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.
find out about investing with montgomery
With food prices on the way up and Woolies share price on the way down, I have received many requests for my updated valuation (my historical $26 valuation was released last year). Add to that Woolworths market announcement on 24 January 2011, and you will understand why I have taken slightly longer than usual to publish your blog comments.
With Woolworths’ shares trading at the same level as four years ago (and having declined recently), I wonder whether your requests for a Montgomery Value.able valuation is the result of the many other analysts publishing much higher valuations than mine?
Given WOW’s share price has slipped towards my Value.able intrinsic value of circa $26, understandably many investors feel uncomfortable with other higher valuations (in some cases more than $10 higher),
Without knowing which valuation model other analysts use, I cannot offer any reasons for the large disparity. What I can tell you is that no one else uses the intrinsic valuation formula that I use.
So to further your training, and welcome more students to the Value.able Graduate class of 2011, I would like to share with you my most recent Value.able intrinsic valuation for WOW. Use my valuation as a benchmark to check your own work.
Based on management’s 24 January announcement, WOW shareholders can expect:
– Forecast NPAT growth for 2011 to be in the range of 5% to 8%
– EPS growth for 2011 to be in the range of 6% to 9%
The downgraded forecasts are based on more thrifty consumers, increasing interest rates, the rising Australian dollar and incurring costs not covered by insurance, associated with the NZ earthquakes and Australian floods, cyclones and bush fires. The reason for the greater increase in EPS for 2011 than reported NPAT is due to the $700m buyback, which I also discussed last year.
Based on these assumptions and noting that WOW reported a Net Profit after Tax of $2,028.89m in 2010, NPAT for 2011 is likely to be in the range of $2,130.33 to $2,191.20. Also, based on the latest Appendix 3b (which takes into account the buyback), shares on issue are 1212.89m, down from 1231.14m from the full year.
If I use my preferred discount rate (Required Return) for Woolies of 10% (it has always deserved a low discount rate), I get a forecast 2011 valuation for Woolworths of $23.69, post the downgrade. This is $2.31 lower than my previous Value.able valuation of $26.
If I am slightly more bullish on my forecasts, I get a MAXIMUM valuation for WOW of $26.73, using the same 10% discount rate.
So there you have it. Using the method I set out in Value.able, my intrinsic valuation for WOW is $23.69 to a MAXIMUM $26.73.
Of course, I only get excited when a significant discount exists to the lower end of these valuations and until such a time, I will be sitting in cash.
Posted by Roger Montgomery, author and fund manager, 14 February 2011.
How did independent investment expert Roger Montgomery’s A1-quality rating portfolio actually perform? Roger revealed the results to Peter Switzer on his Sky News Business Channel. Read article.
Following the release of Telstra’s half yearly financial results, Roger Montgomery shares his views with Ros Childs on the ABC’s Midday Report. Fast Forward to 10:50 to see Roger’s interview. Watch the interview.
Peter Switzer asked Roger Montgomery to reveal six of his cheapest A1 stocks. In Roger’s A1 list are three retail businesses, a supplier of oil well equipment, an auto part manufacturer and another that services the casino and gambling industry. Which business is Roger Montgomery’s hot A1 pick for 2011? Watch the interview.
In late 2010 Peter Switzer set Roger Montgomery a challenge – create a portfolio of A1 businesses that will outperform the market. Whilst Roger does not trade short-term, on Thursday 10 February 2011 he revealed the results of his A1 portfolio. Of the 10 A1 businesses Roger named, the share prices of two rose 25 per cent, another two rose 12 per cent and the remainder returned an average of seven per cent. That’s an average share price appreciation of around 10 per cent in just six weeks! The All Ords returned 5.7 per cent over the same period. Even Roger’s A1 businesses that were trading at prices higher than his Value.able intrinsic value returned an average of 10.5 per cent. It just goes to show that Roger’s Value.able method of valuing only the best stocks, his A1s, and buying them for less than they’re worth, can beat the market. In this interview Roger also shared his thoughts on Telstra following the company’s recent results announcement. Watch the interview.
On the last show of 2010, Peter Switzer asked me to list six of my A1 businesses that, at the time, were displaying the largest margins of safety. Tonight Peter has invited me to join him once again to review how those six A1s have performed (and chat about Telstra’s result no doubt). Tune into the Sky Business Channel (602) from 7pm (Sydney time).
