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.
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With reporting season over, and armed with the Value.able mantra, how are you uncovering the very best stocks worthy of your attention?
Lifebuoy soap was once marketed as Floating Above the Rest. Are there any companies post reporting season doing the same?
While many of my peers believe 2012 could be a very difficult year for investors, there are currently a selection of companies that appear to be both high quality and trading at prices offering a rational safety margin compared to our estimates of their intrinsic value.
Each reporting season we present a short-list of companies worthy of careful analysis. This reporting season is no different. As always, the list is not exhaustive. You are free to agree, disagree or append the list. Indeed, I encourage you to do so. For debate often brings A1 ideas.
I decided to look for Large Caps, Mid Caps, Small Caps, Micro Caps and Nano Caps with an A1 or A2 Quality Score across all sectors and industry groups.
I’m also interested in companies for which there are analyst forecasts for at least one year ahead and whose current market price offers a safety margin of more than 10 per cent.
From over 2080 listed companies, 17 meet the criteria.
An attractive and sustainable Return on Equity is also important, so let’s seek out companies whose ROE is greater than 20 per cent in the most recent financial year, have a forecast dividend yield of more than four per cent and whose intrinsic value that is forecast to rise at least six per cent per annum.
The result?
Nine companies trading at a discount to intrinsic value that may be worthy of your attention.
Here they are: Seymour Whyte (ASX:SWL), Nick Scali (NCK), Codan (CDA), M2 Telecommunications (MTU), Credit Corp (CCP), Global Construction Services (GCS), Breville Group (BBG), GR Engineering (GNG) and Flight Centre (FLT).
If we were in a bull market, I suspect a stampede to get ‘set’ may ensue, without proper research. With the luxury of a market where the tide may still be going out, you may just have the indulgence of time to conduct plenty of research. Regardless, independent research is essential. As is seeking personal, professional financial advice.
So, what have you been researching? Go ahead and list your “Top 5”. We’ll put together a worthy riposte.
Alternatively, put forward your A1 suggestions and we’ll compile a list of intrinsic valuations and Skaffold® Quality Ratings for the next blog post.
Finally, keep in mind that I cannot predict where the share prices for these companies are headed. They could all halve, or worse. And remember, seek and take personal professional advice.
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 stock market service, 8 September 2011.
In this appearance on Switzer TV with Peter Switzer, Roger Montgomery searched through large caps, mid caps, small caps and micro caps to uncover a list of A1 and A2 businesses. He then filtered out those companies who achieve a Return on Equity greater than 20 per cent, currently offer a safety margin greater than 10 per cent and whose intrinsic value is forecast to rise by at least six per cent over the next three years. Watch this interview and discover nine companies that make Roger Montgomery’s A1 grade. Watch the interview.
If your strategy is to buy extraordinary businesses trading at discounts to intrinsic value, Woolworths offers the required combination. Roger Montgomery explains why Woolworths is a good buy. Read Roger’s article.
Money magazine published an edited extract from Roger Montgomery’s best-selling stock market guide book, Value.able. Read the extract then order your copy of Value.able at www.rogermontgomery.com.
What is the definition of a defensive investment? Despite the tired and predictable answers you are likely to get from the advice industry, it’s a fascinating question to ponder at a time when many traditionally ‘safe’ investment choices are exceedingly unattractive. Roger Montgomery has spent some time thinking about this conundrum and has arrived at an unorthodox conclusion. Read Roger’s article at www.eurekareport.com.au.
Reporting season is now over, presenting many new Value.able opportunities. Roger Montgomery reveals to Ross Greenwood which A1 companies have caught his eye this season. Listen to podcast.
The time has arrived.
My team and I are delighted to invite Value.able Graduates to pre-register for Skaffold®, our next-generation A1 service.
Skaffold is the stock market like you’ve never seen it before – the world’s best visuals combined with its most reputable information and ideas.
Amazing, incredible, simple. That’s Skaffold.
Those who have already seen Skaffold called it “the missing piece”.
Value.able Graduates will receive a personal invitation today. Keep an eye out for an email from me with the subject line “Your next-generation A1 invitation. Here it is”.
IMPORTANT: It has come to our attention that some @optusnet.com.au email addresses did not receive my invitation. Rest assured, if you have contacted us, posted a comment here at the blog or on my Facebook page, or simply not received your invitation, my team will be in touch.
Posted by Roger Montgomery, Skaffold® member #1.
Skaffold® is a registered trademark of Skaffold Pty Limited.
Who would have thought a little comment at the end of my 17 August Value.able column for Alan Kohler’s Eureka Report on Qantas’ strategic direction announcement would cause such a stir!
It appears I wasn’t the only Value.able Graduate wondering aloud about the coincidental timing of the strategic change of direction, coming as it did whilst the share price was trading at near record lows.
My Value.able column started like this: “Sick of losing money, Qantas CEO Alan Joyce revealed a long-overdue change of strategy for the airline earlier this week, which included cutting jobs, delaying the delivery of six A380s until 2019, buying smaller aircraft, launching two new Asia-based airlines and an attempt to turn around the fortunes of Qantas International.”
