What is your WOW Value.able valuation now Roger?
With food prices on the way up and Woolies share price on the way down, I have received many requests for my updated valuation (my historical $26 valuation was released last year). Add to that Woolworths market announcement on 24 January 2011, and you will understand why I have taken slightly longer than usual to publish your blog comments.
With Woolworths’ shares trading at the same level as four years ago (and having declined recently), I wonder whether your requests for a Montgomery Value.able valuation is the result of the many other analysts publishing much higher valuations than mine?
Given WOW’s share price has slipped towards my Value.able intrinsic value of circa $26, understandably many investors feel uncomfortable with other higher valuations (in some cases more than $10 higher),
Without knowing which valuation model other analysts use, I cannot offer any reasons for the large disparity. What I can tell you is that no one else uses the intrinsic valuation formula that I use.
So to further your training, and welcome more students to the Value.able Graduate class of 2011, I would like to share with you my most recent Value.able intrinsic valuation for WOW. Use my valuation as a benchmark to check your own work.
Based on management’s 24 January announcement, WOW shareholders can expect:
– Forecast NPAT growth for 2011 to be in the range of 5% to 8%
– EPS growth for 2011 to be in the range of 6% to 9%
The downgraded forecasts are based on more thrifty consumers, increasing interest rates, the rising Australian dollar and incurring costs not covered by insurance, associated with the NZ earthquakes and Australian floods, cyclones and bush fires. The reason for the greater increase in EPS for 2011 than reported NPAT is due to the $700m buyback, which I also discussed last year.
Based on these assumptions and noting that WOW reported a Net Profit after Tax of $2,028.89m in 2010, NPAT for 2011 is likely to be in the range of $2,130.33 to $2,191.20. Also, based on the latest Appendix 3b (which takes into account the buyback), shares on issue are 1212.89m, down from 1231.14m from the full year.
If I use my preferred discount rate (Required Return) for Woolies of 10% (it has always deserved a low discount rate), I get a forecast 2011 valuation for Woolworths of $23.69, post the downgrade. This is $2.31 lower than my previous Value.able valuation of $26.
If I am slightly more bullish on my forecasts, I get a MAXIMUM valuation for WOW of $26.73, using the same 10% discount rate.
So there you have it. Using the method I set out in Value.able, my intrinsic valuation for WOW is $23.69 to a MAXIMUM $26.73.
Of course, I only get excited when a significant discount exists to the lower end of these valuations and until such a time, I will be sitting in cash.
Posted by Roger Montgomery, author and fund manager, 14 February 2011.
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.
Bucko
:
I have a couple of things to discuss. I’ve thought about them a lot so please read.
Supermarkets
People are complaining about the big 4 banks and how they make big profits. We have 4 big banks, 2 large supermarkets, 3 large telco’s. I see having 4 big banks is suitable for Australia. Sure they make bigger profits than Coles & Woolies but I see this as a cost our society must bear to have a strong banking system. People have very short memories, they forget that our banks were strong during the GFC.
Our banks don’t have huge growth left. I’m not a bank basher, I’m more of a supermarket basher, but not too much. 4 big banks and only 2 big supermarkets.
I think the ACCC were stupid to let Coles and Woolies get into petrol, whats going on here is silly. It is also hurting Australian suppliers who sell to these convenience stores under the Coles/Woolies banners at good discounts. And now they aren’t letting Metcash buy Franklins. I think these are 2 mistakes of the ACCC who need to fix up their act. Anyway, the Liberals haven’t helped in getting competition in the supermarket sector. Aldi has been opening stores in shopping centres to increase their presence, totally against their business model. They have done this slightly out of desperation because of land issues and the land development laws. Margins for Coles and Woolies i’m pretty sure are higher than in other developed countries. Supermarkets have low margins but Coles and Woolies are doing pretty well. Imagine if there was a lot of competition in supermarkets, people would save $20 a week on their grocery bill to put to their mortgage. And they want to complain about banks when they should be looking here.
Anyway, I think that sorting out competition in supermarkets is not the biggest issue at the moment. After all, Woolies only got their act together in the late 80’s. We want to have strong Australian retailers and I think that getting overseas competition in is not in Australia’s best interest hence Coles and Woolies were protected/favoured a bit by our government. And people don’t understand that they could be saving $20 on their grocery bill each week with competition. The profits of Coles and Woolies is something like half of WBC and CBA.
I’m not sure if the Libs deliberately or by lack of policy left Coles and Woolies alone. Either way, I think it was the right choice. They are now making changes to the laws of land development to make it easier for Costco and Aldi to open stores.
Rudd brought in that website of grocery prices that didn’t last long. Another slap-dash policy of Rudd’s. With 10,000 sku’s in many supermarkets and different list price zones, it is a mammoth task to maintain that website, and Coles and Woolies can easily find ways to make that website even less accurate. SLAP-DASH. So did the Libs purposely leave Coles and Woolies alone or was it accidental?
And another reason why having competition in supermarkets is not a big issue is because, if there was more competition in supermarkets, local suppliers get squeezed a lot more. I thought it would work the opposite way. We are seeing it now with milk and other things. I thought that if there were 4 big supermarkets in Aus, the suppliers would have more power because they can opt not to sell to a supermarket if the trading terms are not right, but this is not the case. If there is more competition, the suppliers get squeezed more.
Other slap dash policies of Rudds were the Home installation fiasco and the mining tax, not speaking to the big miners like Hawke and Keating would do beforehand.
By the way, I am for the mining tax. When all our resources are dug out, what is Australia left with in the long term? Nothing. When Ballarat had the gold rush, at least they have those beautiful old buildings, we have something to show for it. We have great natural resources that are limited, Australia should somehow profit from this in the LONG TERM.
We are still running deficits, we need to be running more surpluses through the mining tax and we need to prosper in the long term. So what if it scares off some foreign investors, they will come back, not tomorrow but they will come back. I don’t like this short term view just because people want to make the money now. Dig all the resources out as fast as possible, a few will be rich and then not long after we will be thinking, oh we should’ve put some money away in the bank. But governments as they are, will spend those savings unwisely so what can we do? The carbon tax makes all this even more complex.
Sure BHP pay their fair share of tax but they need to pay more, the royalties the goverment are getting from mining licenses is not enough. Those resources out of the ground making the fat cats rich is not good enough for the Australian person, those resources are ours ie all Australians, not BHP, not RIO’s, ours!
Woolies
I’m not surprised to see the CEO of Woolies resign before he was pushed. Woolies can only run supermarkets in Australia pretty well, not really well. They can’t even get NZ supermarkets right. They can’t get electronics right. Only supermarkets in Australia. And by the way, they are not great at running Australian supermarkets. They don’t care about labour costs enough, they don’t care about running out of products that are on special. All they care about is increasing sales, and the deparrtment managers get commissions for higher sales, its all they care about.
This shouldn’t be surprising, a duopoly isn’t the most customer friendly thing is it? They aren’t as efficient as if there was a lot of competition. Hence, the running out of products on special and the not caring about labour costs. I worked for them, I know, and I work for a supplier of them. This doesn’t happen with Wal-mart or Tesco. Internationally Woolies are mediocre, just in a strong position.
What was surprising to me is that they even put a guy who grew up at Woolies all his working life became CEO. Now they’ve done it again. When there isn’t too much growth left, they need someone… I don’t know, who has a bigger retail picture of the world, not someone who grew up at Woolies. What this tells me is that the board screwed up. And it is the board as well that are to blame. Same story with Fosters, I won’t touch them till they have a new board.
Woolies did have impressive growth but I see that this happened because of their competitive position and through quite good management and nothing else.
JBH/TRS
I know you’ve said that TRS will open more stores that won’t be as profitable, same for JBH. And I will be observing this theory. I was previously under the impression that with a better supply chain and more DC’s, it would make the newer stores more profitable. But I do take your point and I will be observing this over the next few years. I’ve seen many times chains open stores only to close them a little while later.
By the way, I’ve been more of a fan of TRS than JBH. But there are a few little issues that I just don’t understand even though they quite are simple businesses.
Buy backs/BHP
From what I understand about the BHP buyback. I think they are doing this buyback to shut investors up. And they are doing it when BHP is not expensive. BHP to me are a very well run company. I am a big fan. They want to keep the money because good assets are running out and they want this money to buy things that are left. I beleive their long term view of things is one to go by, what they invest in tells me where commodity prices will be in the future, they are well diversified and I’m sure they have a hell of a lot of research that tells them where the long term commodity prices will be. And they are aggressive and what companies in the world are better at mining than BHP? And good capital allocators as well? I don’t know but I’m happy with them.
Uranium
It is quite interesting that China, from what I’ve heard and believe, are putting on hold 20 nuclear power stations. Not because of the Japan tsunami issue but because they want to put pressure on uranium prices and snap up assets. Thats quite funny.
Your piece on ipod’s, Apple, I am very careful about that. Technology always changing. Nokia was a great brand and they are pretty standed now, that didn’t take long at all. I wonder how you’d know about R&D issues at Nokia, in researching them, you’d be lucky to find the right person to tell you about their R&D issues. And you’ll have to keep your eyes opened all the time.
Chris
Roger Montgomery
:
And the ACCC blocked the sale of P&N beverages to Schweppes/Asahi on the grounds that it would reduce competition but Coke has 85% of the market!
Richard Anderson
:
Hi Roger/All
Very new to this and a bit concerned about commenting when just starting but wonder what thought were on Think Smart (TSM)- we had a first go at an IV and came up with 45 cents but will have another look to make sure – any comments please.
Rich and Jude
Ash Little
:
Hi Rich/Jude,
They did a capitial raising near the end of their finacial year so I weighted equity rather than used average or in my case beginning equity to come up with ROE.
If you do this it will change your IV.
Watch the POR though as this will increase as well.
Hope this helps
Simon
:
Hi Roger,
I must say I find your methodology somewhat difficult to understand. You don’t appear to take into account any differences in the underlying divisions of the business, and whether current earnings are reflective of the future. You just take reported earnings for each division, chuck them in a pot and apply a global return assumption. Goodness knows how you value a company Wesfarmers and all its diverse businesses. Sure, fundamental analysis does have an ‘art’ factor where subjective judgements need to be made, but it is based in science, and that is, a company is worth the present value of its future cash flows. I’m not sure your valuation methodology has an economic basis, and your inputs seem simplistic.
As for broker valuations, we all know how tainted most of them are. But at least most of them follow a properly contructed DCF (albeit one with assumptions skewed to get the valuation they want).
Peter
:
Hey Simon,
I can tell you how I would value WES using the Value.able approach.
I can do this in less than one minute.
Here goes –
ROE has been circa 6% over the last 3yrs. I can get an equal or better return in the bank with no virtually no risk. I will keep my money in the bank !!
Thats it !! thats my valuation.
Now I have time to move on to something more value.able, which could be spending time with my family whilst someone using a DCF approach may spend hrs forecasting future cash flows and then discounting them to a present value. And all for what ?? so they can earn a return of 6%.
I agree with you that the Value.able approach is simple and difficult to understand at the same time.
It is simple, in that the inputs are simple.
It is difficult in picking which businesses you should apply the inputs to.
Happy investing.
ronald
:
hey simon
I agree, it was buffet that said a company is worth the present value of its future cash flows. Using old accounting numbers is not a sure way to value a company.What matters is the future not the past.
Arnold
:
Hi Roger
I have just recently got your book, it is truly a great read.
I would like to know where you gathered all the numbers/info to figure out the 2011 Forecast IV for WOW.
Thanks
Raymond
:
Hi Roger, Room,
While I am happy my 2011 forecasts for BHP are in line with Rogers earlier example (so I know I am using the correct formula) I cant spot what I think is an error in my estimated I/V for JBH despite checking several times.
Could someone review the following inputs and let me know if I have misread the 1/2 yearly report as my 2011 I/V of $31.38 seems very high.
My inputs are as follows:
Equity: $352.754m
Shares: $109.222m
EQPS: $3.23
NPAT: $175.72m
F/Y DIV: $88.36m
POR: 50.3%
ROE: 54.4%
SELECTED ROE: 40%
RR: 10%
INTRINSIC VALUE: $31.38
Thanks in advance,
Raymond
Ash Little
:
Forward ROE is a bit too high Raymond,
plus POR may rise
just my view and hope thie helps
Raymond
:
Thanks Ash, you are quite correct. The NPAT was to high.
I now get:
NPAT: 136.45
ROR: 64.8%
ROE: 42.2%
ROE Selected: 42.5%
2011 I/V: $24.28.
Appreciate your input!
Raymond
:
Oops, read POR 64.8% not ROR. :-)
Ash Little
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Hi Raymond,
Closer to me now.
POR will rise to about 80 or 90% soon im my opinion so pug that into your future valuations
see what happens
Andrew
:
REA results looked decent although i havne only just had a brief looka t them at the moment. I have a forecast value for 2011 of $10.54 rising from a 2010 value of $9.15.
I found the presentation interesting especially the comparisons between themselves and domain. There is a huge gap between these two. I’ll probably come back and comment more after i look into the financials.
Andrew
:
Ok just had a look at the whole financial report. This company is a cash machine, their net operating cashflow was again above their reported NPAT and the investing and financing obligations are easily covered by that and still have a lot more cash which means more interest received. There is absolutley no need for this company to raise debt. Which is a huge plus.
There didn’t appear to be any flags in the results that raised my eyebrows. If this company ever traded at a reasonable MOS I would jump right in but it is still expensive.
For the forecast valuations above, I have taken into account an increased POR for this company as they are consistently earning more cash than what they need and i don’t believe they will keep paying such a low POR.
Lloyd
:
For what its worth, I calculate a 2011 IV for REA of $11.50/share rising to $14.20/share in 2012 (at 10% RR). In my humble opinion, you need to think about the value at least 12-18 months ahead for a relatively thinly traded, but quality business like REA. Otherwise, you’ll be waiting around forever for that big MOS entry point.
Ash Little
:
Hi Lloyd,
I am still kicking myself when it got to $5 and I had an IV of $8 during the GFC.
I keep saying that all I lost was opportunity.
This was a good opportunity though
RobertD
:
Hi,
What are peoples thoughts on SWL? Interim report just out with decline in npat. Oulook looks like it will be tough. Only expecting to make the same npat as previous year, hence a decline in roe from previous year. They seem to have underestimated the operational costs to run a public company.
I had a position in this company, sold out yesterday making a small loss. Now on reflection I think the emotion monster was speaking a little too loud, and now reviewing the facts maybe I should of held. My reasoning yesterday was that I could redeploy the funds on better opportunities.
