is with small expensive commodity items. I often think of perfume as a good example, you don’t need to go back to a store to see if you like the perfume (or deodorant or makeup) that you have just run out of, so you order it online. They also have larger margins and they are easy to ship. Bricks and mortar businesses that rely on these are in trouble in my opinion.
And if that logic makes you think of the iGadgets and brings you back to JBH think again, they only make $20 from selling an iPhone. That is not where they are making their bucks! iPhones et al are becoming commodity items after all!
Andrew
:
I think a trend that might start creeping in and i think has been happening in Asia is for stores to turn into more of a show room where they see the product and then go and order it through a related online store.
I completley agree with you about the small expensive products where one doesn’t need to try it on like electronics and perfumes being better to buy online, i would also add books to this equation. i also think all entertainment like DVD’s, CD’s, Games and consoles etc will fall into this category.
You know what your getting in advance so it is a case of finding the best price and that at the moment would probably be online.
RobertD
:
OK – Challenge 1 Task 3
My MOS’s IV’s and MOS’s are quite a bit different from what Leon has posted above – anyway here they are in order of MOS. RR is 10%.
TCL : IV $0 / MOS -infinity
AAC : IV $0.027 / MOS -5001.54%
GNS : IV $0.0338 / MOS -1780.7%
ELD : IV $0.0996 / MOS -502.19%
PGA : IV $0.022 / MOS -204.55%
TPI : IV $0.4727 / MOS -181.39%
AIO : IV $0.8962 / MOS -78.53%
Not sure what Roger was thinking giving us these stocks , based on these numbers one would only buy them if you were serious trying to burn your money.
Be interesting to see what other IV’s/MOS’s people come up with.
Matthew R
:
Take a look at the corresponding MQRs
C4s and C5s – the lowest MQR quality ratings. Not investment grade.
I think Roger is making a point that low quality stocks can be overpriced. You wouldn’t want to own these companies at ANY price!
RobertD
:
Matthew – where can I find the corresponding MQR’s?
Matthew R
:
Roger has listed his MQR (Montgomery Quality Rating) next to each Company in the spreadsheet for Challenge 1, Task 3
Andrew
:
I agree, i think just as important in the learning phase is not only seeing what makes a good company but also able to identify what makes a poor company. The fact that so many people still buy these even though they obviously are not proftiable is quite perplexing. In Transurban for instance, they have made maybe one profit in ten years and a loss for everything else.
I will have to say though that it is a good example that businesses tend to get the shareholders they are after, the Transurban shareholders seem to be quite accomodating and willing to pump in money whenever the board ask for it. Even so accomodating that two of them wanted to take over the company. Not sure why you would want to buy a company that does not make money.
The whole idea that because it is a toll road business that it is somehow different to any other business is a load of australian top order batting in cricket. If a company neither makes a profit nor positive company cashflow and there for relying on debt and capital injected on a ROE of less than 1% it is only a matter of time before it goes under.
Luke
:
I had a quick look in Commsec at TCL. Two years ago I would not have been able to tell you why it is such a bad business. Now I can. From what I can tell, they have been raising debt and selling more shares to keep the dividend going. I think it is ludicrous that they have been paying a dividend while making a loss! Yes, they do often have positive cash flow but the dividend has often been higher than the cashflow (and obviously higher than the profit).
What a rubbish company! :)
Ash Little
:
Hi Luke
Agreed Mate………What a shame that the Canadian’s could that have taken this off our hands
Andrew
:
Funnily enough the Herald Sun/news.com.au is running an article with the top 10 picks for 2011 and transurban is on there for their history of paying sustainable dividends.
Other such great investments are Asciano and Amcor.
Others are ANZ, Macquarie, Alumina, Rio Tinto, Iluka resources, Wesfarmers, orica. not sure what criteria or investment style makes this list.
At least they warned that they take no repsonsibility for their stock selections which is code for “I may be wrong”. But knowing that some people will make decisions based on this you do feel even happier that you follow a saner approach and have a great teacher in Roger, Warren, Charlie and Ben
Leon
:
Robert.
How did you calculate ROE. From my calculations most companies have negative ROE, which effectively make them worth 0.
RobertD
:
Hi Leon,
Let’s use AIO as the example – here are the figures that I used to calc ROE.
