Monthly Archives: November 2011

I have not discovered a method for predicting the short term direction of share prices.  Once we purchase an A1 company’s shares at a discount to intrinsic value, we cannot know what the share price will do in the short term.  We do know that provided the prospects for intrinsic value growth remain bright, the weighing machine that is the market will eventually cause share price and intrinsic value to converge.

Thats why it is so valuable to have an current and future intrinsic value estimate for every company updated daily.  Having a long term demonstrated track record of intrinsic value growth can also provide us with insights into management’s capital allocation decisions.  Knowing what the cash flow profile of a company looks like and whether the company has profitably employed capital entrusted to it by shareholders can further ensure you aren’t overstaying the party.

Soon you too will able to simply and confidently navigate the noisy distraction of the stock market to be shown those securities that deserve your time and avoid those that have a higher probability of permanently impairing your returns.  Skaffold is launching now (so keep an eye on your inbox today!)

Last week I spoke on CNBC with my old friend and peer Matthew Kidman.

You can watch the interview here: http://video.cnbc.com/gallery/?video=3000054986

Our view about the market is influenced by how many companies we can find that are both high quality and cheap.  I remember back in April this year, we had just started investing on behalf of investors in our fund but we could only find a small group of suitable companies.  That was enough to suggest that the other 2050 listed companies were either expensive and or of unsuitable quality.  A similar thing appears to be happening now.  The lower credit growth and declining iron ore prices have impacted the growth rates of future intrinsic values for banks and resource companies and these dominate our stock market index.

If you are following the Value.able-style approach to value investing, you would only be interested in high quality companies with bright prospects at substantial discounts to IV. If that fact changes as a result of the constant process of re-evaluating the prospects for the businesses in which we are interested, then one must act accordingly.

I cannot tell you whether the market is going to rise or fall in the weeks and months ahead but it does seem that value is a precious and rare commodity.  With that in mind, what are the companies that may be most at risk?

We will update this post with a table shortly but here is the short list (keep in mind the issues that have caused the companies to be in this predicament may be temporary):  Tap Oil, Neptune Marine, AACo, Somnomed, Elders, Centro and Gunns.  I will update soon with a more comprehensive list of expensive C4s and C5s soon.

The current list is not exhaustive, what I have done is taken C4 and C5 companies and sorted them by those that most recently reported cash flows that were unable to cover interest.  There are many more but these are the names that piqued my interest and I thought they might pique yours.

Posted by Roger Montgomery, Value.able author and Fund Manager, 09 November 2011.

by Roger Montgomery Posted in Investing Education.

• 71 Comments
• save this article
• 71
• POSTED IN Investing Education.

Good luck trying to buy shares in this boring but reliable business. It is rarely traded and the family owns two-thirds of the shares. Read Roger’s article at www.eurekareport.com.au.

by Roger Montgomery Posted in Media Room, On the Internet.

• save this article
• POSTED IN Media Room, On the Internet.

Gerry’s share price and intrinsic value are about what they were in 2003 and the outlook is not encouraging. Read Roger’s article at www.eurekreport.com.au.

by Roger Montgomery Posted in Media Room, On the Internet.

• 12 Comments
• save this article
• 12
• POSTED IN Media Room, On the Internet.

I have just returned to the office after appearing on CNBC with my old friend Matthew Kidman.  We were in agreement on virtually all points (which perhaps surprisingly made the program very interesting).  If the market does indeed provide a once-in-a-lifetime opportunity, in the next 12 months, to buy excellent value industrial companies, then you may want to be aware of the companies that are either really poor quality or extremely overpriced now.

Stay tuned over the next few days, as I will be publishing our list of companies whose shares are in the hot seat.  Some of them may shock you.

If you would like to pre-empt the report, with some of your own suggestions, go right ahead and list them by clicking on the Comments link below.

Posted by Roger Montgomery, Value.able author and Fund Manager, 03 November 2011.

by Roger Montgomery Posted in Value.able.

• 94 Comments
• save this article
• 94
• POSTED IN Value.able.