Here’s the article/transcript from that appearance.
Click here to watch the latest interview and discover how my A1 picks performed.
A1 stocks are the cream of the crop, but how do you know which stocks measure up? To find out, Roger Montgomery joins Peter Switzer on his Sky News Business Channel program – SWITZER.
Montgomery explains he classes companies from A1 down to C5.
“A1 is a business, I think, that has the absolute lowest probability of what I call a liquidity event – the lowest chance of having to raise capital, the lowest chance of needing to borrow more money, the lowest chance of defaulting on any debt that it has, breaching a banking covenant or a debt covenant, the lowest chance of needing money or going bust,” he says.
Montgomery says he’s interested in consistency of performance – A1s that he think will be A1 in the next 12 months.
“I’m looking for the companies that have been consistently A1s or A2s over a longer period of time,” he says. “They’re the ones that I think are most likely to be next year as well.”
Montgomery stresses that it’s important to diversify and get professional advice.
“Make sure you don’t bet the farm on any one company,” he says. “That’s why you need personal professional advice, because you’ve got to make sure that you’re doing the right thing for you and everybody has different risk tolerances.”
Montgomery’s A1 stocks
Platinum Asset Management – he says this is an “obvious A1 – a great performer, has no need for debt, pays all of its cash out.” The company is trading at about its intrinsic value, so it’s not a bargain, but it’s good quality. The intrinsic value is expected to rise around 14 per cent over three years.
Cochlear – “It’s been an A1 for years,” he says adding that its current share price is not cheap enough. Its intrinsic value is expected to rise around 13 per cent over the next three years.
Blackmores – “Expensive at the moment,” he says. “The intrinsic value is only expected to rise about five per cent over the next three years.”
Real Estate.com – “It’s expensive again – it’s trading at about 15 per cent above its intrinsic value.” The intrinsic value is expected to rise 15 per cent in a year. Its intrinsic value is forecast to rise by about 15 per cent a year. “In a year’s time, its intrinsic value will be its current price.”
M2 Telecommunications – This company is trading at a 10 per cent premium to its intrinsic value, Montgomery says. “It’s not cheap, but its intrinsic value is forecast to rise by eleven and a half per cent.”
Mineral Resources – This is a mining services business and is trading around its intrinsic value. The intrinsic values are forecast to increase by around 30 per cent a year over the next three years – “So that’s not bad.”
DWS Advanced – Montgomery says this IT services business is trading at a three per cent discount to intrinsic value and its intrinsic value is expected to rise by about 13 per cent.
Centrebet – Montgomery explains that people tell him there’s not many competitive advantages with the company because barriers to entry to the industry are low. “The owners of the licenses for these things would say they disagree – barriers to entry are quite high,” he says. Centrebet is at a six per cent discount to intrinsic value and it’s forecast to rise around five per cent a year, Montgomery says.
ARB – “Trading at about 11 per cent discount to its intrinsic value. Forecast intrinsic value is going to rise by about three-and-a-half per cent,” he says.
Oroton – “There’s been some talk about the CEO selling shares. The issue is I’ve bought shares from CEOs and founders who’ve sold shares and the share price has gone up a lot since then. I’ve also seen situations where the CEO has sold and that’s been the best time to have sold.”
Montgomery says there hasn’t been research to show CEOs selling shares indicated anything, but there has been research to suggest CEOs buying shares may indicate something. Oroton is trading at a 13 per cent discount to intrinsic value and is expected to rise 13 per cent per annum.
Companies trading at premiums to their intrinsic value
Reckon
Thorn Group
GUD Holdings
Fleetwood
Wotif
Monadelphous
The intrinsic value on these companies are rising anywhere from six per cent to around 17 per cent per year over the next three years, Montgomery says.
Montgomery says it’s important to do further research on the companies – “you can’t just go out and buy them – some of them, as I’ve pointed out, are expensive, so I wouldn’t be buying them. Some of them are A1s but that doesn’t mean that they’re amazing businesses and they’re the best businesses to buy. They’re the least chance of having a liquidity event.”
Companies trading at discount to intrinsic value
Montgomery explains he isn’t predicting share price; he’s valuing the company.