Subsequently sp has is now tumbling further. Maybe a good picking now? Roger had this listed as an A3. My iv for this based on interim is around $2.35.
Brent
:
SWL have previously released a forecast that their NPAT this year will be largely in line with 2011. This is due to lower margin work being carried out during 2011 (assumedly due to high competition in tendering). Their prospectus suggested that their 2011 earnings would be below 2010 earnings, thus to break-even, they are in fact exceeding their original forecasts, which is a positive.
Read their prospectus, they expect growth to return in 2012, as higher-margin projects are undertaken. We just don’t know how much growth to expect at this stage.
My IV is around the $2.20 mark for 2011, and rising to $2.70 odd in 2012 (based on assumption of 20% profit growth). My reasoning is, in 2011 they are forecasting about 20% revenue growth over 2010 (but flat NPAT), with margins forecast to return in 2012. I forecast that if they can maintain revenue in 2012, in line with that achieved in 2011, and recover the margins, they will achieve the 20% NPAT growth in 2012.
SWL is clearly a well-run company, with exceptional financial characteristics, which is likely to benefit from the long-term boost in infrastructure spend that QLD requires (both for sustainable development, and also shorter-term for flood recovery).
Cheers,
Brent
Brent
:
‘thus to break-even’
I meant to say, if they achieve similar NPAT in 2011 as they did in 2010, they will in fact be exceeding their original prospectus forecasts, which indicated a temporary fall in earnings in 2011 was likely, before recovering in 2012.
Cheers,
Brent
ron shamgar
:
robert if ur IV is 2.35 than u should be looking to buy around 1.50
thats what margin of safety means!!
hope that helps you save brokerage fees :-)
Brad
:
Ashley, do you think the mining boom is a speculative bubble ? (extra ordinary popular delusions style)
Ash Little
:
Yes Brad,
I do,
Please read my post under the BHP blog
It could last many more years yet though
I just want to avoid this stuff and buy really good businesses that we get through anything that may happen.
That said my current holdings is skewed to mining services
If it all turms tomorrow then I will have some colaterial damage.
Andrew
:
Anyone got any thoughts on DJS? They came out with a announcement today and is another one of my companies i keep an eye on.
Seems to be as expected that tougher trading conditions has resulted in a small drop in sales but from some is a lot better than myers. My thoughts on DJS are that it is the benchmark and far far better than Myer as a business both in performance and future potential wise. Superior management, better brand and selling better brands.
They announced FY profit forecast of between 5-10% but said more than likely be at the lower end. So i have worked mine out based on the future profit growth being between 5-8% and a payout ratio of around 85%.
This means on a 11% RR it has risen from $3.74 in 2010 to $3.86 (+3%) in 2011 and i have a 2012 forecast of $4.03 (+7%). So IV rising at a good clip it aint.
The HY and FY results might be interesting.
Brad
:
big time key person risks in fund managers like PTM? (eg 452 Capital)
Brad
:
Simon – my quick 2011 seek val is $5.50
Ashley – have you read “Extraordinary popular delusions and the madness of crowds” written by one Charles Mackay over 200 years ago – it’s got the tulip bubble but the other chapters on alchemy, beards and duels are great
The theme is: “Intelligent people to crazy things when caught up in speculative bubbles”
Ash Little
:
Hi Brad,
Yes I have read that one.
I just reading this stuff.
I have a list of quotes that I read before I invest and the one below tries to solve this issue
The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.
We are not at the pumkin and mice stage ATM but these are sage words
Ash Little
:
Sorry I mean I just love reading this stuff
ken fraser
:
Nick, VOC seems ok to me also, as I bought more today.
ken fraser
:
Lloyd, Re your query on PTM, I always wondered about this also, as I get roughly the same IV as you. To me TRG was a better proposition, at least short term, so it will be interesting to hear Rogers comment.
ron shamgar
:
im pretty sure roger is using a low RR but that doesn’t mean we should also!
its a pretty low risk business unless they keep losing money for their clients.
i would stay away from these type of businesses, only because they usually track the performance and mood of share market indices.
the only time to buy them is when u have a GFC on ur hand and they get ridiculously cheap but unfortunately that was back in 2009 and the next one might be in 20 years from now :-)
Lloyd
:
Ken/Ron,
I believe that an RR of 8% is necessary to come to a 2011 IV close to current share price. Either that, or massively unrealistic forecast earnings growth in the second half.
For me the issue is not a question of buying at the current price level, but rather the wisdom of holding versus folding.
The question of an appropriate RR for PTM is one that remains unanswered, but 8% is too low for me given current longer term deposit interest rates. The risk premium just ain’t there at 8%, although many a fund manager might be happy to achieve such!
Lloyd
:
Ken/Ron,
In the latest ValueLine Article ” ValueLine: Something special” (February 23, 201) Roger quotes the current (2011) IV of PTM as $4.74/ share accompanied by a footnote that it is the “Latest Intrinsic value update February 23, 2011”.
This is not a small discrepancy with what others and even you calculate and what might reasonably be derived via the financial statements in the interim report filed on 18 February. The mystery is why?
I have offered my thought on the two possibilities (RR or the use of a forecast based on massive uplift in second half earnings) and with further digging I have found nothing else that could explain the discrepancy.
Regards
Lloyd
Gavin
:
Lloyd
PTM’s business is scalable with very little need for additional capital. PTMs implied growth rate is not indicative of its actual growth prospects. The difference will turn up as an increasing ROE. The value-able formula does not accommodate changing ROE’s
My first pass indicative valuation for 2011 is $4.92.
Lloyd
:
All,
The “apparent discrepancy” is reconciled with three factors coming into play:
1) Roger is prepared to go as low as 9% RR for very high quality businesses as he notes in Chapter 11 of ValueAble.
2) For such quality reliable business he doe not truncate the annuity and growth multipliers at 60% as occurs on his Tables 11.1 & 11.2 (after all PTM has operated with higher ROE’s than this for years) so you need to use the equations behind the tables to derive the correct multipliers.
3)The valuation is expressed twelve months ahead so to this effect is the average of 2011 and 2012 IV.
Take these to account and you get the IV that Roger has recently quoted.
It should be noted that the approach of basing the investment decision on the the valuation twelve months ahead is appropriate to all businesses in my view. After all history has been banked by the existing owners and the future is what you are paying for.
Regards
Lloyd
Ash Little
:
Hi Ron,
Financial crisis occur much more regularly than people want to admit.
It will be way less than 20 years for the next financial crisis to occur somewhere in the world.
It will be this year somewhere
ron shamgar
:
ash, if you look back at history they usually arrive every 20 years on average. this doesn’t mean to say there wont be large corrections and rallies along the way.
but im willing to bet that we wont see the lows seen in march 2009 anytime soon. these opportunities only arrive every decade or 2…. (unfortunately for us…)
Ash Little
:
Hi Ron.
Financial crisis occur very often. But not so much on a global stage.
I recommend you read “This Time Is Different: Eight Centuries of Financial Folly ” BTW to give away a few spoilers it is never different
Before the GFC heaps of finacial crisis have happened over the last 20 years. We forget the South American crisis and the Asian crisis not that long ago. Greece and Ireland last year.
I am backing eastern europeanean countries this year or maybe Spain.
Buying opportinities will present themselves even if March 2009 lows are a thing of the past.
Hope this helps
ron shamgar
:
the only place that matters is the USA and now China.
if u check the history books for stock market charts, the ASX200 didn’t fall 50% during the Asian nor the south American crisis.
it only happens once every 20 years. if u check the charts u will c..
and i was referring to PTM in terms of buying opportunity missed.
Ash Little
:
Hi Ron,
You are very right.
The maket will absolutely tank every so often(I wont disagree about your 20 year idea.
Plenty of good opportunities in the mean time
Simon Johns
:
Hi All,
I’m just reviewing the half yearly result from seek, the market has been very negitive maybe a bit to negitive? What do you think?
Andrew
:
Just having a look now as it is one company i have had my eye on.
I have an increase in the net profit margin which is always a good thing. However, and i am not sure whether this is proper to do or not, if you disregard the share of profits from the associates the net margin actually drops. This leads me to believe that the core operations of the company actually had a drop in net profit margins for the period.
The non-current borrowings has shot up as well from 99,642 to 228,247 which means the company has a lot more debt than it used to. This debt from what i can see was used to purchase major stakes in overseas companies and is possibly the reason for the big increase in profit from associates on the P&L.
The cash-flow statement shows the biggest change in fortune which is again dominated by the purchase of the new associates. The payment for the associates meant that the company had negative company cashflow which is why the debt was raised. the debt.
This company usually raises surplus cash so i am sure that the debt will be easily repaid but an increase in debt always troubles me.
Either way, i believe the price is still too expensive for an investment so i will happily wait until the Full year and revise my thoughts and see how they are going.
Anyone else have any thoughts?
Andrew
:
Also, if i can get confirmation or not, i disregarded the profit from associates as the equity method i don’t think gives a clear indication of the money it is bringing in for the company.
I wanted to get a picture of how the core business is performing. Is there any logic to this or did i just do more than i needed to. its the first time i have noticed this on a P&L and are not used to trying to interpret it. I can see from the notes where it comes from and i did some research on the equity method which led me to be a bit cautious of using it an overall picture of the business performance.
Just after any thoughts on this.
Ash Little
:
Hi Andrew,
Have a think about equity accounting and Buffets comments regarding his holdings for stocks that are not equity accounted for and those that are.
You are a very intelligent man Andrew and I am sure you will arrive at the right conclusion
alfred schebesta
:
Dear Roger,Thank you for your book and blog. It gives me a reassurance that there is a logical way to invest on the market. I am amazed at the talent of the bloggers and am wondering if at some time in the future there might be a Value.able Charitable Foundation set up that could harness the talents of all who read and /or contribute to the blog. My wife and I are both doctors and have found some of our most rewarding moments doing work in Tibet and the wilds of china. I suspect most of the doctor bloggers have had similar experiences. Value.able gives me peace of mind and some monetary rewards and i would like to contribute some of that profit to a group where i can contribute my time and knowhow as well as cash. Any charitable mission whether it be medical, educational , agricultural requires a lot of preplanning and contact with government etc so many members of the Value.able community could contribute in person (as well as cash) and the rewards from taking part are much more than the inner glow of a healthy bank balance. Indeed such a Foundation would in itself require many Value.able talents . I wonder if there is much support for such an idea , if not i am happy to continue doing our own contributions in our own way. I know that there are many charitable groups doing great work with minimal support and the Foundation could assist these rather than start new ventures.
Regards Fred Schebesta
Lloyd Taylor
:
Value is wherever it can be found. A discount to IV and the latter rising at a rapid clip is all it takes! Moreover, rapid growth in value from a small base is easier to achieve than off a large base.
When one hundred dollar bills are not to be found for fifty dollars, then I am just as happy to go looking for dollar bills for sale at fifty cents.
Ash Little
:
Hi Lloyd,
Nice post,
If you find sometime worth $1 trading at 50c let us know because I am getting $1.10 for a dollar on most and even my favourite is on at about 70c
Lloyd Taylor
:
Ash,
This comment was made in response to the posts of Matthew R and and Andrew above (although it did not link and nest with their comments) To quote Andrew … “I completley agree Matthew. I think there are already signs of it with people digging deep into some really micro-companies in search for companies trading at a discount to IV.”
That is exactly what I do at times like this, but I also do so with an eye to their competitive advantage. So yes I am now looking for dollars at fifty cents and I have found a few, but as yet I am uncertain of the long run competitive advantage.
That said as Roger has noted before when the discount to IV is so large and other things stack up for a good short term run then I am in.
Exactly that argument underpinned his call on MACA “Price gap appeals” http://rogermontgomery.com/price-gap-appeals/
So Mathew and Andrew don’t be too derogatory about this approach.
I have done very well bottom fishing for small fry in the past and clearly Roger has too!
There are many ways to make money in the casino that is the capital market… just be aware that each carries a different risk profile and adjust the approach and your mind set accordingly. As Yogi said “Ninety percent of the game is fifty percent mental”. Dollars bills for fifty cents are out there to be found and can often then be passed on for the full dollar in a short time frame. This is value investing at its purest!
Regards
Lloyd
Ash Little
:
Hi Lloyd,
Great Stuff.
This is where I am fishing ATM as well.
I note by some of your questions and comments that you and I are treading a very similar path ATM
I would very much like I meet you in person one day Lloyd.
Hopefully Roger gets something together one day.
Lloyd
:
Maybe I can take a holiday in Dalby and I’ll look you up when I do! Alternatively, if you find your way to Brisbane some time then let me know.
Ash Little
:
I will let you know next time I am in Brisy?
Don’t think you want take a holiday in Dalby,
Cotton, Sorghum and Coal is all you will see.
Ah sorry I forgot the floods make mince meat of the cotton.
Hope to catch up soon
Ilya
:
Hi All,
I am trying to value a company that is paying more than its profit out in dividends (i.e. Payout Ratio of more than 1). When I get to the of Growth Multiplier x 1 – Payout Ratio I end up with a negative number. Should I leave that number as negative, or is there a trick to handling this situation.
Regards,
Ilya
ron shamgar
:
use a payout ratio of 100% as in the long run its not sustainable.
Matthew R
:
Would that company by ARP?
If so this issue has come up before. ARP paid a special dividend last year, you need to remove that from your calculation of payout ratio.
If not ARP, maybe you could tell us which company so we can help further…
But to answer your question without any further info, if a company pays out more that in it’s profit as a dividend you should calculate the IV as if it had a payout ratio of 100% and not use the growth multiplier
Ilya
:
Thanks, Matt. It did pay a special dividend of 30c and after I took that out the IV looks even more pitiful. The company is PMV – one of my early days disasters before I discovered value investing! Good news is it is trading at at a good premium to it’s IV at the moment, so I should offload that lemon quick smart to stop the suffering.
Matthew R
:
Hi Ilya – I just want to make it clear that not myself or anybody else is giving you advice…
And I’ve never looked at PMV before, but I suggest you do some calculations on it’s cashflow by the method described in value.able. Then compare that with a WOW, JBH, TRS or FGE etc. There is a lesson in there.
Ash Little
:
Plus the company may have a track record of running the business for the benifit of the management rather than the owners?
No advice BTW
Ilya
:
Thanks for you replies, Guys. The cashflow analysis is sobering and was well worth doing. Great tip.
As for the management, I guess they just tying to get a few more bucks for something really important. I’ve heard that the new Maybach is out :-)
Andrew
:
I remember looking at PMV a long time ago when i first read about Zara coming to Australia and Solomon Lew being involved. Turns out i think that Zara would not be held through premier.