And ended like this: “This may not disturb parties that have taken notice of the share price trading below NTA and considered mounting a takeover. You may recall that back in 2007 a consortium that included former CEO Geoff Dixon and former chairman Margaret Jackson had a bid of $5.45 share on the table. At yesterday’s closing price of $1.525 I think it’s safe to say they dodged a bullet.
“If there’s a way to get around the Qantas Sale Act and increase aircraft utilisation rates with an offshore hub, I reckon someone out there in the world of institutional finance has thought of it and run the ruler over Qantas
“…if there was ever a second tilt at Qantas, now would be as good a time as any…”
Have a quick look at the Balance Sheet.
Ignoring the $470 million ‘investments accounted for using the equity method’, QAN has twenty billion of assets (only $593 million are intangibles – landing slots, brand and software). There is $3 billion of cash and $13.8 billion of property, plant and equipment. Now add to that $14 billion of liabilities, some of which is represented by Redemption Revenue*, a portion of which may never be claimed.
For the moment, put aside the Qantas Sale Act (a small thing to do here because it suits this discussion!), now imagine…
You mount a bid for $3.5 billion (funded largely by the cash in the company’s bank account). You sell all the planes, the property and all the equipment to pay off the liabilities, but keep the frequent flyer business, which then cost you nothing.
While it is true my scenario is embarrassingly simplistic (and not nearly as obvious as bidding for ING during the depths of the GFC) it may also be true that the most profitable frequent flyer program in the world (and Qantas’ most profitable Operating Segment) could be in the sights of an audacious bidder.
Let’s compare the Revenue, Earnings Before Interest and Tax (EBIT) and resulting EBIT Margin of Qantas’ four core operating segments:
I know which segment I want to own!
In 2007 Qantas was the target of a takeover attempt by APA (Airline Partners Australia) – a consortium put together specifically for that purpose. They were willing to pay $11 billion.
At the time, fears around the impact of a highly leveraged owner on Australian superannuation funds were added to the national interest concerns. The bid was not supported by employees or the community. Interestingly, the government of the day didn’t intervene in the bid because of undertakings that the company would remain Australian owned and headquartered in Australia. We are a proud nation.
A bid today at, say $4.5 billion, and with the same undertakings, would either make the current bidders look very wily, or those involved in the previous attempt very silly.
Many analysts now have buy recommendations on Qantas. Whilst I agree that the shares are at a discount to tangible equity, I don’t believe the discount is as great as being stated. This is because retained earnings in equity were never really earned. The economic profit of the airline is, as I have stated on many occasions over the years, much lower than the accounting construct that produced the retained earnings entry. But a discount to NTA does appear to exist.
If you were a bidder, and can overcome all the obstacles, with the share price well below NTA and the imminent prospect of the company committing to acquire another 100 planes, you’d want to get a move on.
Of course this is a purely economic discussion and does not take into account the impact on the jobs and livelihoods of QAN’s 34,000 staff and their families. Nor have I taken into account Australia’s national interest.
There haven’t been many occasions when QAN shares have traded below my estimate of the company’s Value.able intrinsic either.
Ten days ago Qantas was trading at intrinsic value. Based on recent results and current expectations, our estimate of intrinsic value is forecast to rise by as much as 30 per cent over the next three years.
Sneak Peek #2: Ten years of historical intrinsic value and three years of forecast valuations for Qantas, compared to the current market price. Why is the price chart orange, I hear you ask? Because Qantas scores a B for quality. In our next-generation A1 service B = Adequate Quality and Adequate Quality = orange. Amazing, incredible, simple.
There are just two requirements to ensure you receive an invitation to become a founding member of our next-generation A1 service.
1. Read Value.able
2. Change some part of the way you think about the stock market
You may also like to submit your photograph to the Value.able Graduate album at my Facebok page, however this is optional. If you haven’t yet secured your copy of Value.able and joined the Graduate Class, click here.
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 stock market service, 1 September 2011.
*The company’s notes states; “Unused tickets are recognised as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket. Changes in these estimation methods could have a material impact on the financial statements of Qantas.” Some have suggested that more can be made from unused tickets than those actually claimed/uplifted.
Redemption revenue received for the issuance of FF points is deferred as a liability (revenue received in advance) until the points are redeemed or the passenger is uplifted in the case of flight redemptions. Redemption revenue is measured based on management’s estimate of the fair value of the expected awards for which the points will be redeemed. The fair value of the awards are reduced to take into account the proportion of points that are expected to expire (breakage). The accounting steps are [a current liability if they will be earned within one year] debit to the asset Cash for the amount received and a credit to the liability account such as revenue received in advance.
As the amount received in advance is earned, the current liability account will be debited for the amount earned and the Revenues account reported on the income statement will be credited. This is done through an adjusting entry.
Reports of the death of Australian manufacturing are greatly overstated. Roger Montgomery visits Australia’s unloved manufacturing sector and finds a group of thriving companies worth adding to your watchlist. Read Roger’s article at www.eurekareport.com.au.
Floating a business in volatile times takes a big leap of faith. Bega Cheese (ASX:BGA) floated last month; issuing 127 million shares at $2 each, this raised $35 million which brought the companies value to $250million. In this interview with Ross Greenwood, Roger Montgomery shares his Value.able expert opinion on the future of Bega Cheese. Listen to Podcast.
