ValueLine: Making money underwater
Audience fragmentation, declining revenues and duelling billionaires. Its enough to put any investor off the media sector for life. But as Roger Montgomery reveals, there are opportunities in this constantly evolving space that investors would be silly to ignore. Read Roger’s article at www.eurekareport.com.au.
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.
LukeS
:
Bandwidth, data centres, web hosting and cloud computing.
People keep talking about the cloud. Sounds lovely doesn’t it. Almost romantic. Roger is using the “Cloud” when he uploads videos to youtube. And why wouldn’t he – it is absolutely free. It makes it sound like things are floating around out there. But the truth is each video is a file somewhere on a hard drive, probably in a datacentre in the USA. It will be mirrored (copied) and backed up onto various other hard drives scattered around the world. A professional datacentre is a building with physical and electronic security, backup power, big fat bandwidth pipes, lots of computers and hopefully very few people. It could also be on a computer in young Billy’s wardrobe. You would never know.
Roger’s website and blog is physically located in Australia. From a hosting point of view it is a fairly simple site. Probably buy that for around $200 – $400 a year in Australia. The going rate in Australia for business grade hosting is around $600 per year. For that you gets site management tools, email, physical storage and a bandwidth allowance (or limit might be a better way to describe it). Bandwidth allowance determines the number of pages and images we can all look at. If a website exceeds the allowed bandwidth they will be up for maybe $5 per Gbyte excess traffic charge.
You can buy plug and play webhosting in the USA from $50 to a few hundred per year with unlimited everything. It is around 50 cents per gig for excess bandwidth. I can get that down to under 10c per gig with a little planning.
So
Hosting: USA $50 – $200 per year compared to Australia’s $200 – $600+ per year.
Bandwidth: USA 10 – 50 cents per gig compared to Australia’s $5 per gig.
I used to run a large web hosting business providing services to some of Australia’s most popular, high traffic websites. They were all hosted in the USA and it did not affect the Australian user experience. Except for patriotism, there was (and is) no reason I could find to run those sites from Australia. It is far too expensive for generally a lesser service. The difference in delivery time is barely a blink.
From your point of view you are probably paying $40 or so per month for your internet access. You might get a 20 gig allowance with that. In the USA you will get unlimited bandwidth with your high speed internet access for the same $40.
People say Australian housing is maybe a bubble. I can assure you Australian bandwidth is.
Grant Duggan
:
Hi Ash/Room
Just been having a look into AIR of late,was wondering where do they fall in the MQR,also is 17% the right figure to be using for POR.One other area that concerns me is now the government has pulled the cards off table on the rebate,just how big of impact will this have on future revenue as the majority of their business is solar panels on houses.Thanks to all
Greg Mc
:
I must say, I’m uncomfortable buying companies that rely heavily upon government whim. AIR may well go well but I’m happy to observe from the sidelines.
Ash Little
:
Hi Grant,
The board have stated that they will payout 60% of profits going forward so you have to use this figure.
The management has stated that that this is a very competive sector so care is needed.
On the Balance 30 June 2010 balance sheet I would guess the MQR to be high A’s but that is just a guess. Now that they are paying 60% of profits out as a divy but have grown stock and debtors alot the MQR may be under preasure come 30 June 2011.
My View on the government rebates is that we will have more solar products in our home 20 30 and 50 years from now no matter what the government rebate is and someone has to distribute these but this one is not for the feight hearted
Hope this helps
Michael Leslie
:
Hello bloggers
I was looking at the Kogan website and found this on their blog about JB Hi Fi:
http://www.kogan.com.au/blog/2011/mar/7/jb-hi-fi-hidden-truth/
There is quite a bit about the company – very interesting. I hope you enjoy the read.
Roger Montgomery
:
I think the responses below the post are more enlightening…
ron shamgar
:
check out switzer interview with james spencely, vocus ceo on switzer TV.
Andrew
:
Hi Roger and everyone,
Sorry everyone, no Eureka subscription so haven’t had a chance to read this but interested in trying to learn more about these type of companies as along with resources, technology is another grey area.
In regards to competitive advantage for Vocus. Would i be right saying that one source of competitive advantage would be their networks.
Am i reading this right and the network is a cable of networks linked to various hq’s in Aus, NZ and USA? The making money underwater leads me to believe so.
I can see how this is a big advantage as it would be extremley expensive to lay a competiting network so it reduces the threat of competition and new entrants.
What competitive advantages does this company has and can someone maybe help explain in non-technospeak what it is they do?
Sorry Roger, i will get around to a eureka subscription one day.
Luke
:
This is the first time that Roger has mentioned a company that I really understand (I started computer programming when I was 13, have an IT degree etc.).
Australia is in a strange position. When you buy a broadband Internet connection in the US, the data is unlimited. As you all know, here it is capped at a number of GB. This is because the people who own the “toll fibre” charge per GB transferred over their fibre and there is only a limited quantity of data that can be pushed through – when something is scarce, you have to charge for it.
Like you say, laying a cable from Sydney to LA is a big task. These cables have fibre optics inside and literally transfer information at the speed of light. You could bounce the data off a satellite but it is a lot slower and people want their data transferred NOW! Competitive advantage: check!
Just imagine saying to someone 40 years ago “I can send a message from Perth to Washington D.C and measure the time that it took in milliseconds.” We take that for granted now.
Since we are now able to send data so fast around the world, the applications are expanding. Every time you look at a youtube video, you are transferring megabytes of information from Google’s servers in the US in real time. Recently, youtube videos have been able to stream in HD – that is a lot of data being transferred and more people are doing it. Roger’s point is that the amount of data transferred has been exponentially increasing since the Internet was invented. That is a good thing for VOC.
What is the next killer application on the Internet? Who cares, VOC will make money no matter what it is if Aussies are lapping it up (which we will).
Interestingly, VOC will need to lower their per unit price over the coming years (as they have been doing already). I don’t see this as a problem since the amount of traffic will be increasing exponentially.
Ash Little
:
Hi Luke,
Nice post
Thanks
michael s
:
Thanks Luke. Love the simplicity of your description. Nice post
Andrew
:
hi Luke,
Thanks for the reply.
So does Vocus own the network or do they buy access to the network or a specific amount of GB’s which they on sell through their products to their customers?
What type of things are in the pipeline with this technology? Could this network become obsolete due to a new form of technology being better? This is always something i am wary of in the tech sector.
Luke
:
Hi Andrew
Look at page 20 of the prospectus http://www.vocus.com.au/investor/FOF-Prospectus-20100517.pdf – it answers your first question in detail.
In answer to your second question: more bandwidth! The routing technology is getting better and better as processing speeds increase especially with the NBN.
Think about it this way: the Internet can be thought of in a similar way to postal mail. There are post boxes (users), distribution centres (routers) and transit vehicles (cables). With the types of undersea cables we are talking about, the “transit vehicles” have enormous size and speed (I see they are talking about 4.8Tbps – that’s 629,145.60 megabytes or just shy of 13 blu ray discs per second). The problem is at the router side – we need to redirect that traffic at both ends. This technology is continuously under development and improving all the time.