My thoughts below (no advice being offered, i haven’t looked at them in a while and could well be wrong)
From what i can see and what my retail consultant (fiance) tells me, they have 3 brands that are quite good. However i don’t think that they are the money spinners that they need them to be. The other brands (portmans for example) are largely irrelevant now.
have not read the financials but i decided to stay away from it as a presentation breaking the growth down to brands basically backed up my thoughts.
Nathan
:
Hey Guys,
ZLG what is everyone’s thoughts roger is this the next MCE ?
Cheers Nathan
Ben
:
ZGL you mean?
I have been tracking this little bad boy since last year and according to my records its gone up 129% during the time (i placed it in my hypothetical portfolio). Interesting company, erratic ROEs but its descending for the 06-10 years. You can also tell that some of the increase in ROE was provided by the use of debt and there is a clear correalation between descending debt levels and descending ROE. I guess this infers that underlying business economics are somewhat lacking.
Anyone else?
Tim
:
Hi all,
Does anyone know how you can refine a search in Commsec for only companies with high ROE or low debt, for instance? Is there a way of searching for a list of companies that meet specific criteria, because at the moment all I can find is list of top% rises/falls etc.
If this is not available on Commsec, is there anywhere else that provides a function like this?
Thanks in advance
Tim
Matthew R
:
Yes
Click on the “News & Research” heading in the top menu
Point to “Company Research” in the black menu
and in the menu that drops down click on “Advanced Search Tool”
enter your search terms
E*TRADE has a very similar looking search tool but I think it might be a bit better because it allows you to edit your search. CommSec requires you to re-enter all of your search terms (which annoys me, but not quite enough to make the leap across to E*TRADE – CommSec has me on a competitive advantage – the perceived benefits do not outweigh the effort involved! ;) )
best of luck with your searches, many people have suggested good starting search terms incl ROE and Debt/Equity etc (but note the CommSec ROE is not calculated the same we Value.Able grads do so you’ll still have to do some of your own calculations)
Ash Little
:
Hi Matt,
I have both only because my SMSF is with Comsec.
Etrade has better search but Comsec have one more year of earnings forecasts.
Nice having both and I really can’t decide which is better.
I use Etrade more but only because I have had it longer and i am more used to it.
I am a total nerd with duel screen and I often find I have both open when I get to the IV stage.
I call having both my version of diversification (Chuckle)
Roger Montgomery
:
I believe Alice Schroeder recently confirmed there is not computer in Buffett’s office at all! Near photographic memory helps.
Ash Little
:
LOL Roger,
I am not Warren Buffet that is for sure.
Michael P
:
Tim,
Go to News and research, then select under Company research the Advanced Search Tool.
Category – Performance measures, Return on equity , then Greater than 0.2 for 20%.
Add query, then Run query.
It is a bit clunky, and some quirks, some data is missing, especially for new listings, e.g dont try selecting on too many fields in the same query, better to choose fields as Display only and then with the result set, select and then paste into Excel.
My main tip in this area to enable numeric operations on fields (eg DPS/EPS) and sorting by column, is to do a global replace by selecting any cell with numeric data, pasting it into the Replace, and remove the value except for what looks like 2 spaces at the start of the field, and in ‘Replace with’ enter nothing. When you click Replace All, it will give you a worksheet that is much easier to work with.
Sorry if the last bit was too technical.
What’s missing from the data that I havent been able to find is the Beginning or ending equity, which makes a IV calculation a little more difficult as you need to source that from elsewhere.
Michael
Matt
:
I tend to do a quick ROE and Debt/Eq search filter to get a starting set of companies. I’ll then have a quick look at the financials in commsec eg. maybe cash flow, what the EPS history is, etc. The commsec numbers are good enough for the first filter.
If the company passes the muster then I’ll get the latest annual reports etc and derive an IV based on the numbers in there.
hope that helps, matt
Ash Little
:
Nice Process Matt,
I like it
Tim
:
Thanks so much, that’s a great help!
This blog really is one of the most valuable (no pun intended) resources I have come across! Many thanks to Roger for providing such a good forum, not to mention a pretty good book as well!
Roger Montgomery
:
Delighted Tim. Looking forward to more of your analysis and contributions. Thank you for taking the time to share your thoughts.
Josh
:
Hi everyone,
I’ve been reading for the past few weeks and developed my own system. My initial screener through the E-Trade advanced stock filter uses the following for those who are interested:
Performance Measures > Return on Equity > Greater then 0.15
Risk > Debt to Equity > Less than 0.30
Company Statistics > Market Cap > Grater than 100,000,000
Then I simply display the EPS and DPS figures.
So essentially I use all 5 of the filter fields and it returns about 70 stocks, majority of which are also rated highly by Roger. I usually them rank them by which ones have the best ROE/DE combo (high ROE and low D/E) and start my research from there.
Interested in other peoples thoughts, and agree with Tim, love reading this blog and its great to have so many like-minded people in the same place.
Bruce
:
Many thanks Michael for the tip on replace all. I had been doing a long winded thing with ‘text to column’ but the replace all is much easier. I have asked Comsec through their feedback/support chat room to give their Advanced Search Tool an option to put the output into a csv file for download but still waiting. Perhaps I can encourage others to request the same ?
Bruce.
Ben
:
Hey guys, random question but I figured if anyone knew the answer, it’d either be roger or one of you guys.
ORL- they boast year on year growth in their online business of 50% and say it has been promoted to be in the top 5 stores in sales size.. but does anyone know how much revenue it contributes to the company?
If no one knows, is there a way i could find out?
Andrew
:
I think it is now the biggest store in regards to sales but i have not seen the actual data and not sure if anyone outside the boardroom would see the results by store.
There is no harm in asking the investor relations person. The worse they can say is “sorry but we will not be giving you those figures”.
David E
:
I note the CEO has said they have data that shows the online store does not cannibalise sales from retail stores. I’d like to see that data too. Let’s make some phone calls…
Andrew
:
That would be interesting data. Personally i can’t see that to be the case and i think it definitley will if not already in the future as it gets more investment and promotion.
I am gradually becoming a believer in online shops having a big affect on fashion retailers and the fact that Oroton is embracing it and doing quite well already sets them up well for when this trend really comes.
Terry
:
Hi all,
A great book and a great blog as well; long time reader here but first tiome poster.
I was wondering if any of the residents here could assist me; I have managed to crack the IV processs and can can value companies using their present financials, and have been getting resulst similar to those others have posted on here so I’m happy with that step.
I’m now trying to get a handle on the forecast valuations but I know the results I’m getting at the moment are incorrect (again, from looking at what other people have posted here). Could someone be so kind as to post their forecasts and the figures they used/arrived at for MCE, as I own their shares and have been trying to undertand the forecast process on them.
Many thanks in advance, and I have learned so much about investing through this blog. Not only good information on how to, but also good insights on the things to look out for.
Cheers,
Terry
Geoff Cruickshank
:
I’m not any expert at this, but I’ll have a crack and learn from any alternative thoughts. My guesses for 2011 go like this: Opening equity 59.9m 2011 FY earnings 35m Dividends, last year POR was 12.6%, so lets say 15% for 2011. That would be a div of 5.25m. This is possibly an overestimate given the 3c div for the first half. Closing equity would come out at 59.9+35-5.25=89.65m. (If I’ve overestimated the div then I’ve underestimated the closing equity) Shares on issue I have at 72.96million. It seems quite likely the FY earnings will come in better than 35m. RR 14%, ROE 45% my value $10.51.
Ash Little
:
Hi Terry,
Please read the below post. I think it will help
http://rogermontgomery.com/what-is-the-value-able-graduates-a1-stock-for-2011/
Reply
Matthew R
:
Roger made a blog post on the topic of future valuations, it provides some good pointers:
http://rogermontgomery.com/how-do-value-able-graduates-calculate-forecast-valuations-2/
Ash Little
:
LOL Matt
My daughter calls this a Jinx,
We will have to take turns at posting that one
Ilya
:
Hi All,
I have a question about using analysts forecasts for determining future values. In the book Roger says that it is worth buying an analyst forecast for the business in order to estimate the future value. As I am new to investing I would like to know if there are reputable companies that provide good research that is valuable for future estimates.
Any advice would be greatly appreciated.
Regards,
Ilya
Matthew R
:
I’m not sure I’ve heard roger recommend paying for analyst forecasts (although he has never suggested it is a bad idea)
CommSec, E*TRADE etc are what most here use – then compare with company announcements and past growth rates. That method seems to work ok
Ash Little
:
Hi IIya
Please read the below post. I think it will help
http://rogermontgomery.com/what-is-the-value-able-graduates-a1-stock-for-2011/
Ilya
:
Thanks, Ash. One conclusion I could make is that analysts don’t know much and their advice should be avoided:-) Still Roger does use the forecasts for equity projections etc. I am not talking about analyst Buy/Sell recommendations.
Ashley Little
:
Hi llya,
The forecasts for june year end are usually 10-15% overstaed in September. They are getting closer now and will be very close in May and most companies will report “inline” and the analysts will pat themselves on the back for getting it right.
Remember MOS is very important
yavuz atasoy
:
Hi Roger,
You gave Mineral Resources (MIN) A1 rating and forecasted high ROE for the next year and beyond (I think 3 years if recall correctly). MIN is becoming 30% equity holder in Reed industrial minerals ltd (RDR) via conversion of MIN’s right to 40% of profits in RDR’s Mt Marion project. RDR has been trying to build a processing plant to produce chemical grade spodumene concentrate (used in Li batteries) and Tantalum concentrate (used in electronics) at Mt Marion. RDR does not have a demonstrated track record of profits and basically it has been an exploration company, active mainly in gold but recently they ventured into Lithium. I see RDR as a C5 company. Would this not increase the risk profile of MIN basically getting into an area, which is not in their area of expertise? Providing engineering / contracting services to the best in mining (FMG, RIO, BHP and others) is one thing but getting involved in building complex processing plants is another thing. They probably not build the whole plant, but it is still outside their area of expertise. Any comments?
Regards,
Yavuz
Dan
:
Yavuz,
MIN has been doing this for a while. Their business called PMI runs a build-own-operate model which involves building and operating a mineral processing plant for their clients. They have been processing Mn for some time ay Woodie Woodie I think.
They are really good at it. So they thought they’d capture the price upside in commodities currently. This is why they bought Polaris (Fe) and Mesa (Mn). They will develop these resources and bring them into production well, because they are some of the best operators in the industry.
Cheers
Matthew R
:
If the market continues in the direction it has in the last couple of months (a big IF) the number of good quality companies trading at significant discounts will vanish. Right now there are nowhere near the number of opportunities that were available only 6 months ago. Personally I haven’t found anything really mouth watering for a couple of months.
My preferred activity in this scenario is to save up cash in anticipation of a market correction / lift in values
Although it won’t stop my search for opportunities, I think resisting the urge to swing will be an interesting new stage in the Value.Able journey. I’m sure it will test some investors mettle!
Andrew
:
I completley agree Matthew. I think there are already signs of it with people digging deep into some really micro-companies in search for companies trading at a discount to IV. I fear the competitive advantage chapter amongst others are being forgotten, it will be interesting to see how people go and what companies begin getting looked at. I think there are still a lot of people who are looking for a way to justify a buy rather than waiting on the market to offer us a great opportunity.
I think what Roger said earlier will happen to an extent that interest in this blog and value investing will decline somewhat and some will also start reducing their required returns to try and come up with a discount.
My preferred activity is the same as yours.
Ben
:
Micros aren’t actually a bad choice.. provided they have sound business fundamentals and the qualitative areas check out. But you REALLY need to dig deep with those..
The reason is-if they’re good (thats the hard part.. if they’re good) eventually they will catch the eye of the instos and the various analysts… when that happens prices will race towards the IV or surpass it.
Andrew
:
I agree Ben, micro’s can be a good choice however they need a competitive advantage or else there is nothing stopping another same size or bigger player coming in and taking all their good performance away.
Having a high roe and other financial metrics is all well and good but it needs to be fortified by a competitive advantage.
Ash Little
:
Hi Matt/Andrew,
I agree
From my Buffet quotes
You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing
Kent
:
Beginning of a new week, so a new company for the astute team to comment on:-
MOC Mortgage Choice
Has acquired a couple of sites lately to add future vale
I have a Margin of Safety of 31% with an RR of 14% and an IV of $2
Interseted in your feedback fellow value investors
Ash Little
:
Hi Kent,
It is on my watch list but I am getting a much lower IV.
My ROE is much lower and I will have to go have a look why.
It may be the acquisitions they have been making lately have been “earnings accretive” but ROE destroying.
Not Sure but I will check.
First glance though is that I have it wrong
Kent
:
Ashley, your contributions are “valuable” to my blog, not only do you reply to the blog you actually answer it – THANKYOU
Ash Little
:
Hi Kent,
I have relooked at this and I am not changing my current guesses..
I think EPS will fall
That said, I am often wrong and all I have lost is opportunity.
I am getting MOC at IV ATM
Lloyd
:
Roger,
Subject: PTM First Half Result and implications for IV
Platinum Asset Management (PTM) filed its interim after the close on Friday.
The interim result looks okay with revenue up almost 10% and earnings up 12%. ROE on average equity for the half is 69% (annualized basis) on average equity for the half of $227 million. Dividend of 10 cents/share was declared consistent with 90% payout on an anticipated full year dividend declaration of 14 cents/share. Cost rises in the business look to have been contained after a bit of a steep increase last year.
Plug all this into the IV calc to get valuation of ca. $3.50/share at 10% RR, assuming the maintenance of current levels of performance through the second half. This is well below current share price.
You stated in the thread “How has my Switzer Christmas Stocking Selection performed?” http://rogermontgomery.com/how-has-my-switzer-christmas-stocking-selection-performed/ that:
“Platinum Asset Management – he says this is an “obvious A1 – a great performer, has no need for debt, pays all of its cash out.” The company is trading at about its intrinsic value, so it’s not a bargain, but it’s good quality. The intrinsic value is expected to rise around 14 per cent over three years.”
The result is broadly consistent your expected 14% rise over three years. However, to get IV close to current price I have to value the company on current released results with a RR of 8%. Do you go this low when valuing PTM, or are you forecasting a very significant uplift in earnings in the second half?
Regards
Lloyd
Lloyd
:
Roger,
Come on! Are you playing mind games with us mere mortals once again!
Regards
Lloyd
Ash Little
:
Hi Lloyd,
I don’t think Roger is playing mind games.
Forecasts have fallen but using forecasts and a 10.5% RR and using beginning equity for ROE I am getting low $4 for IV and not doing much in the next few years.
