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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Audience fragmentation, declining revenues and duelling billionaires. Its enough to put any investor off the media sector for life. But as Roger Montgomery reveals, there are opportunities in this constantly evolving space that investors would be silly to ignore. Read Roger’s article at www.eurekareport.com.au.
In last weekend’s Weekend Australian, Terry McCrann wrote an excellent piece explaining the possible nature and motivations behind the relationship between Murdoch, Stokes and Packer. ‘Hiatus after Packer’s bombshell’ was both enlightening and entertaining. Continue…
Half year reporting season has just finished, presenting some new Value.able opportunities for stock market investors. In this interview with Ross Greenwood, Roger urges investors to understand how much money goes into a business to produce the reported profit. Listen to podcast.
UPDATE: I spoke with Graham, editor of thesmsfreview.com.au, this afternoon. There are only a few (around ten) seats left at the event. If you would like to attend, Graham has asked me to kindly request you do so before 5pm Friday 11 March. Click here to book online.
The SMSF Review and Alan’s Eureka Report, together with my team, have gathered some of Australia’s most respected self managed superannuation and investment experts – Alan Kohler, the Cooper Review’s Jeremy Cooper, ATO Superannuation Assistant Commissioner Stuart Forsyth, Jonathan Payne and Super System Review panel member Meg Heffron, to name a few.
The SMSF Strategy Day – for charity will be held in Sydney on Tuesday, 15 March. The day begins at 8.30am with a Keynote speech from ATO Assistant Commissioner (Superannuation) Stuart Forsyth and concludes at 4pm.
I will speak at 10.30am and at 12pm will join Alan Kohler, Jonathan Payne and Jeremy Cooper for a panel discussion to debate the most popular SMSF investment strategies.
Tickets are $77 (including GST) and 100 per cent of the net proceeds will be donated to those most affected by Australia’s recent spate of natural disasters.
Click here to book your seat online.
To download the event brochure, click here.
I look forward to meeting you next week for this valuable cause.
Posted by Roger Montgomery, author and fund manager, 8 March 2011.
Last month on Your Money Your Call John asked for my insights on Universal Coal (ASX:UNV)l.
UNV is not currently investment grade. It is a business that would not receive an adequate MQR.
Section 3.13 of the Prospectus reads: “The directors… believe that they do not have a reasonable basis to forecast future earnings on the basis that the operations of the company are inherently uncertain”.
Given this statement by management, any investment in Universal Coal appears to be speculative.
Without confidence in the future of the business, estimating its Value.able valuation is nearly impossible and investing is risky.
Turn the stock market off, focus on extraordinary businesses (re-read Chapters 5 – 9 of Value.able), calculate what the business is truly worth and buy them for less than they’re worth. And if you haven’t already done so, pick up your copy of Value.able at my website, www.rogermontgomery.com (there aren’t many Second Edition copies left).
Sky Business Channel have been invited to appear on Your Money Your Call this Thursday, 10 March. Tune in from 8pm Sydney time.
Posted by Roger Montgomery, author and fund manager, 8 March 2011.
Peter Switzer called me earlier this week. He was travelling to Perth and asked me to recommend a CEO to invite on his show. Matrix CEO Aaron Begley instantly came to mind.
Value.able graduates will recall I discovered Matrix a long time ago. It was the first business to achieve my coveted A1 Montgomery Quality Rating (MQR). I have written about Martix in Money magazine and here at the blog, and also shared my insights with Peter on the Sky Business Channel.
Here are the highlights of Peter’s recent interview with Aaron Begley.
I often meet with CEOs and advocate you do the same. Attend AGMs and EGMs, or better yet, call the company. If management isn’t willing to speak to shareholders, that’s a fairly good indication to me of what they think of their owners.
Aaron and the board of Matrix check all the boxes I seek in Value.able companies. Re-read Chapter 6 of Value.able for more of my thoughts. And to watch another CEO interview, click here.
Posted by Roger Montgomery, author and fund manager, 4 March 2011.
Since listing in October 2003, JB Hi-Fi has left analysts and shareholders spellbound by the impact of its extraordinary returns on equity. As you know, the Value.able magic began to fade for me late last year.
Why? Well JB Hi-Fi’s business appears to be maturing. And there are only so many stores you can put on an island!
No matter where you live in Australia, and no matter which shopping centre you walk into, you will never be too far from a JBH store – music blaring behind trademark billboard style placards screaming for your attention.
Yes, there are more stores in the pipeline (currently 153 with a target of 210). At an opening rate of 15 stores a year, that implies another 4.5 years of growth. But will the new stores be as profitable as the existing ones?
Retailers often have two, if not more, ‘Tiers’ of stores and JBH is no different. Of its target of 210 stores, 160 will be Tier-1 and 50 will be Tier-2. Tier-1 stores cost $2.5 million to set up, while Tier-2 are 20% cheaper. But Tier-2 stores generate only 70% of the revenue of a Tier-1 store.
Of the 67 stores yet to open, 31 will be Tier-2. That’s half of JBH’s newest stores less profitable! Currently Tier-2 stores account for just 13 per cent of JBH’s business.
JBH has $180 million sitting idle in the bank. With growth on the horizon, suppliers covering the cost of goods, high margins and low net debt, management’s decision earlier this year to review its capital management policy didn’t come as a surprise.
As we enter the first month of Autumn, the Chairman will no doubt be preparing to reveal the results of this review.
Whatever the company’s initiatives – buy back shares, return capital or increase the dividend payout ratio – the actions will have a material impact on my Value.able estimate of JBH’s value.
With that in mind, I would like you consider which is more valuable… one dollar in a bank account earning 45% and that figure compounds at 45% year after year, or one dollar in a bank account earning 45% and that figure is paid out in dividends each year?