Answering your third question: I don’t think it will become obsolete. Nothing is faster than the speed of light (simple physics) so nothing can possibly be faster. I can’t see satellite technology becoming mainstream because they are expensive to put up there and the atmosphere gets in the way of the signal. Of course, satellite tech has its place (e.g. in the outback) but the majority of Internet use is in the capital cities.
At the end of the day, end users must go through some ISP regardless of fibre to the node (NBN), copper (ADSL) or any kind of wireless. Those technologies may change but I can’t see the Internet backbone tech changing.
Sorry for blabbing on a bit, I hope I answered your questions.
RobertD
:
If you are interested in this market then you may also want to have a read about Reach – http://www.reach.com/about/overview.php – these guys are have a significant stake in this space and provide the same services as Southern Cross.
Andrew
:
No don’t apologise at all Luke, the way you answered my questions were brilliant so thankyou very much. Thanks for all your help i really appreciate it. If its ok with you i would like to save your comments down so i can refer to it in the future if i, after getting better understanding of the marketplace to make informed decisions, wish to get into a company like this.
Another example of what makes this blog and community so great.
Adam
:
Hi Roger / Group,
Oroton released there half yearly today.
If I double there 6 months profit I get a full year estimate of 95% ROE. I reduced this to 60% ROE for my valuation, as I don’t believe 95% is sustainable long-term.
Using a RR of 11%, this gives me a 2011 IV of $9.65 and a 2012 IV of $10.30. (I also assumed a sizable increase in pay-out ration next year, as cash in the bank has built up from 329,000 to 1.2 million this year alone.
Yes ROE seems to be leveling out, but at around 95% can’t really complain about this!! What are others getting for an IV?
Luke
:
Oroton’s report was an interesting one. No NPAT growth but they did open new stores (so I would expect profit growth). I have an IV around $10 for 2011. What’s interesting about ORL is that the dividend yield is 9.3% franked up which is excellent – who doesn’t like money? There is also the prospect of future growth since they are opening more stores, have a high ROE and are a quality company in every respect. Considering that every other Australian “luxury” retail brand has had declining profit in the last 6 months, ORL is performing very well to hold profits flat.
Yes, I hold ORL and I have an Oroton wallet as well, Roger :)
Ashley Little
:
Hi Adam,
Given retailers profits are higher in the first half than the second due to the santa effect doubling first half results may not be the best way to value the company.
I am now getting Mid $7’s or ORL
Andrew
:
Hi Adam,
What figures were you using for equity? I haven’t had a chance to look at the results yet for oroton but i know the half yearly profit was the same as the PCP. If you there for double it, NPAT would be the same as last year and the equity base would have grown so i would have thought that a drop in ROE would be the result and is something i have been expecting.
Do you average equity, use only the beginning or use only the ending? Rising to 95% from 83% but not growing profits i think might mean that there could be some input problems there for you.
When i get a chance i will take a look at the resutls and see what i come up with, my forecast IV’s (before the HY result) was $10.76 and $11.27.
Andrew
:
p.s. my comments about the 95% ROE is purely for debate, as you said you were using the 60% ROE figures than this would not impact your valuation at all.
I am forecasting the POR to stay about 85% for a while yet. It is only a matter of time i think before ROE starts to decline to more realistic levels and i think this year might be the first sign of it.
Adnan
:
Re: ORL
For what it’s worth, I have an intrinsic value closer to $7.00 than $10.00 for 2011. Rising by 15% in 2012 (based on current forecasts). Overall, it looks like the Oroton expansion into Asia has been satisfactory but that the expansion has resulted in an increase in costs (no surprise there). The retail environment in Aus is tough as every retailer has been stating for months now so earnings have only climbed marginally and profit is flat. The company is expecting a flat 2HY2011. The forecasts in Etrade and CommSec will have to be revised down. As more retailers annouce results, I think it highlights how good JBH’s result actually was as it continues to increase earnings and profit during this difficult retail landscape. Just an opinion, not advice.
Adnan
Peter
:
Hi Adam,
I don’t own shares in Oroton so don’t follow them extremely closely. However, when I look at their previous financial year, their first half profit significantly exceeded their second half profit.
Given their outlook for second half is “cautious”, my starting position would be to act on the assumption that 2nd half this year may be equivalent to 2nd half last year. This would lead to a very different outcome than what you have stated. If this were to happen EPS would be closer to 56c, whereas doubling first half profit would see EPS of 74c.
On this more conservative assumption I got a 2011 IV closer to $8.70 (based on 10% RR and 70% ROE), and hence at the moment, not enough discount for me to want to buy.
I would be interested in the room’s view of second half profit.
David V
:
Hi Adam,
I have a current IV around the same as yourself for both years. I also calculated ROE and though I must be wrong as it would equate to 90%. Based on this IV would bump up a little bit, but its hard to see these high ROE numbers keeping on for ever. Mr market obviously is looking at thing differently as the stock has fallen approx. $1-. I would say that people weren’t anticiapting that Profit wouldn’t rise even though revenue rose 7% e.g. they haven’t been following the companies startegy on opening new stores and re-vamping old ones. I’m not sure payout ratio will be increased as Ms. McDonald referred to potential acquisition opportunities. She has made great decisions so far, so I hope this continues. Maybe another brand/licencing agreement or maybe diversification e.g. hotels, spa resorts …..
I own ORL shares.
Chris B
:
Hi guys,
Because the ROE is so high for ORL, even a small adjustment (even as little as 1%) to the payout ratio has a fairly significant impact on the estimated value of the business.
For 2011, I get a value close to $7.00, using…
Payout ratio of 85%,
equity = 32.336
Shares on issue = 40.972
ROE = 60% (for the purpose of using the table provided in Value.able)
RR = 10%
The interim report demonstrates that growth within Australia may be plateauing. Indeed the ROE has declined when compared to the 2010 half year results.
It wasn’t too long ago that Sally McDonald sold shares in ORL – Perhaps she sold knowing that the impressive growth within Australia was coming to an end!
It is common knowledge now that retailing in Australia is becoming increasingly more difficult, especially for companys that are nearing or have reached saturation. So, whether or not you believe the expansion into Hong Kong, Malaysia or Singapore will be successful might just be the all important key to future growth for ORL. Even if expansion into one of these markets is highly successful the growth potential would be large.
I remember watching Sally talking about the way they go about expanding into new markets. They open a few ‘feeler’ stores to test the water. And, if these feeler stores generate the required returns the group will take this as a cue to continue with the expansion. This strategy dramatically reduces the risk to the capital of the business. I am very keen to see how the group fairs with its expansion plans for the remainder of this year. they have quite a few things happening, so you might expect to see slightly higher gearing in the short term.
With the overall negative sentiment towards retialing of late it was no real surprise to see the market shun ORL given the slow down in growth (especially when compared to the previous 4 years of growth).
If the group maintains its fully franked dividend yield of over 7% (and continues to have the cash flow to back this dividend – which obviously is not a problem in the foreseeable future) this might just help support the share price. However, if the group maintains its dividend per share but its earnings per share decrease this will negatively impact the estimated value of the business. And the DPS will probably fall the following year as well.
I believe the only way ORL can sustain its impressive growth is if the group can penetrate another Asian market(s). Time will tell, but all in all, ORL has thus far proven to be one fantastic retailer.