Before the fall in forecasts I had IV similiar to Roger’s
When you have high ROE companies using 60% as opposed to say 65% can make a big difference.
Hope this helps
Lloyd
:
Ash,
I don’t buy the changing forecast as being the issue for the discrepancy in 2011 IV. In fact forecasts have not changed based on analysts consensus data available on E*Trade. For 2011 they were and remain bang on consistent with the H1 result. Rather its the RR used that is most likely the determinant. My belief that 8% RR is just too low, providing no risk premium. See comment below to Ken and Ron.
Regards
Lloyd
Ash Little
:
Hi Lloyd,
I am fairly sure Roger would not use 8% RR
I am using higher and have it starting with a $4
Actually Lloyd forecasts are of a touch lower on etrade.
I only know this because your post has make me relook at PTM and the forecast figures I got on Etarde are lower than what I had.,
Not sure when this changed
Lloyd
:
Ash,
In the latest ValueLine Article ” ValueLine: Something special” (February 23, 201) Roger quotes the current (2011) IV of PTM as $4.74/ share accompanied by a footnote that it is the “Latest Intrinsic value update February 23, 2011”.
This is not a small discrepancy with what others and even you calculate and what might reasonably be derived via the financial statements in the interim report filed on 18 February. The mystery is why?
I have offered my thought on the two possibilities (8% RR or the use of a forecast based on massive uplift in second half earnings) and with further digging I have found nothing else that could explain the discrepancy.
Regards
Lloyd
Lloyd
:
Ash and others,
Problem solved with three factors coming into play:
1) Roger is prepared to go as low as 9% for very high quality businesses as he notes in Chapter 11 of ValueAble.
2) For such quality reliable business he doe not truncate the annuity and growth multipliers at 60% .
3)The valuation is expressed twelve months ahead so to this effect is the average of 2011 and 2012 IV.
Take these to account and you get the IV that Roger has recently quoted
Regards
Lloyd
Roger Montgomery
:
Good effort Lloyd but no cupie doll. 1 is correct but 2 and 3 aren’t. Its time to accept the explanation on page 193.
Pat Fitzgerald
:
Hi Lloyd
I think Roger uses ‘Dividends paid’ so the payout ratio for PTM would probably be closer to 80% than 90%. Roger has stated previously that he uses a RR of 9 for PTM.
Lloyd
:
Roger,
It is interesting to review the comments in so far as most comments focus on WOW and its actions, or to a lesser extent, but quite separately those of its prime competitor, Coles.
Rarely are both examined in the same comment, yet this is where the answer to the question of the true IV of WOW lies.
A little perspective on the subject – For the last five years WOW has tracked sideways, if not declined, on virtually all measure of performance (remember 2005 ROE was up round 35%). Prior to this period Coles was within the incompetently run Coles Myer stable with the result that WOW was running a one one horse race (just cast your mind back to the antics of some of the prominent clowns that were the managers and/or directors of Coles Meyer at the time). Result no competition to speak of. Then WES blew it brains out buying Coles. A near terminal debt funded overpriced acquisition after which an inevitable WES liquidity crisis followed. It survived and now all effort is devoted to turning the “pig’s ear” of an acquisition decision into a “silk purse”. Result, the first real change in the competitive landscape of the food retailing sector in more than two decades.
Add to this the the fact that the relatively (and absolutely) high ROE attained by WOW in the first half of the decade has attracted a few new entrants from Europe who are in the process of cherry picking the highest value market niches.
The result – In two words GENUINE COMPETITION.
This has emerged for the first time in WOW’s history. We all know what happens when genuine competition arrives, don’t we?
Returns for shareholders in the affected business falls, while returns for customers rises – I am cheering!
However, I wouldn’t want to hold WOW based on any valuation with strong historical inputs premised to continue into the future.
Regards
Lloyd
Ash Little
:
Nice Post Lloyd,
I am in totally agreement with you,
But what do I do?
I purchased wow on the float and the tax I would pay if I sold is about $6 per share. I have been dithering about this for years and almost put a sell in when they got to $30 in about September or October last year.
Ok so given it is now $26 and after tax I would have got $24 I am still in front. But I may have topped up ORL FGE or MCE at the time so I really am down lots.
WOW was my first Investment and through total luck and zero diversification I practised Mae West’s advice.
This thing is very hard for me to sell.
Unless you can generate your sage words Lloyd. I think it is time to re read Value.able
Thanks for your post
Lloyd Taylor
:
Ash,
You definitely have a conundrum!
A nice one to have, but difficult to resolve.
My inclination, if in such a position would be to hang in for a while longer and gradually lighten up on the holding when sentiment on the stock is overly positive, as it inevitably will be from time to time in the next year or so. In my view the downside is limited over the next couple of years by the fact that WOW is a major component of any large cap index and all the funds, closet index huggers that they are, will keep it supported (denial runs deep) until such time (if it ever comes) as the problems arising from competition become so obvious that the weighing machine will cut in, then to be over ridden by negative sentiment. Now you obviously don’t want to be in there at this hour of reckoning, but that is some considerable time in the future in my view.
As always, this is not advice, just my thinking out loud as to what I would likely do if I had your conundrum!
Regards
Lloyd
ron shamgar
:
Ash ill make it really easy for you….SELL!
and wait for the next matrix where you can buy it at a $1 and sell it for $9 a year later or u can go nowhere and maybe make 5-10% pa.
thank me later :-)
Ash Little
:
Thanks Ron,
Thanks for the advice.
Can you also help me out with my tax bill
LOL
Matthew R
:
I had to laugh at your comment about thinking of selling at $30 and the $6 of tax that you would have had to pay, but now you are are at $26 and you at still wondering if you should sell
I’ve heard Roger basically tell this exact joke in his presentations! If you follow Roger’s joke you won’t sell until it drops below the IPO price and you can book the tax deduction :)
Honestly though Ash, I don’t feel very sorry for you :) Good luck to you mate!
Ash Little
:
Lol Matt,
I hope it goes this way.
WOW under $2 would be very good
Andrew
:
I think we have all had instances where we have dithered when it comes to selling. I have made some good sell decisions and bad ones. Sometimes i have sold to ealry or sometimes i have not sold early enough (although you could call these bad buying decisions).
It is a tough thing especially when you have seen them go up. My guts served me well in most of my big holdings and selling. I sold Macquarie at $92 and Tabcorp at around $18 for starters as i thought that they were just crazy prices for these companies.
I have twice sold JBH at around $13 after buying them at $8. if only i had Rogers book then.
I am not sure if i am in the minority but i never take tax into account when making my decision, if i make a gain and need to pay tax then so be it. I think paying a capital gains tax is better than making a loss. Although i remember when i first got started and the ASX had a series of education presentations on the weekend (Roger was actually one of them and asked why i bought telstra shares, i didn’t know why i did either, just seemed like a good idea at the time), in some of these courses people spent too much time asking about the effect capital losses will have on tax and i was thinking to myself “i think you guys are missing the point”.
Ashley, you know what your talking about and are quite rational from what i can see so i am sure you will make the best decision and i guess the thing to consider is “Is the intrinsic value of the business rising in the future?”
Ash Little
:
Thanks for the help chaps,
You have all confirmed what my head has been saying for years.
My heart is in a different place.
Emotions emotions.
I cross my fingers and say the next great stock on this blog will have my WOW money
Rici Rici
:
There have been some suggestions that given that WES is trading far above its IV and WOW is ‘somewhat around’ its IV, that value investors should go long on WOW and concurrently short WES.
I would argue that this is a very dangerous strategy. Inefficient market pricing can continue for longer periods than most people can remain solvant.
If one wants to short an ‘overvalued’ stock, then i would strongly suggest waiting for a catalyst that ‘shocks’ the market into more accurately pricing the stock.
However under either strategy the risk is that the investor starts to think as a trader rather than an investor. As Warren Buffett says ‘you cant be a little bit pregnant’. I would argue that its hard enough maintaining the mental control required to be an intelligent investor.
If one wants to be a good trader then learn to be a good trader, if one wants to be a good investor then learn to be a good investor.
But never shall the twine meet between an investor and a trader.
Roger Montgomery
:
I agree Rici Rici,
As I mentioned to Tiago in my comments under the post; IS Your Stock Market Still Turned Off?; “I think you can but there are a very specific set of circumstances that you need to reduce the chances of losing money. In Australia we have relatively few large cap A1s and A2s and so fund managers are forced to invest in companies based often, only on size rather than quality. The result is that you can get it right ultimately but lose a lot of money (a la LTCM) while waiting. Its better to have a catalyst. One of the best is a large, debt funded acquisition that has a negative impact on ROE and IV. I hope that helps.”
Ben
:
I gotta add this, ‘shorting’ a stock is dangerous..
1) Going ‘short’ as a retail investor.. The only way you can do this is by a CFD which is essentially a leverage instrument. So depending on your margin, lets say its a factor of 10.. and lets say you go ‘short’ and it turns out well- a $30 win turns in 300 BUT what happens when you lose? an initial investment will cost you 10 times more.
So be wary, guys please. I’m not a fan of the financial advisory industry and its practices.. especially with the marketing of CFDs. No matter what they tell you please keep that in the back of your mind.
Ash Little
:
Hi Ben,
Yes CFD’s are very very risky and unfortunately easily accessible to retail investors.
I have seen CFD’s do very bad things to the unsuspecting retail investor.
Paul Eagle
:
I have been reading this blog for a while and it looks interesting.
Just did a comsec search on ROE and debt. Found a small business AJJ that looks exciting, good ROE and no debt. Looks like it can grow alot.
Has anyone looked into this one?
I dont own any yet but might bid for some this week.
Paul
Roger Montgomery
:
Hi Paul,
On August 18, 2009, the Company acquired Asian Centre for Liver Diseases and Transplantation Inc, which changed the Company’s principal activity from the wholesale and retail of high end fashion garments and accessories to that of the provision of specialized medical services to cater for patients seeking treatment for all types of liver diseases and transplantation. Curious.
Andrew
:
Wow Roger, i would have loved to see the arguement from management about the change in direction. You can’t argue that their experience in the “wholesale and retail of high end fashion garments” can lead to expertise in the provision of specialised medical services.
Seems a rather odd move.
Paul Eagle
:
Having a deeper look it was a reverse takeover and a completely new management team
kev sep
:
Re AJJ
I would expect growth to be limited to some extent by the work load of the specialist Doctors and available future specialist staff.. profits and ROE may plateau quickly. May be AJJ may obtain $$ benfits from research but from what I can see in their annual report and potential $$$ value from patents etc were not quantified. Anyone like to comment as to why do singapore companies and some china companies (CNH) like to list on the ASX?
I also look at AJJ , Smiles ONT , Greencross GXL and Count COU and ask myself what advantages have these organisations achieved by working under a corporate structure as opposed to indivual traders.
Paul Eagle
:
I tend to agree, they have appointed a number of new doctors recently that should add capacity. This looks like it should double or triple the capacity and maybe do the same to earnings.
ONT has performed really well over the last few years, I am not sure all doctors are very enturpernial.
ken fraser
:
John, I use return on equity more than, >20% and debt to equity less than, <35% and run them both together but not everyone uses these amounts. Just use the amounts you are interested in. Usually the more debt % the riskier the company is to invest in.
Brad
:
Hi Michael,
RE CCP
I get a 2011 val of $6.60 with 22.5% ROE, 65% POR and 10% RR – listened into interview with MD Thomas Beregi, seems OK.
michael s
:
Hi Brad,
I listened to the interview as well. Seems like they are making sensible decisions and taking a longer-term view on purchases, by entering into markets that they hope will provide benefit after a couple of years (rather than the short-term thinking that got them into a bit of strife). I really like the fact they have more people on payment plans (therefore more reliability of collections). I have the IV for 2011 at $5.91 using an RR a little higher than yours. I am guessing they will retain a little more than you have. Thanks for the reply.
Michael
Brad
:
In the words of Yogi Berra: “90% of the game is half mental”
Ben
:
Woolies is wasting its time trying to compete with bunnings..we live in Australia whereby it exacerbates the ‘first move advantage’ as we dont have the geographical capacity to support copious amounts of large brick and mortar site retailers… so its basically a game of who gets there first.. and its obvious whose won that one.
I think the prized JBH is an excellent proliferation of aggressive (and also disciplined) expansion actually working..
Ask me, this will make internet shopping all that more attractive- variety, choice and better prices from the convenience of home.
David V
:
MCE result
Has anyone had a look at cash flow for the MCE 1/2 yearly reports? Appears to be a significant shortfall there for this period. Also would love to get some advice from others on what ‘progress claims and deposits’ is in the current liabilities. There was a significant shift in this item for the period.
Thanks all.
Roger Montgomery
:
Hi david,
These are prepayments from customers. Because the purchase order has not been delivered upon, the amount received remains a liability rather than recorded as revenue, The laibility is reversed upon delivery or progress. Also Chris adds…”MCE has reported a strong accrual profit but operating cash flow is negative by -6.2m. This is due to a reversal of an approximately $30m deposit which was received in FY10. Think of the deposit like a deferred revenue item – cash is received prior to revenue being booked in the P&L. So the revenue was booked in the current period but the cash had been received in the previous period. This can be seen under current liabilities; ‘Progress Claims and deposits’. My understanding is that this came about as a customer was willing to pay a substantial deposit to move up the order book as Malaga was running at full capacity last year and the customer wanted to ensure their order would be filled in a timely fashion.” Thanks Chris. It will be good to confirm the frequency of the treatment and its impact on reputation (what do other customers in the queue think – or are monopolistic behaviours tolerated, indicating MCE is a price maker) during the conference call next week.
Terry
:
MCE result.
Yeah cashflow is down. However they did spend a significant amount of cash on their new property, which they should begin to reap rewards from in the coming years allowing increased production and sales.
Assuming ROE maintains 45% (I know it is high!!!) I believe it can. I get an IV of $11.74 RR 12%. POR also being maintained.
Ray H
:
Hi Terry,
Shouldn’t cash spent on the Henderson plant appear in the Cash Used in Investing Activities rather than in the Cash Used in Operating Activities section of the cash flow statement?
There is $26.48 million under Payments for Property, Plant, and Equipment. I presume this is cash spent on Henderson.
ron shamgar
:
their margins are also improving and they haven’t even began manufacturing in their henderson facility……. yummmmmm
Ashley Little
:
Hi Ron
Yum indeed
Geoff Cruickshank
:
Ashley, I finally got a chance to sit down with the MCE report last night. Payments to suppliers & employees exceeds cost of sales by about 14 million, but inventory has only risen by about 1.4 million. The only explanation I can think of is that this reflects wages for work involved in the move to Henderson, do you think that is right?