Equity (2010)- $2630.1
Shares Issued (2010) – 2926.1
Forecast EPS – 0.089
Forecast DPS – 0.02
Forecast Equity – $2832.0
Forecast Shares Issued – assumed no change for 2010 i.e. 2926.1
Forecast EQPS – $0.97
Forecast NPAT – $260.42
POR – 0.22472
ROE = $260.42 / (($26310.10 + $2832.0) / 2) = 9.5%
Regards
Leon
:
I didnt use any forecasts I used their 2010 annual report.
Leon
:
TRS
Current Eq: 51.543
Curr Shares: 25.97307
EQPS: 1.984478539
NPAT: 23.351
Dividends: 16.103
Payout Ratio: 69%
Avg Eq over two years: 45.9855
ROE: 50.8
ROE Selected: 50 RR:11
IV: 15.62
Ash Little
:
Hi Robert,
Had a nice laugh at your margin of safety and value for TCL. Analyst forecasts have a loss for 2011 and a ver very modest profit for 2012. All this time they hare forecast to pay a very healthy dividend(or should we say return of capital). Due to the large amortization charge cashflow is basically the dividend so I am not sure what the long term strategy of the board is to pay off the $4 billion in debt
I have the book value(sorry equity per share) falling below $2.50 in 2011 with intalgibles of over $5 per share…….It is trading at over $5 per share so go figure……….
If someone put a gun to my head and said you must be short a stock then this one would be it.
Joab Soh
:
Interestingly, Deutsche Bank rates AIO as Buy on 24 Dec. Target price is $2.10. (Source Eureka Report/ FN Arena).
I don’t think I need to say anything more here.
daryl
:
happy christmas
and a happy valuable new year.
have you taken alook at IDM yet?
thats my home work.
daryl
Leon
:
Roger
As you can see from the comments above I believe that their is some conflict between wether to use prior years equity or the average between the two year. Which one is right and should be used. As you can see the results differ from each value used,
Matthew R
:
Roger is on holidays so if you don’t mind, I’ll give you my answer
You will save a lot of time and be approximately right by using average equity (I use it and find it works quite well enough for me)
If you want to be really accurate you can time-weight equity raised by going through all of the ASX announcements for the year
Some of the value.able grads use ending equity if the ending equity is X% higher than the starting equity where X might be 50% or more but that is a personal preference
Most important is to be consistent between companies and through time.
Regards,
Matt
Donald
:
There is another way.
You can calculate IV using both the beginning and ending equity per share; a little more maths but this “range” is probably not a bad way of thinking about IV rather than just one number you’ve created
D
RobertD
:
Hi,
As an undegrad I am having a little difficutly working out the intrinsic value for Challenge 1 Task 3, especially PGA.
PGA are reporting a negative NPAT of ($87.6), with the previous years equity being $262.71, the leads to a negative ROE of -33.333%. Thoughts?
Cheers
Robert
Geoff Cruickshank
:
It’s not an encouraging scenario, is it Robert? The shareholders equity is being destroyed.
RobertD
:
I totally agree Geoff, its a wealth destroying investment and one not worthy of any $. For the purposes of Roger’s challenge however, his spreadsheet asked for the intrinsic value, and for completeness sake I was curious how you go about this with a negative ROE of -33.3333%. Normally if I came across such an investment with a negative ROE I wouldn’t even continue with working out the intrinsic value.
Matthew R
:
The way that Roger values businesses, a business that makes a loss and has no prospect of making a profit has a value of zero
Of course it might have a value if all it’s assets were sold and their sale price exceeded all liabilities but that is not the Value.Able method of estimating IV
Ash Little
:
Hi Geoff,
We are forecasting 2011 valuations here so I would use ananlyst forecasts which are positive so the business has some value. All that said with the track record of the management my required return would be at least 50% so the value is still very close to zero.
Andrew
:
I had a quick look, don’t think i will have time to do the rest of the scenarios as i have some things i have to put priority on first.
basically from what i saw in the companies i look at the intrinsic value is $0.00. A company that has been consistently making a loss and also there for consistent negatibve ROE is in my mind unvaluable and there for must get $0.00 intrinsic value.