If you’re a Value.able graduate, I’m certain you know the answer.
The first bank account is more valuable, and that’s precisely why any changes in JB Hi-Fi’s capital management policies will have a material impact on its Value.able value.
If JBH buys back shares (a disaster if management did that at a price higher than what the shares are worth) or lifts its dividend payout ratio, then my estimate of intrinsic value will decline.
Business maturity is generally accompanied by a leveling off of intrinsic value (followed by a serious drag if a silly acquisition is made).
Watch for how JBH reports its profit. Has return on equity stabilised, or will it continue to rise? Will your estimate of JBH’s Value.able intrinsic value continue to rise?
Whist JBH remains one of my preferred retailers, I am less optimistic it will continue to generate the returns on equity shareholders have enjoyed over the past. What are your thoughts? Feel free to chat here about other retailers too.
Posted by Roger Montgomery, author and fund manager, 3 March 2011.
If you are looking for a true blue chip portfolio, you may need to rethink conventional wisdom. According to Roger Montgomery, a true blue chip portfolio has nothing to do with size or longevity and everything to do with quality. Roger’s Value.able portfolio for Money is proof of this strategy – on average, the stocks in the portfolio have risen 27 per cent in just six months. Read Roger’s article.
When a company buys back its shares, the announcement is often accompanied by reports suggesting either 1) the company has no other growth options towards which it can employ equity capital or, 2) the company has great confidence in its future and other shareholders should be following its lead rather than selling out to the company itself.
Back in 1984, in his Chairman’s Letter to Shareholders (a source of information I have quoted frequently here and in Value.able), Warren Buffett observed:
“When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.”
Note to CFOs and CEOs: “shares selling far below intrinsic value in the marketplace.”
It is just as important for the CEO of a public company to be buying shares only when they are below intrinsic value, as it is for Value.able Graduates building a portfolio.
Buying shares above intrinsic value will destroy value as surely as buying high and selling low – something many Australian companies became all to expert at during the GFC as they issued shares in their millions at prices not only below intrinsic value, but below equity per share.
One question to ask is if companies are engaging in buy backs today, why weren’t they when their shares were much, much lower? The answer of course may be that they may not have had the capital back then. A recovery from the lows of the GFC has not only occurred in the prices of shares trading in the market place, but also in the cash-generating performance of the underlying businesses themselves.
Irrespective of the circumstances, a company now buying back shares that had previously issued them at the depths of the GFC is having a second crack at wealth destruction.
I am pleased to report that not all companies are following the crowd. Some larger companies, including BHP, RIO and Woolworths, have announced buy backs at or slightly below my estimate of their Value.able intrinsic values.
Webjet, Customers, Coventry Group and Charter Hall Retail REIT have all announced buy backs and Bendigo/Adelaide Bank is engaging in one to reverse the impact of shares issued through their DRP.
As I wrote yesterday (Is there any value around?), value is becoming much harder to find. Companies are expensive, even my A1s. Whilst any Value.able valuation is merely an estimate, the absence of a large Margin of Safety, combined with the announcements of buy backs, does not inspire my confidence.
In the US, share buy backs historically peak at market highs. Think back to the first half of 2007 and in 1999 and 2000 – two periods that investors may have wished they’d sold shares back to the companies – are also periods during which buy backs peaked.
Share buy backs are a very public demonstration of management’s capital allocation ability, or lack thereof.
Whilst Warren Buffett is regarded as the master of share buy backs, he has often sited another capital allocator as the real genius – the late Dr. Henry Singleton, the founder and CEO of Teledyne.
When the inflation-devastated stock market of the 1970s had pushed shares to the point that some suggested ‘equities were dead’, Henry Singleton bought back so many shares that by the mid 1980s there were 90% less Teledyne shares on issue. Here’s a para from the web: “In 1976, the company attempted, for the sixth time since 1972, to buy back its stock in order to eliminate the possibility of a takeover attempt by someone eager for the cash reserves the company had accumulated. Altogether, Teledyne spent $450 million buying back its stock, leaving $12 million outstanding, compared to $37.4 million at the close of 1972. With many of the company’s divisions showing stronger results and fewer shares outstanding, Teledyne’s stock increased from a low of $9.50 per share to $45 per share, becoming the largest gainer on the New York Stock Exchange.”
Who is Teledyne’s Australian equivalent?
One iconic Aussie business (it achieves my second highest MQR – A2) immediately springs to mind. In 2009 this business issued shares at a high price to fund a $A3.5 billion acquisition. But things didn’t quite go to plan… the US Federal Trade Commission intervened and the shares slumped. What did management do? They used the cash raised from the share issue to buy them back. Amazing!
Fast-forward twelve months and this business has nearly $1 billion in cash in the bank and no debt. If it keeps using its own cash and that being generated, and buying back shares at the present rate (and assuming the share price doesn’t change of course), it will have bought back all its shares in seven years. A Value.able business… what do you think?
Yes, if not for management’s decision to buy back shares ABOVE intrinsic value.
Unfortunately CSL’s share price may not be as high in seven years as it could have been, had management chosen to buy back its shares below intrinsic value.
If you own shares in a company engaging in a buy back, ask yourself whether value is being added to the company? Value is generated when the shares being purchased are available at prices below your estimate of its Value.able intrinsic value.
If management are overpaying, inappropriate capital allocation practices may be the only addition to the future prospects of the business.
Posted by Roger Montgomery, author and fund manager, 1 March 2011.
Australian Investors’ Association member Brian McErlean recalls his investment journey and how thirty years on he now uses Roger Montgomery’s Value.able to calculate intrinsic value. Read Brian’s story.