Ash Little
:
Hi Geoff,
It would appear to be a timing thing. If you receive a $30m deposit from a customer in one year and don’t complete the order until the next. Then the receipt will be in the first year’s cash flow but not in the profits. The second year will show the receipt as profit but not be in the cash flow.
If you sell very expensive things that require large customer deposits then the cash flow can look lumpy
Also the company is grown lots in the last few years and when this happens cash flow and profits may have no correlation.
I prefer to concentrate on the spectacular margins being achieved and the very high but admittedly debt fuelled ROE
Geoff Cruickshank
:
Thanks Ashley, that seems like a better explanation than mine, love this place!
Matthew R
:
MCE conference call? Do you know the details Roger? I would be interested to dial in
RobertD
:
Hi Roger,
Thanks for the explanation on the MCE cashflow report. However it raises a couple of questions for me:
1) Let’s say MCE hadn’t won that $30M order, then the prior period, 31 Dec 2009 would of looked terrible, as the total reported receipt from customers was $41.6M, less the $30M, would of made it a total of $11.6. That would of made the operating cash-flow look pretty awful?
2) Am I right in reading that MCE now received another $22.3m in the form of a loan for H1FY11? I assume this is on part to pay for the Henderson plant. Their total financial liabilities are now $28.3, increasing from 5.7M – significant increase? It would be interesting to understand the reasons behind the finance.
3) On the balance sheet their tax liabilities seem to have increased 100%, to $11.2M. How do you view tax liabilities, and what is a reasonable liability to have?
4) Where can I get the details of the conference call this week? Is it open to the general public?
Cheers
Robert
Ash Little
:
Hi Robert,
I will try to answer these questions
1) Yes cashflow will be lumpy. It is a because of the high dollar value of the product and the Industry generally.
2) As I know we all thoroughly researched MCE and the increase in borrowings to build the Henderson facility should surprise no one. No one should be surprised when the 30 June accounts come out and this is 6M higher
3) If you make more money unfortunately you pay more tax. They would have booked another 8M to this figure just recently and it looks about right.
4) I am fairly sure the conference call was this morning but us retail investors have access to the Info revealed via today’s Investor Update
Hope this helps
Ray H
:
Hi David,
The cash flow report also caused me to raise an eyebrow. Haven’t had a good chance to go through the report in detail, but the payments to employees and suppliers exceeding revenue for the period rings an alarm bell for me. Perhaps it is just a case of timing of major payments?
Any of the gurus here have further comment?
David V
:
Thanks Roger and Chris – I appreciate the clarity of the explanation. It will be interesting to see how much this fluctuates in the next 12 months with orders expecting to continue increasing.
Thanks Ray,
I noticed this also. Also interesting that the % increase in receipts is not commensurate with the increase these payments. Could this tie into the fact that some of the work completed was already pre-paid (as above)? Hence, artificially infalting the June 2009 period and depreciating the December 2010 result.
Roger Montgomery
:
Thats it.
Ash Little
:
Hi David,
They are selling very expensive things,
Cashflow will fluctuate heaps
Ashley Little
:
What I find very pleasing is how many of the valu.able grads picked up on the cashflow thing straight away.
a year or two ago it would have been much less.
And Ron noticing Margin improvements.
Just fantastic.
Roger, you must feel proud.
We really can’t thank you enough
Geoff Cruickshank
:
Would anybody like to comment on CSL?
After their annual report last year I came up with an IV of around $30. Following the latest report I am now getting about $26, using a 10%RR. It appears they may have been overpaying for the buyback. CSL is the sort of company than has exciting stuff in the pipeline which may produce good results in future, but I have rather reluctantly exited for the moment.
Stephen
:
Hi Geoff,
I’ve also had a look at CSL using the following 2011 estimates:
2011 Equity: $6,112,895,000
2010 Equity: $5,462,895,000
So Av Equity: $5,787,895,000
2011 NPAT: $1,000,000,000
Div POR: 35%
2011 ROE: 17.28%
RR: 10%
I therefore have an intrinsic value for 2011 of $26.67.
I’m not sure about exiting the stock. CSL is a difficult beast to deal with. They have a consistent underlying business in blood products which is growing, but of course, there are always new drug developments to consider and I am also a firm believer in an emerging asian market for their product.
Hope this helps.
Lloyd
:
I am not sure where your guys are pulling equity figures from?
CSL’s interim result financial statements show equity of $3,902,931 (at 31 December 2010) down from $4,215.194 at 30 June – remember they have been buying back shares using cash like drunks in a bar!
Interim report guidance for the full year 2011 is for $950 million earnings at the high end.
Plug these interim results figures into you IV calculation and CSL is worth $24.19 (2011 at 10% RR) rising to $30.00 in 2012 on some possibly optimistic assumptions of fall in AUD/USD exchange rate and competitor restraint.
These guys have been buying back shares at $35-$37/share against an IV of around $24. This is hardly value accretive action to say the least.
I suspect they may be loosing it. Everything has its day and past performance is not always a guide to the future!
Regards
Lloyd
Geoff Cruickshank
:
I agree with your equity figures, Lloyd. I don’t know how many more shares they will purchase by June, so it’s a bit hard to guess an end figure for equity, so I just used the average of 4215 and 3902m. I also used the 950m forecast to come up with 23.4% ROE and value $26.12. Whether it’s $24 or $26, I agree with your thinking that they seem to be paying over the odds for the buyback. Simultaneously the buyback supports the price, but it has to finish one day!
Ash Little
:
Hi Lloyd,
Not sure about equity figures as well but we all agree it is expensive
Andrew
:
For ORL fans on Comsec, it appears that the forecasts in the research section have been updated and is reflecting a POR closer to what i think is correct.
I think it was showing a 50 odd percent POR now it is closer to 85%. After running my numbers i am getting a 2011 valuation at a 11%RR of $9.77 which means a slight discount to my forecast IV of about 3%.
Please seek and take your own advice, as evidenced from my other posts here i am not the best when it comes to forecast IV’s.
Ash Little
:
Hi Andrew
MCE also have new forecasts
They look half decent
Bret
:
To Roger or other students,
I was wondering where you would find forward Equity such as the figure 7690 used in step a. I’ve been working out 2010 calculations in a table to get an IV and then adding the figures to start with the equity for 2011 IV valuations…..is there an easier way such as the WOW valuation used above.
Thanks for the help.
Bret
Wayne P
:
Hi Fellow Bloggers,
Any comments on a few of the other standout results of the reporting season so far…
Mineral Resources aka MIN (my IV is lower than the current share price however it is planned to grow at a good clip in the next few years), Macquarie Radio aka MRN (unfortunately very illiquid), K2Asset Management aka KAM (not sure of a competitive advantage) and Flexigroup (FXL).
Great to hear your thoughts!
Dan
:
KAM have a very interesting performance fee structure, in addition to a long track record of outperformance.
They have FUM of c.$985m and have been adding to this recently at a good clip.
Higher FUM + higher outperformance = higher performance fees = big ROE.
This ROE can be quite volatile: low overheads and fixed costs = big operational leverage.
As such you will see their price (while not necessarily reflecting value) reflect leverage to market movements.
Dividend policy can be arbitrary and there is key man risk – but management hold most of the register.
Also this trades by appointment. Submit a bid, take a number and put the kettle on…
Wayne P
:
Hi Dan,
Great insight.
In addition, I guess the fundamentals need to be coupled with ones outlook on the market and management’s track record.
I think I’ll put this one on the watchlist, keeping an eye on volume.
Cheers
Ash Little
:
Hi Wayne,
Yes Min looks good but not at a discount but IV rising nicely
I am just going to look at MKN now so will let you know
Kam had big changes in revenue recognition this half so I am not totally sure. Looks impressive but my conservative nature gets suspicious when this happens.
FXL has lots of debt and is a B classes company. It may do well but it wont get my money. I suspect they will have to raise more capitial soon as the funding metrics for growth has changed from debt fueled to equity fueled.
Hope this helps
John Watson
:
Hi Wayne,
For MIN I have a current IV of $12.05 rising to $18.80 in 2013 assuming 26% ROE, 11% RR and continued maintenance of management’s stated policy of paying out 50% of earnings.
Wayne P
:
Thanks for the feedback. It’s always good to get a second opinion!
Chris B
:
Hi Roger,
I just watched your latest youtube posting on the Switzer show…I absolutely love the banter that goes on between you two.
You are going to end up a legendary investor and a legendary entertainer.
Your insights are amazing as is the way you deliver your insights,
Well done mate,
Chris B
MattB
:
Hi Nick,
Thanks for the tip. I have had a look at this business and despite its high ROE and discount to IV. I have the following reservations:
Listed for only 1 year
Earnings guidance for H1FY11 is less than FY10
Will the NBN impact its business model? Can it have a sustainable competitive advantage when the whole industry is about to be turned upside down?
With the knowledge pool contributing to this blog, I’m sure others will have views.
MattB
:
Ignore the comment on track record. Found extra details on Commsec.
Nick Mason
:
Hello MattB,
you are welcome for the suggestion.
Investing in businesses with a short track record carries huge risks although when you get it right it you’ll be well rewarded. In cases where businesses cannot provide past financials (due to only being formed recently) I always like to have a look at what their management has achieved in the past with similar type businesses, whether they’ve had success and whether they are well regarded within the industry. The management team at Vocus performs well using this criteria. And of course I have a close look at its current numbers and projections.
I don’t know why you list as a reservation H1FY11 projected earnings being less than FY10. It is not unusual for a businesses performance for the current half year to be less than the performance for the whole previous year. Earnings last year equated to 7.5c a share (the figure on ComSec is higher, 15.4c (I think), although this is due to the change in the number of shares issued and is misleading.) I am expecting profit to just about double (to 15c per share) for this FY although this is my own rough speculation and may prove wishful thinking on my part.
As to the effects the NBN will have on the business it could be seen as both positive and negative. Positive because the main business of Vocus is to operate an international data and voice network and the NBN will lead to an increased demand in higher data intensive applications thus increasing international data consumption.
As to the negatives of the NBN I would say the unknown unknowns which are impossible to predict.
All businesses carry this risk to a degree, black swan events, which are a part of investing.
George Economou
:
Hello Nick and contributors,
I have also recently bought shares in Vocus, for similiar reasons to Nick’s. For me the fact that they are the only dedicated wholesaler in the industry is I think the reason for their success (so far). If you were a ISP retailer would you feel comfortable renting from a competitor? The management is certainly competent and appear to be ethical. How deep is their moat? They claim in their latest update that they’re now a premium supplier and no longer compete on price. I suppose someone with deep pockets could set themselves up in competition but I think that they would be more likely to take them over instead.
Like Nick I also feel indebted to this site. I have learnt (and gained) a lot. Besides Roger I am grateful to all contributors particularly Ashley for being so generous with his insights (nerds do rule).
Cheers
fred
:
Hi roger and room,
You have all talked about MACA and escrow. What is ESCROW?
Thank you
Ashley Little
:
Hi Fred
Escrow are share held that can’t be sold until the expiry of a certain time frame.
The Maca board have some of these
Mike Hall
:
In this case, shares in MACA held by the original company owners, that cannot be disposed of in any way, for a period of 12 months commencing on the date of Official Quotation.
ken fraser
:
John, If you join CommSec. they have a filter you can use.
john
:
Hi Ken,
Thanks for that , sorry to ask basic questions but what parameters would you use to filter out stocks on the commsec advanced search?
Peter
:
Hi John,
I normally do:
– ROE > 20% (from Performance Measures)
– % Debt $50m).
That provides a good place to start.
Peter
john
:
Hi Ken
If i use debt/equity ratio <25 % ( from the risk measure) is that acceptable?
thanks again.
Peter
:
Hi John,
Sorry, my last post seems to have been corrupted.
I use ROE > 20%, %debt less than 30% (from balance sheet), and that gives me a good place to start. I sometimes also filter on market cap.
Peter
john
:
Hi Peter
Thanks for that will try that out.
Nick Mason
:
Hello Roger,
it’s always slightly embarrassing to read my posts and see the bad spelling and grammar.
Vocus operates an international communications network that connects Australia and New Zealand via the USA as well as a domestic network to provide telecommunications services to the ISP and telecommunications markets. Vocus offers wholesale-only IP transit, data and fixed line voice services, and is one of the only independent IP transit wholesale companies in Australia, which does not offer retail ISP products.
What are its competitive advantages? Vocus purchases internet data traffic through two separate independent cables. This differs from the competition because if a cable breaks down they have the second cable as backup. Customers like this ‘insurance’ very much and have made them into a favored provider. Vocus counts Yahoo, iiNet and Vodaphone as clients.
Why is it an excellent business? Its financial metrics read very well ((high ROE, zero debt, 6 million in the bank, excellent operating margins, growing revenues and earnings (as forecast by management.) recurring revenues and earnings)
Management has been involved and even started some great companies in the past which have gone on to be great successes. Whilst this says nothing about the current company it’s been my experience in the past that backing winners often proves a profitable exercise. To be more relevant, management look as though they are doing a wonderful job growing this current business and have demonstrated great financial nous with a recent purchase of data centres from E3 Networks Pty Ltd for $6 million which will contribute NPAT of around $1.05. To have grown the business organically whilst incurring no debt and also through astute purchases speaks in their favor.
I am no expert on this company and only started my reading revcently. Whilst I read all I could and examined the financials I know little about the IT industry and have no experience investing within it. Readers, please do your own research. I am not putting this out there as a buy recommendation, only as a suggestion which you may further consider after doing your own research.
Best Wishes to all.
Ash Little
:
Hi Nick
LOL about spelling mistakes.
Mine are much much worse than yours so don’t stress
Neither of us will be English teachers
Ash Little
:
Oh !!!
I hope your not a teacher
Lina
:
Nick,
You keep saying they have no debt. There is nearly $18M of debt showing on their annual report. Also, they have net tangible assets of minus $10M ! This is a company to stay away from I think.
Lina
Peter
:
Lisa
You have to read the directors report to understand what the entries under “Borrowings” is on the Balance sheet.
It is not a financial interest bearing liability. They have some finance leases which are less than 1mil however they are on fixed payment schedules and have no interest rate risk.
Lina
:
I suggest you read page 61 of the financial report where this $18M is declared as “interest bearing – variable rate”. You might also look at the cash flow statements where it shows they paid approx 250K last year in interest.
Bottom line is they have a lot of debt and negative tangible net assets.
Lina
Peter
:
Hi Nick
Thanks you for your Post.
I had a look at VOC and I like it.