Apart from that, you could say the business is only worth as much as you might be able to get if you luqiudated the business but who wants to bother with that scenario.
RobertD
:
Christmas Day and I have managed to find a window to complete Challenge 1 – Tasks 1 & 2.
I have come up with a slightly different intrinsic value to Andrew. The biggest difference I can see is we came up with different ROE’s. Andrew averaged his equity over 2 years, whereas I just took the prior years equity (2009) and NPAT for 2010 to calculate the ROE for 2010. I will be interested to hear Rogers comments on this, as obviously this leads to significantly different intrinsic values, with Andrews being $15.58 and mine $18.00.
Task 1
Shares on issue – 25.97307
Shareholders equity – $51.543
Earnings per share – NPAT $23.35 / 25.97307 = $0.89905c
Earnings per dividend – $16.10 / 25.97307 = $0.61999c
Investor required return – 11%
Equity per share – $51.543 / 25.97307 = $1.984479
Payout ratio – $0.61999 / $0.89905 = 68.961%
Return on Equity – NPAT (Mill) $23.35 / $40.43 (prior years equity) = 57.7% (Used 55% on spreadsheet)
Required Return – 11%
Step 1 – $1.984479 x 5 = $9.9224
Step 2 -$1.984479 x 18.119 = $35.9568
Income – $35.9568 x (1- 68.961%) = $11.1607
Growth – $9.9224 x ( 68.961%) = $6.8425
$6.8425 + $11.1607 = $18.00 Intrinsic Value
Task 2
Cash – 865-$4,339= $3,474
Borrowings – $14,375-$31,327=$16,952
Share Capital – $3,366-$3,366=$0
Dividends Paid – $16,103
Cashflow = $2,625
Now onto completing the rest……
RobertD
:
Following up on my own question above re: averaged equity. I decided to pull out the oracle (Valuable) and have another read. Roger advocates averaging the equity over 2 years when calculating the ROE, see page 87, and a worked example with JB-Hifi Page 189. While no explicit reason is give, I am assuming it is used to smooth out the equity, to provide a safer profile.
Rob
:
Hi RobertD,
My cashflow came out exactly the same but I added back PPE of $20,926 and got 2,356.1.
I’m not sure
1. whether I was supposed to do that and
2. whether it’s the correct figure.
Cheers
Rob
Rob
:
Now I’m really confused.
I got an IV of $18.08 which is not “considerably lower” than Leon’s $19.20 as per Roger’s reply.
It’s very close to RobertD’s $18 but for different reasons and it’s a fair way off Andrew’s $15.58.
Andrew used an EQPS of $1.98
whereas I interpreted Step 3 on Page 196 this way
I used $2.297 which is 1.98 + generated equity less the resultant dividend
1.98+ (1.98 x 0.5077)-(1.98 x 0.0577 x 68.96%)
Can a graduate please clarify?
Cheers and thanks to Roger and everyone else graduates under graduates and like me under under graduates who contribute to this blog.
Leon
:
dont worry Rob mine was wrong.
Ash Little
:
Hi Rob,
I believe we have been asked to calculate the actual IV for 2010…I may be wrong but your $2.29 would appear to be your forecast for 2011 book value bases of history continuing.(BTW according the managemenat this is not going to continue in 2011)
If you had $100 in a bank account at 30 June 2010 that returned you 10% and you could reinvest 50% would would be calculating your return on the $100 not on the $105 that you would have on 30 June 2011.
I hope that I have explianed this OK If not please feel free to ask more questions
Justin
:
Hi RobertD,
I think you have used the numbers for a 10% required return (5 and 18.119) instead of 11% return (4.545 and 15.236). This change will give you a lower IV.
Hope this helps.
RobertD
:
Hi Justin,
I think my figures are correct – I used an ROE of 55% and 11% RR which gives the numbers 5 and 18.119. If you use an ROE of 50% and 10% RR you also get 5 and 18.119.
Cheers
Geoff Cruickshank
:
My calculations for 2010 come out exactly as Andrew’s above, except that I am using a formula which comes out satisfactorily close to Roger’s table and uses the exact ROE rather than rounding to 50%. Difference is negligable I get a value of $15.98. I get identical cashflow figures.
