Virgin Blue slumps on profit downgrade
Roger Montgomery says the business model of budget airlines is simply unsustainable in the long term. Read article.
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.
Steve
:
It’s also worth noting Roger’s recent article about Health Industry stocks. Both Sonic Healthcare and Sigma have now dropped to be trading near Roger’s intrinsic valuation calculations. CSL which is more of an A1 business has fallen too but nowhere near as much. Goes to show it’s only worth owning the very best companies you can find. Owning poor quality businesses will eventually get you in the end.
Steve
:
Hi Roger,
Thanks for posting this article. I am sad to admit that I am one of those people in pain right now after this VBA announcement. Back around March last year I was looking to buy a number of companies that looked like they were at the bottom of their cycles with the potential to rebound strongly. I bought VBA at 32.5c and then participated in the capital raising at 20c. I was hoping to make up for some of the losses I experienced during the GFC. At one point VBA had given me a paper profit of around $40,000. And then all of a sudden BANG – it all disappears in a matter of days. Why do you have to be so right Roger?! Diversification, investing in good quality companies, NOT investing in airlines. These are all things I am starting to learn the hard way. It’s funny but now whenever I am looking around for share opportunities I can’t help but hear some of your quotes in my head after watching your appearances on Sky Business “it’s just not a good quality company” or “it just looks too expensive”. Whether I like it or not I can’t seem to ignore it! Hopefully this is a good thing and will change my style of investing for the better.
Best Regards,
Steve
admin
:
Hi Steve,
They are very flattering things to say. Thank you Steve. Its just common sense to me and you are on your way to making it common sense for you.
Lloyd Taylor
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Roger,
Competition is also hitting home at REX as Qantas moves on some of its more lucrative routes and the wind comes out of the sails of the resource sector fly in/out game as commodity prices soften. Yet another example that the force of gravity and the rules of the capital intensive airline industry are never suspended for long?
Regards
Lloyd
admin
:
Thanks Lloyd,
Let Virgin’s announcement be a testament to that! If you go to the Media tab, you should be able to find my comments on the ABC today about Virgin.
Martin
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Hi Roger,
How can Virgin come out in such a short period of time, so close the end of the financial year and cut profit by possibly three quarters? If all was ok just a couple of weeks before with lower end of guidance announcement; would that imply that all was on track and these are dramatic changes? If so are things likely to change, because if not they will be out of business pretty quickly if they are losing 60 million dollars in a timeframe of 33 days (second announcement to end of financial year timeframe).
Secondly, I noticed a large shareholder sold a great deal of shares the day before the second announcement, why isn’t something like that looked at?
Lastly, is you were to do the numbers on the last few years, extra expenditure and GFC last year and still recovering. ROE history looks pretty good, even though we hate airlines (now me included); what valuation would you put on them?
Regards,
Martin
Roger Montgomery
:
Hi Martin,
Virgin Blue’s intrinsic value has been well below its price since the day it floated. QAN’s intrinsic value was around $3.65 ten years ago and $1.97 now. The share price was $3.85 ten years ago and $2.52 today. As Ben Graham noted, in the long run the market is a weighing machine – in the long run the price reflects the value. With regards to your other comments, they should be directed to the company and ASIC respectively. If you need any contact names at ASIC, let me know.