Like you, I am not an expert in the IT and communications industry and hence I cannot comment on a competitive advantage. However the one competitive advantage for me at the moment is that ” they are raking it in”.
Is it sustainable ? Well it appears to be for the moment. You just have to keep a close eye if anything changes.
Based on management Guidance of EBITDA 6 mil for HY10, I am forecasting ( what I believe to be conservative) EPS of 9.4 cents on Full year earnings 2011. That is a increase of 26% on the previous year.
I have a 2011 valuation of $2.12 using a RR of 13% and no dividends paid.
Roger Montgomery
:
Hi Nick,
You may have a point but selling bandwith to iinet et al. is a little like selling suit lining sto Zegna – Zegna gets the margin. I have not seen others generate consistent above average performance by investing inin wholesalers or contract manufacturers. I recall Lipa Pharmaceuticals – a contract pill maker for Blackmores and that little suit lining manufacturer called Berkshire Hathaway…
Nick Mason
:
It always struck me as very funny that Mr Buffett would name his legendary investment company after one of the worst businesses he was ever involved with and what you say is true Roger although overly simplistic. Vocus does more than simply sell bandwith to iinet etc. And here I will quote from Jame’s Spenceley (Vocus CEO) in his address to shareholders (not the least biased opinion I know although perhaps the best qualified)
“Vocus specialises in the delivery of complicated wholesale voice and data services… Most importantly we know how to run a network efficiently. This allows us to manage and operate networks profitably at a lower price point than our bigger competitors.”
In addition to this Vocus now operates Data Centre businesses (which looks to be a rapidly expanding industry, my speculation only.)
Comparing them to a business producing suit lining is hardly relevant. The set of skills needed to do what Vocus does far exceeds the skill set needed to produce a suit lining although I see your general observation. That said I have a great respect for your opinion Roger and will look at future results with an eye out for eroding margins.
Thank you for giving me something to think about and quite possibly a more restless nights sleep.
ron shamgar
:
hi nick,
roger may have a point but im willing to stake a bit of money that this company’s share price is going $2+ very soon…
they are in high growth phase and will do very well in the next couple of years.
good luck!
Lina
:
Nick,
Are you choosing to ignore their 48% debt to equity and their $10M NEGATIVE asset position ?
Lina
ron shamgar
:
Vocus out with their results today…. looks like they will beat profit forecasts. this company is on track to earn 20cents by fy12.
cashflow is quite good considering their acquisition.
they do not have large amopunt of debt as they classify their bandwith lease as a liability though it is payed off over the useful life of the cable.
Nick Mason
:
Sorry Lina,
when I wrote that I’d confused in my mind something I’d read in the AFR with what I’d seen on the balance sheet. It wasn’t a deliberate deception and after realising my mistake I felt a tad embarrassed. Thanks for pointing out my error, yours serves as an excellent illustration of why you cannot take whatever you read as fact and why you need always to do your own research.
All the best,
Nick
Lou
:
Roger,
In light of the rear-view analysis of your Switzer portfolio, is there chance of an ex-post look at the stocks for your stockings?
Also, I noted in the FGE’s 1H11 that they did some of the renovations of their HQ on Stirling Hwy Neddies by themselves. Can you get any more A1 than that!
DIY, renos aside, do you see FGE ROE >40% going forward as they bid for bigger contracts?
Lou
Nick Mason
:
Hello Everyone,
I’ve just bought a few shares in a company called Vocus Communications Ltd (asx code VOC.)
I’m not writing this because I want conformation of my purchase or an IV valuation from my fellow posters, only because it appears to me an excellent business and one selling at below its fair value and i though some of you may be interested.
Given that I take a lot from this site it’s always on my mind to give something back when I can.
Best Wishes to all.
Roger Montgomery
:
Hi Nick,
What do you think are the competitive advantages? Why do you think its an excellent business – aside from the metrics?
Matt
:
You can withdraw my earlier comments on this post Roger.
The only concerns I have with VOC are the changing nature of business over time and the impact of the NBN.
fred
:
Talk of a double dip in the U.S.A still, is this possible in the near future Roger?
Adam
:
Hi Fred,
Nobody has a crystal ball, for Roger or anyone else to answer this would be pure speculation.
Markets have always had crashes and bull runs, and they always will in the future too.
Personally, I’ll stick to owning great business’s, and I look forward to the next crash to top up my holdings at bargain prices.
Roger Montgomery
:
I am no economist Fred and my view won’t affect my investment strategy. In light of that and for what it is worth, I don’t think so…yet. Hyper inflation however is the big issue. I have been short US 10yr T-Notes now for some time in expectation of rising yields. Its been working out ok: http://www.barchart.com/charts/futures/ZNM11
Ash Little
:
Hi Fred/Roger
I agree with Roger. Long dated T- Bills are the short from heaven.
Would any sane person lend money to the US government for 10 Years at a rate less than 4%. The yield just has to go up even if you forget the printing press.
Not sure about hyperinflation but I have lived through high Inflation and high interest rates in the past. It is not pretty and it is certain that it will return. I just don’t know when.
Lloyd
:
Roger,
“I have been short US 10yr T-Notes now for some time in expectation of rising yields.” What instruments do you you use to short T-bills and are they accessible to the small retail investor?
Regards
Lloyd
Ashley Little
:
Hi Lloyd,
Not sure if the name will be posted by Roger but I use IG Markets.
Extreme care is needed here Lloyd as the trading instruments are very complex and can be lethal to an unsuspecting retail investor.
Unfortunately it is very easy to establish an account with them and most retail investors don’t have a clue what they are getting themselves in for, so If you go down this path make sure you fully understand the risks involved.
Regards Ashley
Lloyd
:
Ashley,
Thanks for the steer and the appropriate caution. I’ll look into it, but I suspect like so many of these offerings that I will find the risks unacceptable. Complexity and short duration instruments are not too my liking.
Regards
Lloyd
Ashley Little
:
Lloyd
The risks can be minimized by holding the appropiate cash float Lloyd but the instrument by itself is a powder keg.
Roger Montgomery
:
Hi again Fred,
Some quick stats for you:
Commercial property prices have risen by as much as 20% and hotel occupancy rates have grown by over 4% last year according to Bloomberg. According to the Federal Reserve, Commercial loans grew at 8.7% in December and 4.9% in January. Consumer borrowing grew by 3% in December and credit card debt grew by a little more. The latter is the first monthly lift since 3rd qtr 2008. The stimulus is in part leading to credit growth which is outside of the Feds control. Higher asset prices – particularly commercial property is likely and commercial mortgage backed bond issues will be 4 to 5 times bigger in aggregate than that of 2010.
Michael S
:
Hi Roger,
Credit Corp (CCP) before and they reported some great numbers today. The ROE has gone from 17% to 24% and they seem to be running the business very well. The debt has declined and they have retained a lot of equity. This will change and I wouldn’t be surprised if the payout ratio increases. I use a different formula to Roger’s Valuable one and have them at a discount of about 20% to 2011 IV. I have this IV rising for 2012 at a “good clip” (to steal a line from Roger).
Has anyone else ran the numbers on CCP?
Great work to all the contributors to this blog – especially Ashley Little (you are a guru mate!)!
Michael
Roger Montgomery
:
Hi Michael,
Have owned CCP for a little while. Very thinly traded. Trades by appointment only really.
Ash Little
:
Hi Michael S,
Thanks Mate but we all know that Roger is the Guru.
He has tuaght me and others very well.
I have CCP on my watch list but would very much like it to start with a 3 before I Invest.
Good result today though. I will redo my numbers
Lloyd
:
Roger,
You stated that you “Have owned CCP for a little while.” Does this mean you owned it for a short period and no longer hold the stock, or do you currently own it having recently bought in? If the former, then what triggered the disposal of your equity holding in the business?
I ask this as you generally espouse a buy and hold (until things change) type philosophy; such being the case for example with CSL in the ValueLine portfolio.
Regards
Lloyd
Roger Montgomery
:
Hi Lloyd,
A significant price rise itself may be justification for a sale. I do currently own it however Lloyd.
Pat Fitzgerald
:
Hi Lloyd
Roger mentioned them back here: http://rogermontgomery.com/have-you-been-getting-your-daily-dose/
They have risen almost $2 since. I use a RR of 13 for CCP and my IV is about $5, rising to $5.50 in 2012.
Lloyd
:
Pat,
Thanks, I recalled Roger mentioning it, but I always have problems finding the relevant item amongst the the plethora of comments. This thread also provides a timely reminder of some comment I made on CSL which proved correct in terms of the fundamentals, but far too early in terms of the madness of crowds.
As for CCP, I have updated for the interim result and its impacts on future equity and outlook and carry IV (12% RR) of $5.49 (2011) and $6.27 (2012), the latter based on my current conservative forecast for the company’s earnings of 15% earnings growth, well below the 53% experienced in the last half year.
Regards
Lloyd
Matthew R
:
Yes, good result from CCP
it is one that flies under the radar a bit here at the blog but I think it is a worthy candidate for attention
One factor is that I believe it wouldn’t be that hard to actually run the business on a daily basis for the managers, which I like a lot
Greg Mc
:
I’ve held a grudge against CCP after an unpleasant and expensive experience I had with them a few years ago (as an investor I might add, I’m sure a few people here understand). I haven’t had a serious look at them since. Perhaps I’ll at least take another look. After all, as Tony Greig says, a grudge is just a place to park your car.
Matthew R
:
Yes, I understand Greg. I didn’t own them then, but I know the story – not pretty.
The first thing you will notice is that their financials have changed a lot since then. ROE is not as high, but nor is the debt (and it is coming down).
Ash Little
:
.LOL Greg Mc.
Not cheap enough for me plus their is still the risk that the keys will get stuck in the crack
Ann
:
The ACCC has badly let down Australia in allowing Woolworths and Coles to get as dominate as they have. The Shopping Centre lease exclusions, the huges rebates & allowances they make suppliers pay (unique around the world), the blocking of competitor DA’s, you name it the list is long.
The kneecapping of Grocery Watch and the rolling over of Minister Emerson was a disgrace. With the IT available today, it was dead simple for the majors to supply weekly pricing by store.
Andrew
:
What you have given above, to me, is a great example of Micheal Porters Five Forces and the idea of a competitive advantage and an example of what makes Woolies such a great business to own.
I think there is a fine line between having an entrenched competitive advantage and being anti-competitive. I don’t think it is woolies job to make it easier for competitors to catch up to them and compete and i don’t think they have been doing anything wrong for the ACCC to step in. I know they have blocked a fair few acquisitions by Woolies. Other than that Woolies are doing nothing more than using its competitive advantage which i guess can look to some people like they are throwing their weight around.
Ron F
:
Hi Roger
Thanks for the post on WOW.
As always, it was interesting and informative with valuable knowledge.
Regards Ron F
Al Rigg
:
Hi Roger,
Unless I’m having a moment (quite possibly) an NPAT of $2,028.89 was not reported in the 2010 Annual Report so could you let us know which source you’re using or how you’re deriving that figure from the reported numbers?
Thanks,
Al
Roger Montgomery
:
Hi Alistair,
I have moved on but will go back and revisit that one next week.
Chris
:
Hi Guys,
As the 6-monthly Forge (FGE) results are out today I am wondering what people are getting as the updated IV for 2011?
My calculations are that if they can keep the first half results up for the second half (Full year NPAT $42M) the value will be around $9-10 with a 12%RR.
What are other people calculating?
Cheers
Chris
Christopher
:
Hi Chris,
Close to $8 for me, but I’m modifying things slightly to make the growth rate a little more realistic(don’t forget the multiplier values rely on more than one year’s worth of data).
Watch out for lower payout ratios, the inevitable slowing of ROE and the possibility of debt.
John Watson
:
Hi Chris,
My updated 2011 IV of FGE using 12% RR with a 25% payout ratio and 40% ROE is $8.19, that still gives a margin of safety of slightly over 25%. My 2013 IV is $13.29, so I will continue to hold this stock and watch closely the impact of any acquisitions.
Roger Montgomery
:
Hi John,
Please be mindful that 40% ROE and 25% payout ratio equates to 30% earnings growth. Simply not possible in the very long term.
ron shamgar
:
my gut feeling tells me Clough will takeover forge one day. it just makes sense for them. maybe in a year or 2. lets cross our fingers.
Roger Montgomery
:
Hi Ron,
Precisely what I suggested at the time the deal was consummated. No superstitious fingers required. That however is not a suggestion that it will be at a higher price than today though.
Christopher
:
Hi Ron,
Honestly, I’d rather that they didn’t, but you may well be right.
As Roger also said at the time, Clough’s stake in FGE makes it alot harder for someone else to take them over.
Roger Montgomery
:
Couldn’t have said it better Christopher. And that’s the Opposite impact Ron. Anyone else is challenged, leaving Clough to pick and chose the time and price. It really might have been a deal born of insufficient experience on the part of Forge. Arguably, if they needed the money, they could have come to us, no? And if they needed experience, they could have used some of that money to find someone and insert them into the drivers seat.
Ash Little
:
Hi Roger,
Given Clough’s result today they have a few problems.
FGE was 50% of their NPAT.
That takeover may be awhile away yet and lets hope it is not at such silly terms that they got the initial stake.
I am just scratching my head ATM. How bad would Clough look if the FGE transaction did not go through
Roger Montgomery
:
Hi Ash,
Recall, we talked about this when the deal was done? Clough was not an A1. I should add however that their quality could improve substantially with the Forge tie up.
Christopher
:
Agreed, about the money and the experience.
The irony is that now they all this extra cash they don’t know what to do with it. Given their very low capex, they could have achieved exactly the same profit if the Clough deal had never been done, if you’re willing to believe they would have won the same contracts on their own. So there was no point to the deal.
All that being said, I have (nearly) unlimited sympathy for Forge. I just wish they had realised their own potential to begin with.
Wayne P
:
Hi Christopher,
I did note in the director’s report that they are targeting $500m in annual revenue with opportunites for larger projects, especially now there bank guarantees support such undertakings. Without Clough’s backing this would have been unattainable in the near term.
Admittedly like many Forge shareholders I didn’t like the sounds of the Clough tie up at the time, however if their targets are achieved over the next few years (with only a modest decline in margins) things will look bright.
As i picked up my stock at 80c I shall hold on until comfirmation of a decline are certain.
Ash Little
:
Well Done Wayne,
80c to an IV of near $8 or above.
That;s a 10 Bagger even if the market does not quite recognise it,
Once again well done
john W
:
Thanks Roger,
Maybe we should simply cap ROE for all stocks at 35% and in FGEs case assume a payout ratio of somewhere in the 40% to 60% range?
