A Value Trap? (02/04/2013)
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.
paul harris
:
You had an interesting Article in the Australian at the w.e “How to become poor etc”-in it you said that it takes the export of 9 tonnes of iron ore to pay for one imported i-phone. That seems extraodinary. Is that really correct!? Thanks Paul Harris
Andrew Legget
:
Not sure of the iron ore price Roger used, but i would imagine he has better access to this price than i do. Assuming the iron ore price is $150 (which you could argue is likely to decline in the future), the Apple store has outright prices of:
16GB=$799 (Just over 5 tonnes of ore)
32GB=$899 (6 tonnes of ore)
64GB=$999 (just over 6.5 tonnes of ore)
If the iron ore price declines then all things remaining equal, the ratio of ore to iphones will increase.
Rather than the cost, i think a more interesting look is how much it costs to produce each item. One source i have found says that an iPhone 5 costs $167.50 to produce or 20% of the purchase price of a 16GB. This could be way off but it seems reasonable.
Depending on the firm, it can cost a lot more of the total market price to produce a tonne of iron ore. Then you have to deal with potentially falling prices and the fact that there is no differentiation, a buyer will buy the cheapest ore as it is very similar where ever you get it from.
Locking ourselves to the travels of resources and their volatile demand and market prices and not trying to promote better australian products that can have similar characteristics to an iPhone (like a cochlear implant etc) is a lazy, conservative and potentially dangerous approach.
I will change my mind when people get excited about Fortescues latest iron ore shipment and see scenes similar to what i see outside the apple store every product launch.
Roger Montgomery
:
go to were the puck will be, not where the puck is.
Charlie Dalziell
:
Audio is not working. My lip reading isn’t up to the task:)
rmassera
:
Thanks Roger – your thoughts in this regard make good sense and remind me of a buffet guideline about investing only in businesses “whose earnings are virtually certain to be materially higher in 5, 10 and 20 years” – certain statistics you discuss make me contemplate ARB’s business. For example: How many of the 50K plus BHP employees & 70K plus contractors own 4WD’s (no doubt a large proportion)? what percentage of ARB’s total customer base does this group comprise? ARB’s revenues depend largely on the number of 4WD’s sold as well as the ability of owners to pay for accessories. What are your thoughts & insights on the certainty of earnings over the medium to long-term for ARB?
David
:
But where are we in the cycle? we may have had the last rate cut, Manufacturing growth seems to be on the way up. Commodities are input for manufacturing and inflation is not a problem. How do you know that in the next four years that inflation won’t go up and commodity prices will rise? we could be selling mining services companies at the bottom of the cycle
Roger Montgomery
:
Hi David,
Not suggesting you sell or buy anything. We don’t own mining services companies in any great quantum anymore, so have little if anything to sell ourselves.