Chris B
Dave Nalin
:
Hi Roger,
I bought Westfield Retail Trust (WRT) in the FPO last year. The price has since never even stayed at $2.75. Today the price dropped to 2.54.
My view at the time of application was that the company would soon announce some concrete expansion plans and the price would start creeping up. So far it has dropped at every occasion.
Please suggest should I cut my losses by selling it or hold on to it patiently?
Cheers
Roger Montgomery
:
I cannot give you advice Dave. You wrote “My view at the time of application was that the company would soon announce some concrete expansion plans”. You purchased shares because you expected the company to make a positive announcement. That is not investing, it speculating. Has the company announced their expansion plans?
RobertD
:
Interesting piece of news that landed in my inbox today –
“Lynas shares soar on Forge deal”
http://www.cfoworld.com.au/news/533988/lynas-shares-soar-on-forge-deal/
I am surprised that their wasn’t any ASX announcements, or did I miss something? and I wasn’t aware of capital raisings of $31M schedule for May – Again am I living under a rock here.
Roger Montgomery
:
Different Forge I think Robert.
Jane
:
Hi all,
I’ve just finished reading the book and have been reading the posts and comments here for a little while, all of which is very interesting. I’m now having a go at some valuations, but I seem to have made a bit of a mess of my first attempt and was wondering if someone can set me straight. It’s Brickworks (BKW). Using a 2010 ROE of 6.8%, payout ratio of 50%, and RROR of 14%, I’ve come up with a value of $4.46 compared with today’s price above $10. Tell me it ain’t so (I already hold shares purchased before I heard of this book etc). Where have I gone wrong?
Many thanks, Jane
Andrew
:
Hi Jane, and welcome to the journey.
Using the information you provided i get very close to your calc at $4.24. Based on my own calculation i get a higher one of $5.96. This is due to me getting a higher ROE figure at around 9%. I also have POR lower 33.9%. Without seeing the specific inputs you used to come up with these inputs i can’t really see if you have gone wrong anywhere or not. I think you are definitley using the right method to calculate and differences will come down to the inputs used.
As for why the difference between market and the value. Well as Roger says, the market price and value are 2 completley different things. The way i describe it is that the price is just a mechanism of supply and demand on a marketplace which can be affected by emotion amongst other things, the value cannot be influenced in such the same way and reflects an estimate of the true value of the actual business.
The key to being a value investor is trusting your method and turning the market off. You will see these big diferrences between the two prices and you might be tempted to think that you have done something wrong but in actual fact it might be just that the company is overpriced.
Absolutley no advice or reccomendations here. I am just trying to explain the thought side of things.
Nic Arena
:
Hi Jane,
I have an IV of $6.89. I have used 10% ROE, 14% RR, 11.22 EQPS and POR of 40%. In my estimates it would be a mid range company in Roger’s evaluation eg: B3 or B4. Debts decreasing and Equity is rising but the main concern for me is the IV is not really increasing – They are getting more Revenue but NPAT doesn’t seem to be keeping up. 2 years ago they had a massive jump in NPBT/NPAT compared with other years (haven’t had a really good look at why this is – maybe sold an asset). This could explain the reduction of debt. ROE has basically been 10% for the last 5 years except 2 years ago when it was 22% but again I don’t know why the massive jump in profit for the year. 10% is okay I don’t think you need to panic but if something better comes along I would definitely reevaluate your position. Hope this helps.
JustinP
:
Have I plugged in my numbers wrongly then? I get the following for BKW: (data from Etrade)
Code: BKW Price: 10.53
INPUT:
……….. EqPS .. Shares … DPS … EPS … RR
Next Yr … 11.59 .. 150.00 … 0.420 .. 0.804 .. 14
Curr Yr … 11.21 .. 147.20 … 0.400 .. 0.768 .. 14
Prior Yr … 10.32 .. 132.90
OUTPUT:
………….. IV .. .. ROE . NPAT .. POR
Next Yr … 4.23 … 7 .. 120.600 .. 52%
Curr Yr … 4.09 …. 7 .. 113.050 .. 52%
Chris
:
Hi Roger & fellow posters,
My question is regarding coca cola (ccl:asx).
What are your thoughts on price & it’s IV???
I’m a student and learning so please swamp me with information
Punchy
:
Hi Chris,
I am a novice but I did look at CCL last week and couldnt get past the debt level.
Cheers Punchy
Punchy
:
Hi all, I need some help.
I am using the holiday worksheet as a pro-forma and have found it a bit confusing. Example Steps one and two are two steps then
step 3 has 2 steps but only one instruction, that is Multiplier x Payout Ratio equals value. Obviously this is not the instruction for the Growth Multiplier part of step 3. Does anyone have a worksheet with adjusted instructions? I am trying to teach my kids how to do the valuations.
Also can I just deduct the payout ratio from 100 to get the retained profit percentage for the Growth Multiplier? (I don’t understand 1 minus something)
Finally the book instructs me to use annual reports and the worksheets seems to suggest I can use data on comsec. Is the comsec data accurate for the purpose?
Thanks for your help. Punchy
Grant Duggan
:
Have been researching AGO of late and considering their price am interested in the company.Was wondering if anyone could enlighten me on their recent share issue,is this likely to effect their IV now or into the future.
Thanks to all for the contributions Grant.
ron shamgar
:
another stock to watch for is platinum asset management PTM as they are heavily exposed to Japanese equities. if they’re performance falls so will their funds under management and hence ROE.
watch this space…..
Andrew
:
Any long term analysis of the market shows, the big drops are temporary and will then usually recover and reach a higher point than before. I don’t think this time it is different.
A great company like platinum (which has been trading at a hefty premium) might lose a lot of their market price but the company will still be the same and as the markets recover they will also recover from any temporary hit, this could mean that we are able to jump on board the platinum train at a discount to IV as people get scared.
ron shamgar
:
hi roger,
there goes out the door that 2031 crystal ball prediction about uranium :-)
or maybe its an opportunity?? not for the faint of heart.
RobertD
:
Interesting news snippet re: VOC.
“Vocus Communications has sourced $A15m in fresh capital via a share issue. It was the first such raising by it since an initial public offering, and very successful. Analysts have however overlooked the recent acquisition of an intangible asset and $A13m in liabilities due to a deal struck with Southern Cross Cables. Microequities is arguing against the trend among experts and recommends that investors sell off their Vocus stock. CEO James Spenceley says the $A15m has not been earmarked for any particular purpose”
Roger Montgomery
:
Hi RobertD,
Hopefully the analysts idea catches on and the share price tumbles! Without sellers, their would be little to buy.
But all liabilities are not created equal. When VOC buys bandwidth via an IRU an intangible asset is created. The funding, at very low interest rates is provided by SOuthern Cross = liability. Its VOC’s very real job now to resell that bandwidth. That is their business and all roads for the investment case, lead back to a vote for or against management’s ability in this regard.
BTW You left out the parts that said:
1. “We’re always looking at a number of possible acquisitions.”
2. “BBY analyst Mark McDonnell said his firm was not providing formal stock advice on Vocus but said … “We regard their recently announced results to be at the very upper end of company performances,” he said. “the major trend in respect to the demand for data is that we’re seeing very strong growth as a result of increasing use of broadband.”
