Valueline: The retailers
Retailers with competitive advantage make big profits. Here are my top picks. Read Roger’s article at www.eurekareport.com.au.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Ken Milhinch
:
Roger,
As your website becomes more widely known, it is probably inevitable that you will get a few “contributors” who leave comments designed to pump share prices. I am sure you know this. A friend of mine who runs a forum insists upon registration and refuses any applicant who does not have a real email address (Yahoo, Hotmail, GMail etc not allowed). I realise you don’t want to spend your days as a website administrator, but registration might be a wise safeguard for the future.
Regards, Ken
Roger Montgomery
:
Hi Ken,
Thanks for the suggestion. The gift of perception comes in handy. I will not accept any such posts and be sure to let me know if any slip through.
jc
:
Hi Pat,
SFH as a business has certainly changed a lot since 2003 ( the divestment of a large business primarily – the Discount Variety division which held business such as Go-Lo and Crazy Clarks; given the subsequent performance of the business this seems fairly prescient in my opinion). Further, SFH has had problems in the past (from conversations with management I am comfortable this is fixed) which has likely artificially depressed the stock price. In addition, the sale of Queenspark in order to redeploy capital into more profitable businesses highlights that management is taking a rational approach to capital (they also received a reasonable price for the business). La Senza/Victoria’s Secret is probably a free option at this point as well…
Something to think on.
Roger Montgomery
:
Hi JC,
Thanks for your thoughts and insights. Thankfully there are now a growing number of Value.able contributors who will be able to run it through the refining fire of Value.able and confirm or repudiate. To all commenters; I would prefer you use your real names rather than initials. Especially when you are using hotmail addresses.
Pat Fitzgerald
:
Hi jc
I hope that management are improving the business as that is what the shareholders would expect. I find SFH’s past too scary for me, over the last ten years the ROE has been erratic, earnings growth has been poor and too much shareholder equity has been lost. Also broker consensus estimates currently forecast minimal growth for the next couple of years, the ROE is falling quickly and I am not sure what competitive advantage SFH have. SFH is not in my list of extraordinary businesses.
James
:
Hi Roger,
Was there any particular reason you left SFH out of the post?
Do you see it as an A class stock? Perhaps it is no ORL but it certainly looks attractive.
Roger Montgomery
:
Hi James,
No list is exhaustive. No specific reason for its exclusion.
Pat Fitzgerald
:
Hi James
To invest in SFH I need to believe that management won’t repeat the mistakes of the past. Also I find SFH difficult to value using the method in ‘Value.able’ because their ROE is falling quickly. Back in 2003 SFH had Equity of $215.9m but Equity fell to 10.8m in 2008. The ROE has been high in recent years because of the lower Equity but the ROE is falling quickly as their Equity grows. The current share price is under my FY 2011 IV of $1.70. (I don’t own shares in SFH)
Roger Montgomery
:
Hi Pat,
The situation you describe suits the Value.able method perfectly. I can think of many such examples that I have avoided as a result and been delighted to have.
Pat Fitzgerald
:
Hi Roger
If I ignore the past and assume SFH has consistent EPS growth then using a RR of 13% and the forecast ROE, my IV’s for SFH for the next few years would be:
For 2011 with a forecast ROE 45%, IV is $2.49,
2012 with a forecast ROE 39%, IV is $2.43,
2013 with a forecast ROE 35%, IV is $2.41,
2014 with a forecast ROE 31.5%, IV is $2.40.
Using the forecast ROE of 45% for 2011 is giving me a IV that I am not comfortable in using, but it does make the current share price look cheap but the IV is not growing therefore that is a reason for me not to buy.
Is this how I should value SFH or should I use a lower ROE for all four years (ie 30%) ?
Luke
:
Hi Roger,
Thanks for the great list – I already hold two of those A1s. Is there any reason why the valueline portfolio doesn’t have Oroton in it? It is A1, has a high ROE and there is a margin of safety. Of course, the margin isn’t enormous like it was with MCE but it still looks like a good buy even now. Or perhaps you believe their high ROE is unsustainable?
Cheers,
Luke
Roger Montgomery
:
Hi Luke,
I am friends with the CEO and owning the shares would necessarily stunt our conversations and make just hanging out difficult. Better to miss the profit and enjoy the friendship.