The float of Collins Foods earlier in the year at a price of $2.50 did not interest your author.  The lack of interest however was not shared by others and the company listed on the ASX with a ‘Top 20 Shareholders’ list that included many if not most of the major nominee companies (Nominee companies have long been established as the mechanism by which asset managers and custodians can process transactions on behalf of their clients).

I wrote a column for Alan Kohler in which I explained why investors might want to reconsider any enthusiasm and you can find the full column here http://rogermontgomery.com/invest-in-kfc-or-just-eat-it/

Much of the commentary around the time of the float referred to the “defensive” nature of fast food restaurants but as we have always suggested here, the only truly defensive stock market investment is an extraordinary business at a large discount to a conservative estimate of its intrinsic value.

One of the issues I had with the float was articulated thus:

“To begin with it is important to note that Pacific Equity Partners (PEP) – the private equity firm behind REDgroup, the parent company of Angus & Robertson and Borders now under administration – will be exiting its stake completely.

“Perhaps more interestingly, the existing management team is cashing in, too. Managing director Kevin Perkins will reduce his holding from over 20 per cent to about 8% and the rest of management will reduce their holding, too.

“When Pacific Equity Partners paid $US210 million in September 2005 (the $US6.92 a share was a 42% premium to the then traded price of $US4.92) for Worldwide Retail Concepts, the US publicly listed company that is now Collins Foods, management then co-invested with a 48% stake. According to all reports, management will now retain just 10%. In other words, management is selling 80% of its holdings into this float.”

Shares fall 50%

The prospectus (which didn’t include the above photo of a genetically modified chook) noted Collins Foods strengths included: “Attractive market dynamics”, “Leading market position” and “strong financial track record”. But just two months after the float, Collins Foods has warned that it will miss prospectus forecasts.  The shares are down 50% at the time of writing after the company stated that it would miss forecasted by almost a third (up to 27% to be precise).  Collins Food said that the downgrade is due to “fragile consumer confidence and a highly competitive restaurant industry”.

Indeed.  My contacts tell me that, according to analysis of credit card usage, the only place doing really well in Australia’s retail sector is…wait for it…restaurants.  Meanwhile at yesterday Dominos Pizza AGM, that company confirmed that on a like-for-like basis, sales had grown by double digits.

You cannot help but wonder, what was motivating management to sell so much of their stake into the float?

If you had your hands on the prospectus for Collins Foods and followed the steps in Chapter 11 of Value.able to value the float of Collins Foods, you might have used a forecast profit of $16 million, equity of $161 million, 93 millions shares on issue (giving an equity per share of $1.73), earnings per share of 17.3 cents and dividends per share of 11.8 cents (giving a payout ratio of 68%).

Return on equity of 10% is low and this is with the benefit of leverage (total borrowings $105 million).  Immediately you know that if you are using an Investor Required Return of more than the ROE of 10%, the intrinsic value will necessarily be less than the equity per share of $1.73.

Shares fall to Intrinsic Value Estimate

Using Tables 11.1 and 11.2 and an Investor Required Return of 13% Table 11.1 produces an income valuation of $1.33 and Table 11.2 produces a growth valuation of $1.08.  Multiplying $1.33 by the payout ratio of 68% results in 90 cents and Multiplying $1.08 by one minus the payout ratio of 68% results in 34 cents.  Adding 34 cents and 90 cents gives a valuation of $1.24.  (You can see just how bullish you or I would have to be to produce, at the time of the float, a valuation of $2.50!)

You might like to download the prospectus yourself from the ASX website here and try using Value.able’s Table 11.1 and 11.2 to arrive at the same valuation.  If you don’t have a copy of Value.able, you can order your copy here

I’d love to know how you go. If you have valued any ‘Turkey’s’ yourself, go right ahead and upload your thoughts about the company and your valuation, along with a comparison to its current price.

Posted by Roger Montgomery, Value.able author and Fund Manager, 03 November 2011.

by Roger Montgomery Posted in Consumer discretionary.

• 34 Comments
• save this article
• 34
• POSTED IN Consumer discretionary.