RobertD
:
Oh don’t you just love the analysts :-) I picked up that news snippet from LexisNexis news – unfortunately they don’t give the source of information.
VOC is an interesting company and I have an appreciation of the business. I worked as a management consultant and one of our clients was Reach, which is also in the business of selling inter-connects / bandwidth. At this particular time we were looking at their billing system.
The way the inter-connect / bandwidth market works is quite interesting. Reach has two primary sources of revenue – 1) It provides the bandwidth / network to the Australian market e.g. ISP’s and 2) It has ownership on a number of trans-alantic pipes that it sells to the wholesale market. Reach purchases this bandwidth on a live market – there are several “pipe” providers that connect and the pricing for bandwidth between providers changes on a daily basis. Forward contracts are also normally purchased. Not suprisingly Telstra has a large stake in Reach.
I imagine VOC is a direct competitor to Reach now?
Luke
:
Hi Roger and fellow bloggers,
I was reading Value.able again on the train this morning. One point that Roger makes in the book is that the value of a company will decrease when shares are issued below book value. The value of the company will increase when shares are issued above book value.
As far as I can tell, VOC’s book value is around 29c from the last half year report. Since the issue price is $2, this is significantly above 29c and therefore should increase the value of VOC, assuming they can maintain a high ROE.
I am not an expert, I could be wrong. Thoughts?
David E
:
Read page 71 of Value.Able for some risks of captial raisings – actually page 67 onwards might be useful to you. One ‘flaw’ in the logic of your statement is “assuming they can maintain a high ROE”. You’ll need to do some math to estimate whether this capital raising will have a negative impact on ROE, and some math/research to assess whether/by how much the captial raising might dilute shareholder value. I don’t own VOC, and am quite unfamiliar with this business and the purpose of this capital raising.
John A
:
Hi Roger (and Everyone),
First of all, I will declare that I don’t own shares in VOC but your commentary has put it on my radar. I’m still trying to learn about the company and get a handle on it’s business. One thing that struck me about VOC’s equity raising was the inequity between the ‘big end of town’ and the small investor. This has happened with me on other stocks. Why is it that the ‘Institutions’ get the bulk of the new capital being raised (around $13m) thereby diluting the small investor (who’s share is only $1.9m). I don’t think that this is very friendly to the existing shareholders.
Why is it that the ‘big guys’ get such preferential treatment?
Cheers
John A.
Roger Montgomery
:
HI John,
Its about speed, regulation and cost. More speed and less regulation and cost.
Ash Little
:
Hi John & Roger,
Yes this is the lot of the retail investor.
These companies can raise money from the Instos with a phone call
Us retail investors got absolutely creamed during the GFC and that was the main reason the SPP’s were increased to $15,000 from the former $10,000
Given VOC’s market cap I am guessing the SPP won’t be as high as this. My Guess is closer to $5000.
Lucky I have this in three accounts with 3 different HINs so I will get 3 goes at the SPP
Brad
:
PS re AIR / SOO and renewables….
SOO looks cheap also
The Japan eathquake may well be a big tail wind for renewables..
Or moreover, a big headwind for the nuclear industry….
Stevek
:
Hi Brad,
Yes, SOO looks cheap to me as well – they seem to be well run since a change of management some years back. A good range of techinal and commercial experinece, key supplier arrangements and a growing industry. Their competitive advantage story isnt compelling but I believe that a case can be made.
Foreign currency impacts on contracts that remain unsettled have made the balance sheet look a bit unattractive but there is shine if you dig a bit deeper.
Steve
Stevek
:
Sorry, should declare that I do own a small parcel of SOO
RobertD
:
Hi Roger / Folks,
I remember somewhere on this blog that Roger looks at his investment opportunities as to whether they are first prize, second prize, and third prize. For the life of me I can’t see to find the original reference. Would someone mind sharing again what constitutes the different prizes?
:-) There must be easier ways to navigate this blog – have you considered opening a forum Roger?
Thanks in advance
Robert
Justin
:
Here ’tis:
Roger Montgomery
:
Hi Justin,
No advertising of websites, forums or blogs here. As I don’t have time to vet the information you are recommending, I cannot determine wether it is beneficial for blog posters. Much simpler to just have a rule.
Rob
:
Hi Robert,
I agree that a forum would be a great idea but there are probably issues (mostly legal) that would make it difficult. There wouldn’t be a problem with moderators, this blog has more than its share of Gurus. But then, who is responsible (legally) for what is said or done on the forum.
It could be done by a third party, but again I wouldn’t like to be the one taking the risk.
You not only need to be aware of defamation, but other problems where a post may fall foul of Asic with ppl ramping stocks etc.
I agree, the Blog is a pain in the butt for finding stuff but it’s probably the best way to communicate with Roger himself.
Roger, I have recommended your book on a number of occasions and recently someone who bought the book highlighted a problem. Can I suggest a panel or page titled “New to this Blog” with the following links.
First assignment http://rogermontgomery.com/how-do-your-value-able-valuations-compare/
Source
Answers
Christmas assignment etc.
A person new to the Blog doesn’t know those assignments exist.
Cheers and thanks again
Rob
Roger Montgomery
:
Hi Rob,
Send me an email or give me a call. Delighted to make corrections and improvements.
ken fraser
:
John, AIR does seem cheap. Lev Mizikovsky who is a director (he also started Tamawood) has been buying more shares lately.
Rod h
:
Does anyone have any comments on the Affect of the additional capital raising on the current valuation of VOC ?
Ash Little
:
Hi Rod
My view for what it’s worth is that we need to know what the money is going to be used for before we can calculate what effect it will have on IV.
My estimate is that if they do nothing with the money it will drop my 2011 IV by 15% but looking at the December accounts suggests they did not need to raise this amount unless the have something in mind for this cash.
What that is I just don’t know, but I am sure all will be revealed soon
BradLey
:
Hi John,
AIR does look cheap and a major shareholder and director has been buying in past month. No debt on bal sheet and ROE is high.
On the other hand revenue for the half doubled from pcp however npat was only up 13% – lots of profitless growth. It could be because the price of REC’s fell.
No broker (that I’m aware of) covers the stock and I’ve called the company twice and no one wants to talk to me!
The Company’s competitive advantage is it’s management, systems and processes but certainly not their investor relations!
The “cons” are solar panels are a commodity business ( in the sense there’s little or no brand loyalty) and it’s highly subsidized via the RECs which is constantly changing.
Hope this helps.
Cheers
Brad
Brad
:
Hi John,
AIR does look cheap and a major shareholder and director has been buying in past month. No debt on bal sheet and ROE is high.
On the other hand revenue for the half doubled from pcp however npat was only up 13% – lots of profitless growth. It could be because the price of REC’s fell.
No broker (that I’m aware of) covers the stock and I’ve called the company twice and no one wants to talk to me!
The Company’s competitive advantage is it’s management, systems and processes but certainly not their investor relations!
The “cons” are solar panels are a commodity business ( in the sense there’s little or no brand loyalty) and it’s highly subsidized via the RECs which is constantly changing.
Hope this helps.