Perhaps we need a valuation model for calculating IVs somrthing like a 3 step DCF model where there is an initial growth phase, a maturing phase and a fade?
If I use a 35% ROE and 40% payout ratio with a 12% required return my 2013 IV for FGE drops from $13.29 to $10.57.
Roger Montgomery
:
Hi John,
Great to hear from you. Now we would be heading into ‘precisely wrong’ territory rather than staying on the ‘approximately right’ path.
Stephen
:
Hi Chris,
Using a projected NPAT of $42m and a POR of about 16% I got an IV of around $8.45.
I used an average ROE of 35% and a RR of 13% so I’m comfortable with that amount. I hope this helps.
Christopher
:
Hi Everyone,
I trust we will all be pleased with FGE’s half yearly report released today. Aside from the healthy revenue and profit numbers, things that stood out to me were:
A higher interim dividend of 4c (changes to payout ratio?)
Steady capex (a good thing if profits can still be grown, despite what QRN might tell you)
The company is still talking about “potential acquisitions that take our model into other markets.” They also make a fuss about their organic growth background and “fastidious” M&A prerequisites. Nevertheless, the talk of there being pressure on the board to make an acquisition and the fact that several targets have already been reviewed indicate a very high likelihood of there being an acquisition in the near future.
Cash flows from operating activities are down on the same period last year, but this was only caused by income tax/timing issues.
The Company notes some skepticism about the Clough deal.
Overall things look solid, but I guess we will have to wait and see what happens on the acquisition front; hopefully nothing!
Ash Little
:
Hello Chris & Fellow Bloggers
For those that own FGE it was a very good day indeed. I will stick my hand up and say that I own FGE
A super performance
As regular bloggers know I am a total nerd and love looking at all angles
So can I share with you all some of my numbers that I have come up with.
Based on a 40% ROE and a payout ratio of 18% and given that I and using beginning equity to calculate ROE I will use a RR of 16% I am getting an IV of $618M or about $7.85 per share.
If they can do this for the next ten years then the IV will be nearly $8B dollars or about $100 per share. Now this is a return ex divvy of about 57% per annum.
Now before you run off and buy this stock and put it in the bottom draw let me share some of my other scenarios.
FGE is generating lots of cash at the moment they purchased 9M in PP&E in the last 6 month and still added heaps to its cash balance. Forge current have just short of 70M in cash on the balance sheet.
So let us assume that FGE increases its payout ratio over time (This is inevitable BTW unless they make a really smart acquisition) from 18% to 65% over the next 10 years. (Not an unreasonable assumption given the cash they are generating)
I have IV at about $2.9B or about $36.7per share with a return of about $37% per annum ex divvy. Still pretty good (I can’t get this in a bank account)
Now let us assume that seeing the huge ROE that are being achieved by Australia mining services companies Canada’s mining services companies who are generating heaps of cash decided to establish mining services companies in Australia. On this basis it is a reasonable assumption that ROE will decline over time to say 20%
Based on these numbers I have IV going to $745m or $9.47 per share and a return ex divvy of 4.90%, not so good this last one.
I have written this to draw to everyone attention that if you have a high ROE company with low payout then the metrics change very much as the businesses life cycle changes.
I own FGE and will not be selling anytime soon but we really need to monitor things closely
.
Hope this helps
Ash Little
:
Oh Btw,
This is what Charlie Munger hints at about his guesses being better than others.
I have presented wild variations in IV.
Who can guess these the best will be the richest
john
:
Hi Ashley or anyone who can help,
Still very new to this but was wondering if you have any suggestions on a
site or a filter package i could purchase to select stocks using rogers guidlines?
Thanks in advance.
Ash Little
:
Hi John,
I have a list on about 60 businesses that I would like to own if the price ever gets rational. This are in my etrade watchlist.
They have been developed over time via hard work and help from Roger and the Blog.
I run the debt to equity ROE filters on Etrade ever now and then to make sure I and not missing things.
Also, It is good to have a look at the half yearly accounts to see if a business has improved.
Unfortunatley, really good returns require lots of work.
I have been working really hard lately but I have not found anything since November when Roger gave us the leg up into MLD.
Everything I look at ATM is at best not offering a big enough MOS.
I don’t know when this will change but know with great certainty that it will.
Sorry that I can’t help any more than this
Christopher
:
Hi Ash,
Thank you for that fantastic post!
I couldn’t agree more. As you say, the payout ratio simply must change unless they make an acquisition; in reality, probably both will happen.
The fascinating part is that they literally don’t know what to do with their $69m of cash. What happens next will give us a good indication of what kind of company they hope to become (the language of the Interim Report gives us some hints).
I also agree that they are worth close to $8. We have to be careful using Roger’s formula when a company is in transition to the next phase of its life cycle.
ron shamgar
:
i wish it was that simple Ash…. according to my calculations IV is about $9 but not going anywhere unless they make a smart acquisition or win some serious work.. we also need to keep an eye on china in the next 2 years. maybe Forge will buy Decmil? :-)
DC
:
If we know that these types of businesses are going to reach maturity within a time frame that can be reasonably estimated shouldn’t we make an earlier adjustment to the IV? If we don’t aren’t we at risk of overestimating our MOS as maturity hits and the growth in incremental equity slows together with a higher payout ratio causing an significant reduction in IV.
Should you jump off the growth train early?
Do you calculate a “maturity risk” for the companies you assess?
Given Australia’s small population are some sectors more at risk of early maturity than others i.e domestically focussed companies? Are the only unlimited growth companies those with overseas operations/ earnings?
Are mining services at risk of early maturity? Do those with world wide customers have a lower maturity risk?
Roger Montgomery
:
Yes, you should make an earlier adjustment to IV and yes, you will miss out on further gains. I wrote some time ago about TRS, with the share prices at $15 or $16, that I could see maturity. The share price subsequently rallied to $19. Early.
DC
:
Thanks Roger
It seems that on maturity companies cannot reinvest their free cashflow in the existing businnes model, and as you have reported they either try to expand overseas, buy something or keep doing the same thing and increase their dividends.
Given the way your valuation formula works I would have thought increasing the payout ratio to say 85-90% would adjust for the maturity risk in a company that you assume will continue selling the same stuff from a largely fixed number of stores.
Does ROE drop significantly as well without the growth i.e store roll outs or does it stabilise?
Thanks
DC
Greg Mc
:
G’day DC,
I can see what you’re saying regarding assuming a higher payout ratio for a company that is going to mature at some point (that being just about all companies) but timing is the issue. In the long term it might even out but in the shorter term (say 2-3 years for example) that would understate the value of a high ROE/low POR company by a long way. In any case, I tend not to look too far into the future in trying to assess IV particularly with companies with a very high ROE and low POR as the IV can change by such large amounts that it becomes meaningless. In these cases I try to look out to the next 12 months and then have a rough idea of what the company’s prospects might be after that.
Your last sentence is spot on I reckon and a big potential sign of a maturing business – falling ROE as the company finds itself unable to reinvest earnings and produce the same return. A maturing company can maintain that ROE by increasing the POR – which affects IV – JBH being an example with a significant increase in POR in the past couple of years and even then their ROE has started to dip. While JBH may still be at a discount to IV, it may be that that in time IV falls to meet the share price rather than the share price appreciating, especially if there is another increase in POR. ‘Twill be interesting to see what their capital Mx plan is too.
Roger Montgomery
:
If the payout ratio doesn’t increase, then cash builds up on the balance sheet, equity expands and the ROE may drop if profits don’t grow as fast as the equity.
John Pike
:
Great post Ash. By the way, I would rather be a “rich nerd” than a destitute follower of some of the broking fraternity!
Greg Mc
:
G’day Chris,
While I saw the reference to potential acquisitions they also made a similar statement in their report 6 months ago, so they have at least been able to resist the temptation for a while. That and their comments about the Clough arrangement also makes me think that the board are aware that people are watching them more closely now. Perhaps they won’t go and do something stupid for a while longer. We can only hope. Even so, every time I see the little newspaper icon (announcement) next to them on my comsec watchlist I’ll be just a little trepidationous (yes, I made that word up).
Roger Montgomery
:
It must be catching on. Pretty soon it will be an epidemic and I will have to step in and edit to maintain the blog’s reputation.
Ash Little
:
Hi Greg Mc,
I love your humour
Andrew
:
Hey everyone,
is there a way you can set up something on the ASX website or commsec where you can get a list of all the appendix 3B’s for a day?
Just started catching up with some valuations and some of the companies i am looking at have had these and there has been a bit of a change in my valuations.
Anyone got a 2011 Valuation for REA they would like to share? I have $9.15 for 2010 but my forecast one is decreasing to around $8.69 for 2011 which i do not think would be correct for this business. I was basing this off an EPS figure of 0.49 DPS of 0.219 which i got from Commsec with a 12% RR.
Thanks everyone.
Andrew
:
As per the above query on REA for me, as a reference i have used the twelve stocks of christmas post where roger posted his IV’s and forecast change in IV.
One thing i did notice when i ran my $8.69 forecast valuation is that the pay out ratio was well above what they paid out in 2010. If i alter it down to an amount closer to this pay out ratio and adopt a 26% POR then i get $10.12 which is a growth of 10.6%. In Rogers twelve stocks post he had forecast IV to rise about 13% so i think this is possibly where the difference was and i do remember in the JB Hi-Fi example in the book mentioning that you need to adjust the POR sometimes as the analysts forecasts can be far from reality.
I would be interested to see anyone elses forecasts for 2011 for REA as a further guide to how i went as i still have not done many forecast valuations and have learnt a lot from the post above and have slightly changed my calculator to do it.
Of course i will seek and take my own advice and i know the origianl post by roger was for educational purposes only.
Matthew R
:
there may be a way that I’m not aware of to filter the types of asx announcements…
but I find wotnews works well enough
Roger Montgomery
:
I agree Matthew, I took a look and its very helpful.
Andrew
:
Hi Everyone,
Need some help as the forecasting thing has been something i have been struggling with for some companies and as i have not had the chance to use half year information before until now i am trying to re-learn everything about forecasting.
I just have some questions which i have not been able to find the answers too myself. Sorry in advance everyone.
1)WOWs NPAT in the 2010 yearly report was 2020.8, how was the figure of 2028.85 arrived at? I know it is only a suttle difference but i am interested to see where i went wrong.
2)How did everyone arrive at the final dividend amount?
3)How was the 2010 figure in Rogers calculation arrived at? It appears to be different to the ones in the 2010 report. Was it a case of this taking into account part of the buyback?
4)Not the case for WOW, but how do people come up with the capital rasing figure? Do you take the amount of shares and divide that by the total amount to be raised to come up with the figure?
Some of these answers could just be down to Roger and others following the news and adjusting their figures as they come up and i only do it for half and end of year for the time being but i am hoping to get on top of this element as it is one that i have been struggling with.
Sorry everyone, this is a part i have trouble with so i am hoping someone can point me in the right direction. And thanks in advance for anyone who can help.
Ash Little
:
Hi Andrew,
Have a read of this blog,
I think most of you answers are already on here.
If you are still having problems …Someone here will be able to help
Andrew
:
I am still unsure where the 2028.85 figure came from as i had a look at the annual report for 2010 and it mentions 2020.8.
This might also lend itself to answering the question about the 2010 equity figure. I am not sure whether i am completley missing something or not but as i got the figures direct from the annual report as i always do i am getting confused.
I could just follow what Roger figures are but that is not how i do things and i won’t learn or get better by doing it this way. if someone could let me know i am sure i can work out the rest.
Ash Little
:
Hi Andrew,
These are Roger’s figures and they are slightly different to Mine so I cant help with being exact.
The WOW buyback is a hard place to start with value investing and the important thing is to be approxiametly right.
What we are doing is not exact,,,,,,,,You just can’t be exact about a future IV. It is your best guess.
Just a word of advice and I am an accountant so these words were hard for me to learn but you will get much more out of being approximately right rather than exactly wrong.
Just my view and I hope this helps
Christopher
:
Hi Roger,
Thanks for this update. The well meaning advice “Ditch WOW and buy Coles (read: Wesfarmers)” is certainly doing the rounds again.
Did you learn anything new about Transurban today, and are you able to share any of it with us?
Roger Montgomery
:
I am writing about Transurban right now.
Craig
:
Hi Roger,
Nobody has yet used the “s” word in relation to WOW. I wonder if they’ve reached a level of market saturation in this country that is going to limit them?
Regards,
Craig.
Andrew
:
I think if the population does not increase then yes they have perhaps hit saturation, however this is not the case and the population is always growing.
More people means there is more need for housing, land etc. Where ever a new suburb is created with a shopping centre then you can be sure that Woolworths will be there.
Woolworths is a volume based company that mainly sells what people need to survive instead of want and so as long as the population keeps growing then woolworths should be able to keep growing. Especially if Australia grows via new suburbs and not growing vertically through high density housing meaning that the population is in a spot where a woolies already is.
The Hardware will also be an interesting battlefront which could be great for the business or could be a big drain on finances. Their partner Lowes knows what it is doing in this market and Woolworths are the best retailers in Australia so i am cautiously optimistic.
The key is going to be how much savings they can find to reduce their operating costs in the future in order to keep entrenching their compeitive advantage and increase margins whilst all this is happening.
Tony
:
Hi Roger, have you had a chance to look at Finbar yet?
thanks
Roger Montgomery
:
Hi Tony, Not yet I am afraid.
Louis
:
Thanks Roger,
Everyone should noted that Roger did some of the valuation based on range instead of definite.
Beside I also use my instinct and understanding of business to have a grasp of the downward risk of valuation.
So in my humble opinion,
i)Everyone should compute a range of valuation,
ii)Future intrinsic value
iii)Invest based on safety of margin
iv)probability of the downward risk of the valuation
With prudent and discipline , Everyone should do well in long run
David
:
Hi Roger,
Thank you for the insight. I have found your work quite enlightening and appreciate the effort you take to share your research. I produced the same $23.69 result as you did for WOW.
Cheers,
Dave
Peter
:
Hi Roger
Thank you for your post as it gives us an opportunity to check our workings. I am pleased to note I had a valuation which was pretty close to yours. The is one discrepancy in the numbers whch I cant put my finger on and that is the forecasted equity for 2011.