Looking ahead to 2011, though, with guidance of 21-22m profit, I estimate that ROE (average) drops to 39%. Presuming no increase in issued capital and payout of 70% I get a value around $12.
arthur pagonis
:
I just hope you get enough lubricant for that throat of yours Roger because the energy you put into the Sky Channel segments seems to leave you nigh on hoarse….all the best for Xmas and the New year.
Regards arthur Pagonis.
Leon
:
My order is: All using 10% required return
Gunns- Trading near intrinsic value, MOS: -5.83%
Transurban- MOS: -47%
Transpacific Industries- MOS: -101%- 3rd because its at least making a profit.
Asciano- MOS: -100%
Photon Group- MOS: -100%
Elders- MOS: -100%
Australian Agriculture- MOS: -100%
In my eyes these businesses are worth a big fat 0 and will not be participating in my portfolio until improvement arises. Only A1’s for me :)
Andrew
:
heres the reject shop task. Will work through the spreadsheet but need to put that off and instead finish an assignment.
Challenge 1 Task 1 (Reject Shop Intrinsic Value)
NPAT 23351
Equity 51,543 & 40,428 (average 45,985.5)
ROE 50.78% (used 50% on the spreadsheet)
Dividends 16,103 for a 69% POR)
Shares 25,973
EQPS $1.98
RR 11%
Step 1 $1.98 X 4.545= 8.9991
Step 2 $1.98 X 15.263= 30.22074
Step 3
Income 8.9991 X 69%= $6.209379
Growth 30.22074 X 31%= $9.3684294
Intrinsic Value for Reject Shop $15.58
Challenge 1, Task 2 (Balance Sheet Cashflow)
Cash 865-4339= 3,474 (begin)
Debt 14,375-31327=16,952 (less)
Capital 3,366-3,366= 0 (less)
Dividends 16,103 (add)
total cash flow for reject shop= $2,625 ($000)
Leon
:
Andrew with prior year equity why do you average it out to 45,985.5 why dont you just input the equity number of 40,428?
RobertD
:
I had the same question yesterday (see my post a couple below). I decided to pull out the oracle (Valuable) and have another read. Roger advocates averaging the equity over 2 years when calculating the ROE, see page 87, and a worked example with JB-Hifi Page 189. While no explicit reason is give, I am assuming it is used to smooth out the equity, to provide a safer profile.
Matthew R
:
Hi Robert,
Yes – using Average Equity (average of the current year and the previous year) is generally the correct way to calculate the ROE.
Calculating ROE with only the previous year’s equity will overstate the ROE because often more equity was added during the year (by retained profits and capital raisings). This additional equity during the year assisted in increasing the profit.
Averaging the equity is not a perfect solution (consider if on June 30 a large capital raising was undertaken…) but it is a reasonable compromise for most.
However, the most important thing is to be consistent between companies and through time.
Regards,
Matt
Rob Walker
:
Hi Matthew R,
Well explained, I would add that using the averaging method also provides another level of safety, If you look at TRS at the moment I have an IV of around $15.62 for 2010, I would much prefer to buy this stock at a discount to IV of about 16 – 20 % which would be around $13.00.
If i was only using Last year equity the my Purchase price would be around $15.12 ( $18.00 less 16%).
As one of the golden rules is to buy A1 Companies at large discounts to the intrinsic Value then I believe any layer of caculation that provides some further safety is a good thing.
Cheers Rob W
Justin
:
Hi Andrew,
While you have posted the average equity, your EQPS figure seems to come from the ending equity.
Using average equity I get EQPS of $1.77 and an IV of $13.93.
Andrew
:
Thats the way i have always done it. The EQPS as far as i am concerned is based on how much equity per share there is at the end of the period we are working out intrinsic value for.
Where as i use the average equity method for the ROE as it helps come up with a more approximatley right figure for the entire period than the begionning or ending equity figures due to more equity being added as the year goes on.
in my opinion it is not necessary to aveagre the equity over the beginning and ending figures for the EQPS.
Tom Charles
:
IV for Reject Shop = precisely $15.98. (Only taking into account figures that are provided in Annual Report and not updating these due to events since report was issued).
Andrew’s looks pretty spot on – I’m pretty sure only difference is due to rounding, etc.