Cheers
Brad
ron shamgar
:
my advice stay away from this industry and stocks. the only one to play, if u r a speculator, is CBD energy. the Millners have a stake in this one and so does a big German firm.
good luck.
RobertD
:
Hi Folks,
I am just trying to determine what RR a company like ARP should deserve – From what I have read about the company and looking at the financials its looking like a RR 10%? Would others concur?
Cheers
Robert
ron shamgar
:
RR10% is fine but u want big margin of safety. so if u value ARP at $8 u want to buy for $5.
Stephen
:
Hi Robert,
Yes,
I would concur. I own them.
Stephen
Robert
:
Hi Roger,
I have two questions regarding the calculation of intrinsic value:
1) Should Net profit or NPAT be used?
2) How should intangible items be treated in calculating total equity & thus determining the ROE?
FOR EXAMPLE: in 2010 LVMH reports brand value & intangibles worth EUR $9 billion, total equity of EUR $18 billion generating NPAT EUR $3 billion.
However if the business were liquidated I would imagine the actual recoverable equity would be much closer to EUR $9 billion or less (total equity $18 billion – $9 billion of intangibles).
Therefore is it more accurate to say the business generates $3 billion NPAT from $9 billion of genuine equity, or should the intangibles be included, and if so why?
I look forward to your response.
Regards,
Robert
Roger Montgomery
:
Hi Robert,
The answer lies in the way you think about equity. Think of equity not in terms of what might be left in the event of a fire-sale but in terms of what has been put in and left in. if that amount coincides with tangibles +intangibles then so be it. And a lower ROE should result. The best intangibles remember are those not found on the balance sheet. Its the economic goodwill not the accounting goodwill we are after. Read my chapter on intangibles.
fred
:
Solco Limited ( soo ) is under its intrinsic value according to my calculations is what I meant to say.
fred
:
Hi John,
Astivita Renewables Limited ( air ) is well under its intrinsic value according to my calculations. You may have to check where they import there solar panels from as there might be a impact from japan earth quake. Solco Limited ( soo ) is another one that is under its intrinsic value and which is into solar panels. I do not hold either but I believe some people in this room do.
John
:
Hi Roger,
AIR looks cheap at the moment doesn’t have any competitive advantages and has been effected by the floods, but it appears to represent good value?
Ash Little
:
Hi John,
Their supplier agreemnts are a form of weak competitive advantage.
Plus one Director buying recently.
I confess to a small holding
Ash Little
:
BTW
Divy a bit early IMHO
would have liked to see this delayed a bit longer,
Divy will put a strain on cashflow
Just MHOP
Andrew
:
If only they could negotiate an exclusive supplier agreement with the sun.
I find these businesses interesting however not from an investment point of view and more from an innovation and future opportunity point of view so i am finding the discussion on these companies very interesting so please keep it up everyone.
David
:
Hi John, i’ve looked at this one and confess bought some because like you i thought it represented value and is in an area that makes sense (solar electricity).
The problem with this one is that whilst the greens would agree solar electricity makes sense, the governmments (state and federal) keep playing around with rebates and tarrifs, etc which this industry requires to make it competative.
I am not sure it really has a competative advantage but i will hang on for the time being.
Am curious whether others have any research on this one.
David M
O'Reilly
:
You have a sceptical admirer in Marcus Padley:
http://www.smh.com.au/business/investor-type-2-the-tester-of-patience-the-value-investor-20110311-1br90.html
He says about value investing:
“The good bits are that if you do have the time and you do learn the skills and you do have the ”financial patience” then value investing has integrity. It is also one of the few approaches that do not offer some tempting but unrealistic shortcut.
At its worst, it is a great filter for identifying bad stocks. At its best, it is a disciplined structure for share assessment that works. If you can do it, it knocks the socks off any other. For those that want to pursue it, let me plug Roger Montgomery’s book Value.able. It’ll get you started without having to read boring old textbooks. It’s on Montgomery’s website – http://www.rogermontgomery.com”
On a separate matter, I wonder who filled their bag with VOC after your Eureka article, immediately before the Thursday 11 AM placement of the stock into pre-open for a capital raising?
In respect of the latter, I find it amazing that all the people on this blog who are declared champions and smart money holders of the VOC query the purpose of the capital raising. They cannot have not read Note 9 to the Interim Report which details the need quite eloquently.
So much for all the bloggers with a deep understanding of what they are buying. I suspect they do not walk the talk, but simply follow on Roger’s coat tails. Dangerous stuff indeed!
My first post – I’ll be like the chap recruited to the Triumphal Parade of every Caeser. He rode the processional chariot, standing immediately behind Caesar and continually whispered in his ear that “You are mortal” – a gentle reminder that the great Caesar should not to let it all go to his head.
Luck of the Irish to you all!
Roger Montgomery
:
Great to hear from you Tony,
…as I keep saying, I cannot forecast share prices. They could halve tomorrow (indeed I kind of hope they do). So many comments here reflect far too much fascination with a daily move in the price. It is important to compare this to the many days that I don;t look at the market at all and go to bed not even knowing what happened to prices in the market that day.
Joab Soh
:
Personally, I would very much prefer share prices which slowly creeps up compare to one with significant volatility (since volatility tends to go both ways). Afterall, Value Investor has a long investment horizon (in term of years).
Additionally, if I am not wrong, VOC has been mentioned here awhile ago. So regular bloggers would have come across this company way before Roger posted his article in Eureka. And Roger mentioned in the article he already owned it, so he could have bought some time ago.
I would also say that how one investment or manage his money is to his own. Everyone has their own individual circumstances. So, we should be encouraging anyone reading Roger’s blog / Value.able to actively engage this community and to learn from one another, rather than suggesting “Roger’s fan club” behave like some mindless teens.
Happy to be corrected if anyone thinks otherwise.
Greg Mc
:
Hello Mr O’Reilly,
To be fair to our bloggers here, I suspect that it is predominately the Eureka report subscribers who piled in on Thursday morning (though many here subscribe, including myself). The price zoomed up well in advance of Roger posting here.
MattB
:
I regularly check this blog for scuttlebutt and Roger’s latest musings. The morning Roger made his comments on this blog about VOC I watched it trade that day. All he had to say was that he owned it. VOC went up around 6-7%. The next day the Eureka article was published and it went up around 14%.
It could be a coincidence but I seem to see a regular pattern. If Roger mentions a stock here it equates to around 5-7% increase in buy ups the first morning of trade the day after. I think that shows a lot of people are not seeking personal financial advice- despite Roger always stressing this.
Matthew R, my inner scorecard reads “Camry Driver” also. It won’t feature on Top Gear unless they are driving something else over it, but it does the job.
Matthew R
:
LOL
my car is not even as fancy
if TG had been around for a while longer my car might have been chosen for the “Star in a Reasonably Priced Car” segment
I don’t have anything against nice cars, I just think many are bought for the wrong reasons. Personally I might buy a porsche one day but not before I can afford 10 of them.
Roger Montgomery
:
My mother used to say; “if you can’t pay cash, you don’t deserve it.” I fined tuned it for my kids (a sign of the times); “If you can’t pay cash, you haven’t earned it.”