If WOW report $2160m NPAT and pay out $1538m in dividends then the difference is $622m
Therefore we can add $622m to the 2010 equity of $7570m
This brings 2011 forecast equity to $8192m
For the purpose of IV, If we average out the 2 yrs we get equity of $7881m
Just trying to understand how you came up with $7690m
Thanks
Darren
:
Hi peter
I was thinking the same thing and then I remembered that when a company buys back it stock it usually does it with its own equity so I think you’ll find Roger’s value of 2011 forecasted equity takes into account NPAT and dividends like you calculated ($8192) and less the number of shares bought back (1231.14 – 1212.89 = 18.25m) * price paid ~$27.50 which leaves you $7690 2011 est equity
Cheers
Darren
Peter
:
Thanks for your reply darren- I didnt think of`that one – now it all makes sense.
Cheers
Scott T
:
Great post Roger, and a good catalyst to ensure we are getting our numbers right. Whilst WOW is trading around 12% above your new IV, that is nothing compared to WES trading at double their IV.
Mr Market has totally bought the turnaround story, (as he often does) and woolies are on the selling end of it. Exceedingly low ROE will persist at WES and ultimately the price will correct.
WOW will start to roll out their new Hardware superstores this year and I think we will see superior ROE, better site selection and Superior supplier relations pay dividends.
I’ve put my money where my mouth is, I am long WOW and short WES, lets see how we go.
All the best
Scott T
Scott
:
Scott T, you could be correct. However in my years selling to the large retailers of the world I would not really consider the WOW have great supplier relations. They use their market power and the suppliers know it. In terms of the better site selection, they are currently complaining to the government that they are being blocked from the better sites as Bunnings expand their stores at a rapid pace.
It is not easy to secure suitable sites for a huge outlet and against record property (over)valuations it is not easy to get and attractive RR when the established competitors paid a fraction of your costs.
I prefer to keep my money away from both of these shares
Andrew
:
I am sure that the suppliers know that Woolies use their market power however, why shouldn’t they? As long as they stay as dominant as they are then there is not a lot the suppliers can do other than pull their products however would that hurt woolies or the suppliers more? I think it is dependent on the brand and product but is the collateral damage done to the suppliers own bottom line enough to try and take the fight to woolies?
Scott
:
Andrew you are right, but that is close to what the ACCC would term abuse of market power isn’t it? With 4 banks we are concerned about market concentration, but few are really jumping up and down about the total lack of choice in supermarkets. Go figure?
Anyway the consumer does not gain nearly as much as the retailer here, so if there was a margin of safety they would have been a good buy.
Rhett
:
Interesting, there is quite a discrepancy between other valuations and your valuation…..
Roger Montgomery
:
Well of course Rhett, different models will produce different valuations. I use a completely original and unique method.
David Sinclair
:
Roger,
I would be very interested to know how your method differ from other authors that use multiples of equity based on both ROE and payout ratio.
I know you like to keep a few secrets, but even a very vague hint about the difference would be helpful.
David S.
Roger Montgomery
:
Hi David,
I want you to start with the work of James Walter as I mention in the book. Its a great place to start your journey of discovery. He was the first to consider equity multiples based on profitability and capital management.
David Sinclair
:
Hi Roger,
I specifically mentioned Brian because his approach is so similar to yours, which is why I am interested in finding out what the differences.
Roger Montgomery
:
Hi David,
I regard him a friend and we regard each other highly. Our value investing philosophies are similar and we both come from the school of Buffett/Munger (and I would add James Walter, who precedes Buffett in the thinking around the impact of ROE and Payout ratios on intrinsic value) but we are not the same. We would pick different stocks and if you would like to see the differences, running the numbers will produce substantially different results. Because the philosophy is the same, I have nothing but praise and excellent results with different stocks is evidence of the efficacy of both approaches to solving the problem. It is as we both would say, ‘the truth’. By definition there is no alternative. The reason for not mentioning any newsletters, tip sheets, software or even books, is to keep the site truly independent. This is a blog not a forum. If you want to discuss products or debate or review them, there are many other places where this occurs. I hope that helps.
DC
:
Hi Roger
It seems that the “orthodox” valuation methods PE multiples/ risked DCFs etc used by analysts and presumably most fund managers/ institutions generally produce a higher “valuation” than your method of determining IV.
Do you consider the other methods to overvalue companies?
If that is the case and the people using these approaches are the price makers in the market then it would appear difficult to find A1 companies at a discount to IV in the widely covered stock universe. The exception may be when an event causes a wild swing in sentiment i.e. Mr Market without appropriate medication.
The other exception may be in the not so widely covered stock universe outside the ASX100.
I can’t recall reading anywhere that companies have to be big to have a sustainable competitive advantage. Better re-read Porter.
DC
Ash Little
:
Hi DC
Nice Post
Roger Montgomery
:
Hi DC,
Yes I do. You will find that as the market progresses and value becomes even more challenging to identify, interest in value investing and this blog will wane. Don’t worry, I have seen it before. The temptation you will face, sitting there and missing out on the ‘fun and gains’, will be to adjust down the required returns. For a while it will work, but then you will hand back all the gains…The timing is something I don’t know but its regularity is predictable.
Greg Mc
:
Hi Roger,
That is pretty much the exact point that has been wandering around my head for the past few weeks – that RR will be reduced, or that the quality of companies considered suitable for investment will fall. That is to say that inferior companies that are trading at a discount to calculated IV will be put forward for consideration in the absence of better companies trading at a discount.
We all need to be patient and vigilent and take opportunities as they occur, rather than try to make them occur by fiddling with the numbers or buying garbage at a discount. It could be some time before any of the well known desirable companies become worth buying. Quality companies. Big discounts. Patience required.
David V
:
I think the increasing number of requests that pass Roger’s desk to look at the ‘next great’ opportunity is a sign that we are all trying to stretch our sights wider and wider. Eventually you get into the very grey areas where we are wandering towards punting more than value investing.
Andrew
:
I have seen that too David, i think people have been focusing more on the finding companies at a discount to IV instead of simply finding great companies and waiting till they are below their IV.
I think that is a danger we need to watch out that we don’t fall into. We should always focus on the company quality first and IV second in my opinion.
Nick Mason
:
Hey Roger,
I thought yours a very generous valuation for Woolworths as I currently value their shares at just over $22. Does anyone on this forum think that Woolworths can be a significantly larger company in 5-10 years time?? This is the big stumbling block for me and would prevent me from considering an investment right now even if the shares dropped below my estimate of fair value.
This is not a company whose future growth opportunities (and therein its chance of replicating its wonderful performance of the past) I can view with any optimism.
Tony
:
What about all the free cash flow? Woolworth’s can use supermarkets to launch any number of new initiatives including OS expansion. That’s the beauty of supermarkets – the stock turns every 7 days but suppliers are paid monthly. The only way they won’t be bigger in5 years is if they stumble with poor acquisition or expansion decisions
Christopher
:
Hi Nick,
For many years now, people have been saying that WOW can’t get any bigger. I think it can and it will. However, as Roger said in his post, the issue for them is spending habits, foreign currencies and margins.
Nick Mason
:
Hi Christopher,
I have no doubt Woolworths will be bigger in the future, I just doubt they can be significantly bigger.
If I can’t see a business being at least double its size in 5 years, I have no reason to invest.
Best Wishes to all.
Peter
:
Perhaps, just perhaps, you dont need WOW to get bigger.
WOW can be priced at 8x cashflow, with no growth other than inflation, which gives you roughly 12.5% pa ad infinitum post inflation OR WOW can be priced at 16x cashflow with a “hope” that it will double in size in the future after massive capital expenditure.
Which WOW would readers prefer?
Roger Montgomery
:
Hi Peter,
Can you explain your arithmetic. When you say 12.5% p.a. what are you referring to and how do you get that?
Matty
:
When the question comes up as to how big Woolworths will be in 5 to 10 years time a consideration would have to be how big Australia will be in 5 to 10 years time. Granted, investing in any company that will only grow at 1.8% per year will not get a speeding ticket from the ASX regulator, but WOW could easily be 20% bigger in 10 years time. While we were looking at future valuations I thought I would also re-read the paragraph on implied growth rate from value.able page 111. The implied growth rate from a POR of 71.2% and 27.5% ROE gives an implied growth rate of 7.9%. So Roger’s valuation at $23.69 looks to be using about 6.5% NPAT growth which looks on the safe side of the implied growth rate.
It is amazing what you will find in this silver jacketed little tome.
Thanks, Roger for putting up a future valuation exercise that is just what the stock doctor ordered!
Raymond
:
Hi Roger,
Thanks for the example which confirms my results. The mechanics of the formula are easily understood but I can’t see where you get your dividend amount from (Mine was somewhat lower). Could you explain how you arrived at that number please? I have read your excellent book twice but seem to have missed that bit. :-)
Raymond
Ash Little
:
Hi Roger,
Nice post.
This is how some analysts are calculating forward valuations for WOW. I know this because I read it a few days ago. Not exact quotes here because i did not kept the document.
WOW is a great business with earnings that are easier to estimate than most if not all listed on the ASX.
Given this fact WOW has historically traded on a forward PE of 20 and as such we have a price target of $35.
This is how some (read lots) do it and it would have impressed the light out of me a few years back
I will throw my arm in the air and admit to making silly decisions in the past based on these total irrational arguements.
Roger regularly refers to this and If Ben Graham teaches you only three things in life it should will be.
1) Margin of safety
2) Margin of safety
and 3) Margin of safety
Hope this helps
Regards Ashley
Greg Mc
:
Fair dinkum, Ashley? A (presumably well) paid analyst came up with that price target? A 12 year old could have produced that. I reckon that many people buying shares (are they investors?) would be impressed by that and buy WOW simply because they assume that the analyst is correct. Wow! You can buy WOW for $26 and it’s going to $35!
Lloyd
:
The promise of free money always attracts the vast majority of people…. naive as they are!
All that analysts and stock brokers do is to play to this naivety to relieve fools from their money (or at least the commission involved in the transaction)! Hence their preference for the valuation “methodology” and assumptions that yield the greatest potential lick of free money.
In this respect, I observe that they simply fulfill part of the natural order of things, which is to separate fools from their money.
Ash Little
:
Yepper greg Mc,
LOL,
Because a 12 yearold could calc it is why I did not save it.
It was garbage.
Scott
:
Roger from inside the Hardware industry I see that Woolies are going to be spending a LOT of money to create any type of competition for the Bunnings chain.
Yes Woolies could be generally considered a better merchant to the Wesfarmers business (they only seem to know how to run one retail business model, everyday low pricing, hence the current price war in Coles such as the noise about milk). This is also hurting Woolies in the food retail business.
Anyway the Bunnings chain have a pretty good grasp of hardware and starting a competitor from scratch is going to be a big drag on the Woolies cashflow and balance sheet for years to come. Looking deeper it also suggests a drag on Wesfarmers as the price war sets in.
Tony
:
The beauty about woolworth’s entry into hardware is that they only have to open one store in each city, run it at a loss and destroy the Bunnings business.good luck Wesfarmers
Peter
:
I dont think WOW need to run the hardware stores at a loss.
My experience with Bunnings is that they are always short staffed and you can never find a sales person when you need one. The result is that I spend alot of time looking for items and I often walk out frustrated. If WOW offers some sales assistance and customer service I will never step into a bunnings store ever again.
Scott
:
Peter and Tony, it is not going to be so easy to destroy Bunnings and Wesfarmers as just opening a couple of shops with more staff. More staff means higher cost and a competitive advantage is eaten away.
Woolies may be a better merchant however the Bunnings empire is the home turf of Wesfarmers and they have revolutionised hardware here by bringing in their Home Depot clone. You should also consider that in the North American market the Home Depot model competes very strongly against Lowes.
McCoy Pauley
:
Disagree with this. Part of the allure of Bunnings is that there is a Bunnings not far away from most people in middle-class suburbia targeted by Wesfarmers. For instance, I live about 15 minutes away (by car) from two Bunnings stores. In order to be able to make a substantial impact on Bunnings, WOW and Loewes must have enough critical mass to replicate the number of big box outlets in the suburbs.
Roger Montgomery
:
…Thanks for that thought,
With the benefit of time, what makes you believe they won’t?
Roger Montgomery
:
Great comment Scott. Big, Big discounts…and also because Woolies are not perfect. Witness the lacklustre results from their attempt to compete with JB Hi-Fi through Dick Smith.
Travis Adams
:
Indeed no company is perfect but here is some WOW Scuttlebutt:
We have just had a Woolworths open up in our area and instead of discounting the one item many of their specials particulariliy in the packaged food section sees them offer two for a reduced price than the singular item multiplied by two to entice you firstly to buy more than you need but secondly to fund WOW’s purchase of the good.
From WOW’s perspective they are able to make more in absolute dollars by selling two than selling one and that by receiving in the cash before they pay the supplier the absolute dollar means more than on a per item basis.
In effect WOW is just a distributor of product where the consumer pays the inventory cost of the business causing negative working capital is a huge advantage for the business and adds to lower equity and higher ROE.
Hardware is a lower turnover business but if they are able to come close to the turnover & supplier terms as the Supermarkets business and lower the cost of inventory this would be a huge benefit. In addition the takeover of Danks bought distribution for a tiny portion of the cahs flow of the other parts of the business and their partner Lowes is no bunny in the US.
Coincidentally the WOW replaced a Coles where we never used to visit but now the WOW seems to have more people than Coles did. At least in this small area WOW looks to be a much harder competitor. In addition they upgraded and expanded the store area and is sure to have take customers from the Metcash supported Foodland across the road where we used to do most of our shopping.
Ash Little
:
Thanks Travis,
Congratulations are in order for two reasons.
1) The new addition to the family and
2) Your first post.
I am very happy you have moved from long time lurker to first time poster.
I hope this is the first of many as I know the community will get heaps out of you sharing your thoughts and views.
BTW nice talking to you today. Will catch up again soon
Cheers
Roger Montgomery
:
Travis,
every time someone takes the plunge and moves from Voyeur to participant, there’s a little celebration here at Montgomery HQ. Thanks for taking the time to make the blog such a fantastic venue for value investing in Australia.
Travis Adams
:
No worries, thanks Ash & Roger hopefully i can contribute something people can use.
Roger Montgomery
:
Five for $10 is a very old selling technique. Not unique to WOW, but I too have seen it more at the stores. They might have hired or promoted a new head who is rolling it out across the network. I think the rollout of hardware will be expensive but ultimately successful.
Scott
:
Travis this is essentially the way every retailer in Australia works.
Woolies would never had bought that new site if they did not feel they could turn it around, but in other terms Coles might have been the wrong fit for the customer group there.
Phil
:
Hi Roger,
I noticed that sometimes you use current reported equity and sometimes you use forecast equity in your calculation of Step A. Can you clarify this for me?
Regards,
Phil
Roger Montgomery
:
Hi Phil,
Just depends on whether I am calculating current intrinsic value or estimated/forecast intrinsic value.