John A
:
Hi Roger,
Like many others, I am a far better investor because of your generosity and selfless efforts in creating this Value.able community leading us away from the day to day noise of the market. I can’t thank you enough for that. One moment that stuck with me this year was on Switzer when Peter asked you why the market went up (or down) on that particular day. Every other commentator would have come up with their own theory. Your response of “Who cares” was really honest and reminded me of why we need to ‘turn the stock market off’
Have a great Christmas with your family and friends and enjoy a well deserved break.
Regards
John A
Robert
:
Hi Roger,
I have just completed reading your book, and here is another thank you for your insights.
Maybe I am a little blind – but where would you like the submissions for the homework sent too?
Happy Christmas
Robert
Roger Montgomery
:
I would prefer you post your answers up here on the blog Robert. Thanks for asking.
Sam S.
:
Hi Roger,
First of all Merry Christmas and a prosperous and healthy New Year.
Just wondering if your familiar with Liberty Resources and if so can you give me your opinion on it. They are an exploration company focusing on Urea Fertilizer, it’s in its infancy stage but has the potential to grow.
Sam
Leon
:
Intrinsic Value for TRS is 19.2
Roger Montgomery
:
Hi Leon,
Mine is considerably lower. Might be useful to provide your inputs.
Manny
:
Hi Roger
Thanks for the knowledge that you have given through a simple to read and understand book. Have a great holiday season and I sincerly hope as your new venture grows and you get busy you will still have time for us Value.able undergrads in 2011.
Take Care
Manny
Ann
:
Merry Christmas and thanks Roger for all your tips in 2010
fred
:
Hi Roger,
I am on holidays but your links work for me and thank’s again for all your help alway’s.
Merry xmas all
Lloyd
:
Roger,
You have taken many of us on an interesting and stimulating journey in the last year. Thanks for the Valuable insights along the way.
I look forward with anticipation to where the route will take us in the next twelve months.
And have fun on that mountain bike! I can see from your build and your approach you are not one prone to over indulgence, or exotic technology.
My best wishes to you, your family and the Valuable team for a safe and happy festive season.
Regards
Lloyd
Roger Montgomery
:
And a safe and happy Christmas to you and yours Lloyd.
Sav
:
Happy chrissie Roger. Take care on the mountain bike mate. Recently we have started seeing more serious injuries from mountain bikes than motorbikes believe it or not. And now that you have entered your 5th decade of life you have officially been re-rated as an “old fart”.
So take care and have fun!
Paul
:
Hey Roger,
This link doesnt work.
http://rogermontgomery.com/?attachment_id=1275
Cheers
Roger Montgomery
:
Hi Paul, It seems to be working for me here. What message are you receiving?
Rob Walker
:
Hi Roger,
I am Unable to open the spreadsheet, says “sorry no post”
Cheers
Rob W
Roger Montgomery
:
That’s two now saying it cannot be accessed. Will look into it.
Michael
:
Hello Roger!
I can’t wait to sink my teeth into the homework you provided in the above post but I am having trouble downloading / accessing the Spreadsheet Link.
When you said “Use the worksheet to fill out the [spreadsheet], then rank the companies by their Safety Margin. When I return in late January I will publish my table and we can compare results.”
The [Spreadsheet] Link: http://rogermontgomery.com/?attachment_id=1275 gets the following page error on your website: “Sorry, no posts matched your criteria.”
Please Help.
Regards,
Michael
Gady
:
Merry Christmas Roger and a happy new year.
Thanks for everything ;-)
Cheers,
Gady
Greg
:
Hi Roger,
I cannot download the “Christmas Holiday Spreadsheet” I get the message “Sorry, no posts matched your criteria.”
I can download everything else fine.
I am very much looking forward to the tasks.
Many Thanks Greg
Greg
:
Hi Roger,
This arvo spreadsheet link was “http://rogermontgomery.com/?attachment_id=1275”
This evening it is “http://rogermontgomery.com/wp-content/uploads/2010/12/Value.able-Christmas-Holiday-Homework-spreadsheet.xls”.
Its working fine for me now.
Many Thanks Greg
Mike King
:
Hi Roger,
Your link to Christmas Holiday worksheet doesnt appear to work.
http://rogermontgomery.com/?attachment_id=1275
cheers
mike