Peter
:
Hi O’Reilly,
Fair points, well made. Many of the shares mentioned in this blog have had a good run over recent times, so it’s good to be reminded that 6 months worth of gain is worth nothing if ones long-run results tank due to hubris leading to ill-advised or overly optimistic or naive or plain dumb moves.
At the end of the day I guess we have to remember that the name of the game is to buy quality businesses at a good price. I for one have been guilty of thinking about only the price on at least one or two occasions and forgetting the quality bit.
Accordingly, I’ll treat your post as a timely reminder. I don’t have a chariot but I’m happy for you to ride along in my Toyota Camry and point out the dangers. If you don’t want to get in my Camry, doing it via the blog is also good from my perspective …
Matthew R
:
I think if you drive a Camry you probably don’t need the voice over your shoulder, your inner scorecard will see you through
Stu
:
Some articles assume that you manually look through 200 financial reports. In this day and age, there are stock screeners that take all the hard work out of it.
Roger Montgomery
:
Hi Stu,
Unfortunately not one valuation matches mine so cannot advocate it here. Read page 193 carefully again.
David
:
Bloggers – I have held Thorn (TGA) for some time now and am curious to know what value other’s have on this stock.
I am probably over generous using a rr of 10% but i come up with a figure of around $2.37 based on a profit upgrade last yr.
I paid around $1.50 so i am not concerned but am curious to know if others see this current fall as an apportunity or the stock simply falling to its IV (if this is less optomistic than my calculated figure).
Appreciate your input.
David
Justin
:
David – do you have a forecast book value for next year?
Bob
:
Hi David,
My IV calculations for TGA using a rr of 10% for FY 11 is $2.77 rising to $3.12 for FY 12 . My imputs are :-
2011
# Shares = 130m
Avg.Equity =88m
Por = 50%
NP = 22 m
ROE = 25%
Equity per share = 0.71 using EOY equity of 93m
IV = $2.77
2012
# Shares = 130m
Avg. Equity = 99m
POR = 50%
NP = 25 M
ROE= 25.25%
Equity per Share = 0.81 using EOY equity of 105.5 m
IV = $3.12
On Current share price of $ 1.89 this is a MOS of 30% to 2011 IV.
I am very new at this and would be interested to hear from others as to their inputs and IV calculations.
Cheers
Bob
JustinP
:
EqPS # Shares DPS EPS RR
Next Yr 0.81 130 0.092 0.186 10
Curr Yr 0.71 130 0.085 0.168 10
Prior Yr 0.54 128.7 0.063 0.151
My IV’s are fairly close: 3.07 for 2011 and 2.94 for 2012 using the above inputs, which I got from Etrade.
Cheers,
Justin
David
:
Bob – I get a similar figures but used a lower ROE of 22.5%, payout ratio of 40% and with equity of around $88.2 million, equity per share of $0.68 and with a required rate of 10% I get a figure of $2.37.
Seems to me there is some value here – it’s a well – run business, low debt – sleep well!!
Regards
David M
Nic Arena
:
HI David,
Funny my IV for 2010 was 2.42 (so 5 cents off yours). With their half yearly report just released I have an IV for this year at $2.81 rising to $3.11 the following year (end of 2012). I got in at $1.62 (one of my first buys) so was very happy when it went to $2.30. 95% of shares have been hammered recently so not worried in the slightest that they are back to $1.75 roughly (now $1.89). In fact if it drops below $1.62 will most likely buy some more. Even if it stays at $1.89 for the rest of the year I’ve almost made 20% return on my money. When a bank account offers 6% and I am slightly disappointed that I only got a 20% return from Thorn shows how far I have come with my investing. Unfortunately MCE and FGE (which I also own) has spoilt everyone slightly. People seem to be too interested in the daily price rise of these companies (although it is extremely exciting to watch). We have to be careful that we still see the long term value in companies and I believe Thorn has long term value! So I still think it looks promising. By the way how great is a 20% return? Well Bufett has average 22% (I think) over his entire career. Hope that helps.
Brad voigt
:
Hi Justin, I have been watching TGA for a while now have 2011 valuation of 2.07 using a 12%RR and 50% payout ratio out to 2.35 in 2012 . At todays price $1.83 looks to be offering a reasonable margin of safety.
This is my first post just wish to thank roger for his wonderful book was the best christmas presentI have had in years. Cant wait for the sequel !
Thanks also to everyone whos had input into this wonderful blog. Roger definetly is the master but he plenty of apprentices
RobertD
:
Hi David,
It is quite interesting to see what other bloggers are using for their RR’s. Personally I have been a lot more conservative with TGA – I am using a 12% RR and have them valued @ ~$1.83 for 2011, and ~ $2.10 for 2012. I have also insisted that I get a 8% MOS on this stock, so I have an alert setup when we hit $1.68 – will we get there? Who knows – but being patience and practicing the philosophy will no doubt bring great rewards – well that is what I am telling myself.
Determining the RR I think is one of the most “Artful” aspects of calculating IV. We all want a good opportunity and it is very appealing to wind down the RR to make this happen. Getting the right balance is difficult, personally I like to be a little conservative.
I would be interested though what RR others are using on TGA? 12% too high?
Thanks in advance
Robert
Matt
:
I liked the application of MOS Roger mentions on p245. 12-13% would seem OK, a *robust* MOS negates any doubts though.
Matthew R
:
Hi RobertD,
I think it was John M who made the thoughtful post along the lines that if you have the nerve to buy only when the most exciting opportunities arise your long term results will reward your patience
Buffett said that he used to be totally rigid on his buy price, but later in life he became more flexible. I would put that down to his appetite later in life for buying better quality businesses where the future added to his MoS (time being the friend of a wonderful business). It did not result from a decreased enthusiasm for outstanding returns….
You are not likely to lead the race if you only invest once every 20 years, but if that is how long it takes before an adequate MoS emerges in good companies then you should be willing to wait. If you were a Japanese investor only looking locally you might have done very well in the last 20 years by following this method (in relative terms). (note: I don’t know anything about the individual values of stocks over the last 20yrs in Japan, but the general trend has not been promising….)
Michael Horn
:
Robert
I use 10% for TGA, because I think it is one of the best stocks on the ASX, and I get a value of, from memory, $2.75 based on recently-published metrics for YE 31/03/2011.
I wrote extensively, or rather, intensively, about TGA recently in this blog, so I’ll not repeat what I wrote. You might have to Google:
TGA site:http://rogermontgomery.com
and look for all the TGAs to find what I wrote, or stick my name into the search – it might work. I have only written about TGA in this blog because I know it well, and I like it (perhaps to the point of foolishness).
LukeS
:
You wrote an article a little while ago about TFS Corp.
http://rogermontgomery.com/is-cash-made-from-sandalwood/
They are at it again. They recently announced an interim dividend then raised some money by issuing more shares. How can that be in the best interests of shareholders? Why do managers do that? Are they stupid or cunning?
Ash Little
:
Hi Luke,
This was my reply to Lloyd and Roger when they were talking about peeple trying to talk the price up.
Hi LLoyd and Roger,
“My bet is on some peolpe trying to get the stock price up so the company can raise more funds from it’s shareholders.
After all by my calculations it will have very few coin in the bank after it payis it’s dividend in december.
