Don’t be mislead by conventional wisdom again. Find out how Roger Montgomery identifies A1 businesses trading at D-grade prices to produce returns that have significantly outperformed. Discover his “true cash flow” calculation and ten businesses that have the highest probability of success. Listen to Podcast.

The Formula That Works was recorded at the Australian Investors’ Association National Conference, Surfers Paradise Australia, 28 July 2010 and was rated by investors as the second best overall presentation of the Conference.

Listen to Roger’s keynote presentation What works on Wall Street?

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice 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.

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18 thoughts on "Roger Montgomery's formula that works: company analysis made easy"

  1. Roger, do you have a model provider you recommend. I find it hard keeping up with all the data and assumptions people make. if companies issued their accounts in Excel or something it’d be a lot easier. Thanks, Paul.

    • Hi paul,

      Check out Skaffold. We had it built by some of the same people who work with Ninetndo, Google, Porsche and HTC. It does what we need to help us find high quality companies trading at discounts to intrinsic value.

  2. Hi Roger,

    Thanks for the podcast. I just finished reading your book, it was great! You really hammer home the concept of investing rather than speculating. I am halfway through reading the intelligent investor and I can assure you that your book is much easier to read and more relevant to Australian investing in this century. I have a PhD so I am well aware of how difficult it is to write a large piece of work like this. It is very well done!

    There are still a few questions remaining. I was expecting the book to cover how you rate a company A1 – C5. Never mind though, you make it clear what makes a quality company.

    Yesterday, JB Hi-Fi, one of my favourite businesses (and yours of course), released their 2010 results and with this new information, I value them at about $23.50 using your method. Is that around the right figure? It makes it look like they are trading well below their intrinsic value – definitely by a “margin of safety”.

    Cheers

    • Hi Luke, The valuation doesn’t look too bad. The issue for JB – I have just completed a research note for myself on it – is that ROE is plateauing when I look out a few years. The impact of this is that the rate of growth of intrinsic value will now begin to approach the increase in equity. The business generates very strong cash flow; $94 million in 2010, with $67 million used to pay divs and $20 million used to pay down debt and still plenty left over (keep in mind that the biggest asset is inventory and this is almost totally funded by suppliers). Arguably the $20 million isn’t needed either. That could mean that the dividend payout ratio could increase again which would detract from intrinsic value. One caveat is the very large (circa $220 million (present value) in lease liabilities which may keep the company from doings so).

      Separately, changes to reporting standards will have a big impact on retailers if they are required to put contingent liabilities like leases on their balance sheets.

  3. one would think jbh could expand overseas ? open a couple stores overseas other than New Zealand . just to test the consumers to se if it works .
    maybe india china or the us .

    cheers Cody

  4. Hi Roger,

    What do you think of JB HiFi’s result today. Has it altered your intrinsic value for the shares and their ROE in the next few years?

    Regards,
    Eddy.

    • Hi Eddy,

      Intrinsic values don’t change very much at all because the full year result was basically in line with the numbers that were my inputs. Interestingly however I am coming to the conclusion that returns on equity are plateauing. They were at 48 per cent a couple of years ago, 45 per cent now and heading to 41 per cent in the next couple of years. It is partly a function of the fact that the company is maturing and also that equity keeps growing from the issues of shares under the company’s ESOP (executive share option plan). The company is also throwing off lots of cash ($94 million in 2010) and as a result, it may increase the dividend payout ratio again. This impact of this latter event would be a certain decline in intrinsic value. AT the moment the shares are below Intrinsic Value and I still expect intrinsic value to rise by 15 percent per year and so I am in no rush to suggest the shares have peaked, but I have now reached the conclusion that through my telescope I can see the day that the share price begins a long sideways movement, much as HVN has done for the last decade (its share price is unchanged from the year 2000).

  5. Hi Roger,

    TRS, is worth under 10.00 mark, am I right ?.

    Every time I send a msg it disappears, ???????????

    Regards

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