Time will tell”
I also think they may be frugale with the truth as they announcement regarding the capital raising says the money will be used to repay debt leaving the company debt free.
This is a strange statement given the auditors signed off the the December accounts with current and non current liabilites at twice the capial raising.
I only wish I could make debt diappear that quickly.
Rici Rici
:
Interesting comments regarding TFC. I recently started acquiring positions in this company including today when i picked up some stock under the rights issue price, so obviously i am interested in any commentary regarding TFC.
Firstly Ash i think you are being a bit unfair when you state:
“I also think they may be frugale with the truth as they announcement regarding the capital raising says the money will be used to repay debt leaving the company debt free.
This is a strange statement given the auditors signed off the the December accounts with current and non current liabilites at twice the capial raising”
Current liabilities are not debt, they are future obligations that need to be met.
I had a look at their Dec half year balance sheet and current assets of $97 million offset current liabilities of $95 million. This is before the capital raising. Net borrowings as at dec2010 was $50 odd million (and formed part of the current liability balance of $95million) With the capital raising of $37 million this is effectively debt free in my opinion (as post balance date there could have been some movement between coversion of current assets into cash).
Non-current liabilities dont look excessive to me in conjuction with the capital raising.
Further more i think one needs to read the details of the rights issue.
‘All directors have agreed to take up their allocated rights’ and further more the chairman has taken on a significant subunderwriting position.
Now given the amount of shares owned by directors is significant this means that they are coughing up something north of $2million of their own money to participate. Thats not chump change, they have to believe that its represents a good opportunity.
(compare this situation to say downer EDI where the directors own squat all shares).
Further more the fact that the chairman has taken on a significant subunderwriting position appears to me an opportunistic attempt to grap more shares now that this business is moving into ‘production cashflow stage’.
Anyway just my opinion, and of course i am open to different view points.
ron shamgar
:
hi Rici,
management held a lot of shares in great southern and timbercorp and kept buying more when share price was falling. these companies are gone now and shareholders lost all their money!
stay out of these businesses and look for better businesses with low capex and high ROE and little or no debt. you will be a happier and richer man.
Greg Mc
:
I’m with Ron. I held WFLPA (well, technically I still hold them) which while in the forestry game, has many similar characteristics to TFC. With the pref shares that I had, the company didn’t have to do well, all that had to happen was the company not go under.
Ouch, ouch, ouch.
Jefferey S Nelson
:
Just looking at the rear view mirror to look for the future.
Japan our 2nd largest export trade partener after China.
Kobe 1995
The earthquake caused approximately ten trillion yen or $102.5 billion in damage, 2.5% of Japan’s GDP at the time. It is listed in the Guinness Book of Records as the “costliest natural disaster to befall any one country.” Most of the losses were uninsured, as only 3% of property in the Kobe area was covered by earthquake insurance, compared to 16% in Tokyo.
2011
Tōhoku was traditionally considered the granary of Japan because it supplied Sendai and the Tokyo-Yokohama market with rice and other farm commodities. Tōhoku provided 20 percent of the nation’s rice crop. The climate, however, is harsher than in other parts of Honshū and permits only one crop a year on paddy fields.
Sendai is the center of the Tōhoku region’s economy, and is the base of the region’s logistics and transportation. The city’s economy heavily relies upon retail and services – the two industries provide approximately two thirds of the employment and close to half of the establishments.
Sendai is frequently called a branch-office economy, because very few major companies are headquartered in the city. Various authorities are cooperating to alleviate this problem, primarily by encouraging high-tech ventures from Tohoku University, which is well-known for its science and engineering departments.
Tohoku Electric Power, a major regional supplier of electric power, has its headquarters in Sendai
Jefferey S Nelson
:
Opportunity
I remember the Asian financial crisis we were working on MHI 737 parts.
The slow down really effected the Areospace industries as a lot of Manufacturing of sub assembles came out of the area effected, Probably to early to tell what the effects will be.
With this one.
Michael
:
I think the opportunity to buy many shares at lower prices is coming soon.
This will test us all to see if we are really value investors – i.e who will think something is wrong when MCE and FGE prices start to fall after experiencing the recent purple patch.
Keep some cash ready to take advantage!
Ash Little
:
Hi Michael,
A friend emailed me today and said “keeping droping Market…I am stalking you”
LOL yes I got a laugh but this is how we all should be thinking.
Richard Anderson
:
HI Roger
We wrote a few days ago to get your thoughts on our first go at an IV on Think Smart – we were thinking around 44 cents and just wondered how we were going? Probably need a lot more practice!
Interested to hear your thoughts,
Cheers
Richard
Roger Montgomery
:
Hi Richard,
Whether you are seeking the 2010 or 2011 valuation will determine whether 44 cents is above or below my own for (Thinksmart, ASX:TSM, MQR A2). I have closer to 80 cents for 2011.
William Gill
:
Hi Richard/Roger
I have IV a few cents more than Roger, but the important part is research, you will see they had a capital raising last year so they could expand in UK, It is important to wait until the results of this capital raising are known to see if the money was put to good use. Remember that UK is also going through a rough patch at the moment, so sales are down.
Brad
:
VOC: definately got the “X factor”
Adam
:
It is dangerous that people just blindly go out and buy something the next morning after Roger mentions it.. particularly when there is little or no margin of safety!
Roger out of interest, you’ve been drilling into us to only own the best (i.e. A1) business, and only buy at a BIG discount to intrinsic value.. Could you explain your thinking behind buying a B2 business at instead of just being patient and waiting for an A1 oppurtunity?
Is it perhaps you believe it will be A1 next year? (And wouldn’t this be speculating?)
Roger Montgomery
:
Hi Adam,
B2 is not fixed for life! I don’t think it will be a B2 after the full year results. Not speculating at all. Besides, B2 is acceptable too. A1 is better of course and I wouldn’t dedicate as much or my portfolio to a B2.
Nick Mason
:
Hello Roger,
An excellent article you wrote for Eureka Report, your analogy comparing Vocus to toll road operators I thought was very appropriate.
Your initial reaction to Vocus was sceptical and none too complimentary and so I am also happy that you went to the trouble to investigate the company more thoroughly. Upon more thorough research the similarities to Berkshire Hathaway (operating as its former business) would have grown less and less obvious I’m sure.
$2.45 is about fair value in my mind as well so if readers were looking to buy stock in the company with a margin of safety anything under $2 would be good buying. It will be interesting to see what they do with the capital raised and how this will affect the value of the company. Management’s past acquisition history (of the data storage centers) was done at a very opportunistic price so if management can repeat their efforts of the past shareholders will stand to gain.
Best Wishes to all.
Roger Montgomery
:
If they keep paying 4 times EBIT for equity funded and debt-free acquisitions, the ROE will be satisfactory.
Greg Mc
:
Hi Nick,
I went back and had a look at your initial post on VOC in February. That was a pretty good call and good on you for having the courage of your convictions, when, as you note, there were a few people that didn’t share your enthusiasm.
I dips me lid to you mate.
Ray
:
I also am a little puzzled over this selection.
I saw it as Peter mentioned but when I looked at it even though I got a much higher IV than Roger listed on the Eureka report I did not think it would qualify as investment grade because of the debt level and the high intangibles which are 50% higher than total assets.
Although I enjoyed the book Roger and found it very informative I have decided after this that I am definitely not a graduate but I must be an old undergraduate.
Again thanks for the book Roger as it has made a great difference to my investing.
Ray
Roger Montgomery
:
Hi Ray,
Its really important to avoid the mistake of looking at debt/equity and writing the stock off. As I say in Value.able, take a look at the pattern of debt and the cash flow of the business as well. Try to understand the nature of the intangibles too and why accounting rules cause those entry to be made. Regarding debt, take for example a company that sells a yearly subscription to something. It receives the cash up front, yet it has a liability (deferred revenue) that may be 11/12ths at balance date of the revenue. What is the company’s liability? The answer is, to deliver the service it has been paid for. If its is insanely successful, you might think its debt was too high.
ron shamgar
:
keep up the great work roger and please continue to share with us your great insights!
fred
:
Hi Roger,
Vocus Communication Limited ( VOC ) Roger you have me scratching my head over this one.
Benjamin Graham & Warren Buffet have made plenty of errors , Good Luck with this one!
Thank’s for all your help!
ron shamgar
:
he’s already doubled his money on this one (and me)…….so no luck needed!
Nic Arena
:
Got to agree with Fred on this one Roger. B2 and only a 11% MOS??? Must be struggling to find anything A1 or A2 at a decent value. I thought that if you ever invested (and that was a big if) in a B2 company it would have to be at a huge Margin of Safety not 11%. Love reading all your blogs and then applying it to my investing but scratching my head at this one – can’t figure it out and how to use it to improve my investing. Interesting price rise seeing that everything else is moving down quickly in the last few days.
Roger Montgomery
:
Hi Nic, Don’t invest in by looking in the rear view mirror. You are right though, not a lot of value around (not surprised the market is declining again). Very high proportion of cash in the portfolio at the moment.
ron shamgar
:
what makes you think roger bought this for himself at such a small MOS? you have to remember that by the time roger prepares a eureka post about a company, the share price can start moving fast before the post is published. which is exactly what happened with Vocus.
my feeling is roger bought it for himself around $1.60 and by the time he was sharing his thoughts on eureka report, the price shot up to $2.20.
keep up the great work roger and please continue to share with us your great insights!
Peter
:
Thanks also to the Value.Able blogger (I can’t remember who it was) who first mentioned VOC on this site 6-8 weeks ago. I find the suggestions by Value.Able graduates one of the best features of this site (besides Roger’s insights), because sometimes companies get mentioned that for whatever reason my search criteria missed.
I like to check out all companies that get mentioned. Some I ignore, but some look too good to pass up.
VOC was at about $1.35 five-six weeks ago when it was first suggested by one of the bloggers. I’m very grateful for the suggestion to look in that direction because the returns since that time have been stellar to say the least.
To that Value.Able graduate, take a bow! (and don’t be shy about stepping forward)
Peter
Ash Little
:
Hi Peter,
I agree,
I check every stock mentioned,
Some are OK some are garbage but every now and then you get a nice gem.
Keep up the good work fellow bloggers as we are all hear to heap each other out
Craig B
:
Ash,
I do the same, but in the last 12 months I’ve passed on Decmil, Matrix, and Vocus.
I must read that book again!
Ash Little
:
Hi Craig,
The good part about that is all you have lost is opportunity.
Plenty of that will come by if we are patient.
P.S i too missed decmil but that happens,
ron shamgar
:
i’m going to take partial credit for that…. i also bought at $1.40, i guess u owe me 5cents :-)
David V
:
Hi Peter,
Congratulations. Remember that in the short run, the market is a voting machine; in the long run its a weighing machine.
Short term runs are great but not really what the philosophy is about. Many of us have enjoyed great runs with some stocks e.g. MCE, FGE, SWL, MLD to name a few; but the real proofing of the strategy will be in consistent returns over an extended period.
George Economou
:
Thanks Peter,
Sometimes even amatuers fluke it.
George
fred
:
Hi Roger,
It must be difficult to pick stock’s with the guide lines Peter Switzer has put on to you but the change you and Peter talked about might give you more of a chance. I was very please to hear your views on JB-hi fi and I concur. Could you please give me the code to the stock you mentioned regarding internet use.
Roger thank’s always
Ash Little
:
Hi Roger,
You seem to like this underwater stuff
Buoyancy devices and underwater cables,
I might have to buy a snorkel to get the next stock
Keep up the great work
Roger Montgomery
:
Hadn’t thought of that Ash. Will check the flippers next time I go out.
zoran
:
Dont forget ARB/snorkel.
Cheers
Ash Little
:
Nice one Zoran
Very funny
Hardin
:
VOC, competitive advantage and IV “rising at a decent clip”, shame about the margin of safety.
I will be extremely interested to see the reason for the capital raising.
Thankyou for the great blog Roger.
Hardin
Greg Mc
:
That’s what I was thinking yesterday prior to the article being released. Certainly the MOS has now disappeared, but that may be shortlived once Roger’s followers have been satisfied. The reason behind the trading halt may or may not make a difference as well. Certainly an interesting day for existing shareholders!
My recollection of one of Roger’s posts is that an exceptional business with rapidly rising IV but no MOS gets second prize, while an exceptional business at a significant MOS but without a rapidly rising IV comes third. First prize of course is all three. I’m speculating here, but reading between the lines, VOC might have an IV that is potentially rising rapidly enough that the relatively meagre MOS at the time of writing was acceptable. Happy to be corrected, Roger.
Rob Walker
:
Good research Roger, interesting day with VOC, trading Halt and sharp increase in opening price.
Would anybody like to shed some light on SXY takeover of STU
PS:- Good luck with SMSF Strategy Day
Regards
Rob W
Rainsford
:
Hi Rob, I don’t think we are supposed to be talking about resource companies as Value.able grads but I’ve been an SXY shareholder since before I got the gospel according to Roger. From what I’ve been reading I think we will see consolidation in the Cooper Basin eg Beach might have a go at merged SXY/STU. The shale gas potential is aso getting more attention. SXY have a new MD who is much more agressive than the previous one.
Regards, Rainsford
Rob Walker
:
Hi Rainsford,
Thank you for your reply, I am currently holding stu, and have elected to exchange for 2.5 x sxy shares. Due to the increase in the number of shares now for sxy I have not been able to get a good picture of iv for sxy.
Lol regarding the resource stock comment, if I can find a good business with a Good mos I’m in and Stu has been good to me so far :)
Cheers. Rob. W
ron shamgar
:
Roger u mention Vocus last night and today up by 14%…. THE POWER!!! :-)
they also seem to be raising money….
Scott T
:
You’ve done it gain maestro, one hell of a response from the market to this article.
You continue to astound and educate us.
All the best
Scott T
Roger Montgomery
:
Thank you Scott.
Greg Mc
:
I just started looking at this one properly yesterday and then you go and ramp it last night! Unfortunate timing of course, but c’mon! (kidding, kidding…)
Now the self funded retirees have piled into it this morning and it darted further north before going into a trading halt. Previously escrowed shares being sold perhaps?
Oh well….