“Valuing a company is different to predicting where the share price is going to go”.
In descending order – biggest discount to smallest discount:
Matrix
Composite and Engineering
Nick Scali
JB Hi-Fi
Oroton
ARB
Centrebet
DWS
“We’ll come back in the New Year, we’ll have a look at how the index has gone, and we’ll have a look at how that little group of companies has performed.”
Important information: This content has been prepared by www.switzer.com.au without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek and take appropriate professional advice.
Posted by Roger Montgomery, author and fund manager, 10 February 2010.
Last year in Eureka Report Roger Montgomery wondered out loud if JB Hi-Fi’s steep profit trajectory may be levelling out. Has the company matured and what are the consequences of management’s promise to review its capital management practices? Read Roger’s article at www.eurkeareport.com.au.
At this time of year, well-meaning articles on the subject of how to invest in the year ahead abound. Indeed I have contributed to the pool of wisdom in my recent article for Equity magazine titled Is your stock market on or off?.
Value.able Graduates know to turn the stock market off and focus on just three simple steps. Even if you have read Value.able, or joined in the conversation at my blog, its not just me that believes they’re worth repeating. Ashley wrote about the article ‘More of the same stuff for the Value.able disciples but the more you read it the more you will practise it’ and from David ‘’twas a good refresher indeed!’.
Step 1
The first step of course is to understand how the stock market works. Once you understand this, turning it off is easy. And you do need to turn of its noisy distraction.
Step 2
The second step is to be able to recognise an extraordinary business (Go to Value.able Chapter 5, page 057).
I have come up with what are now commonly referred to by Value.able Graduates as Montgomery Quality Ratings, or MQR for short. Ranking companies from A1 to C5, my MQR gives each company a probability weighting in terms of its likelihood of experiencing a liquidity event.
Step 3
Finally, the third step is to estimate the intrinsic value of that business. Use Tables 11.1 and 11.2 in Value.able.
Three simple steps. If you get them right, you too can produce the sorts of extraordinary returns demonstrated and published, for example, in Money magazine.
The key is to buy extraordinary companies. To save you some time, I would like share a current list of companies that don’t meet my A1 rating. Indeed these are the companies that receive my C4 and C5 ratings, the worst possible. Avoiding these is just as important as picking the A1s because even diversification doesn’t work when your portfolio is filled with poor quality companies or those purchased with no margin of safety.
Whilst the eleven companies listed above are low quality businesses, they won’t necessarily blow up. This is not exhaustive, nor is it a list of companies whose share prices will go down. It is however a list of companies that I personally won’t be investing in.
If your first question is what are the chances of loss?’ then my C5 rating represents the highest risk. But of course risk is based on probability. And a probability is not a certainty. Nevertheless, I prefer A1s and A2s. More on those lists another time.
Posted by Roger Montgomery, author and fund manager, 3 February 2011.
Toll operator Transurban is set to release its results tomorrow. Roger Montgomery tells ABC reporter Andrew Robertson the company is still in business because the revenue is sufficient to meet the expenses and also the dividends they are paying, however if interest rates were to rise, debt would become an acute burden. Read transcript.
If you are new to my stock market Insights blog, welcome. And to the Value.able community, thank you for your many comments and encouraging words. It gives me great encouragement and motivates me to hear how your investing and returns have improved as a result of reading Value.able and the collection of comments posted by Graduates here at my blog. Thank you also for spreading the word and purchasing additional copies for family and friends.
Taking a look back over the stocks we discussed last year, it appears the Value.able approach to investing in the highest quality businesses, with a true margin of safety, has been doing quite well.
In addition to the blog, I also wrote about many of the stocks that achieve an A1 Montgomery Quality Rating (MQG) in my Value.able stocks for Money magazine over the last six months of 2010.
The stocks are listed in the table below. The column titled ‘Gain’ demonstrates you can do well without exposing yourself to lots of risk – for example the risk that is inherent in speculative stocks.
The returns exclude the dividends received, which would obviously boost results materially. The correct comparison therefore is the All Ords price index rather than the All Ordinaries Accumulation Index. Since 30 June 2010 the All Ordinaries has risen 12%. That is a stark contrast to many of the returns produced by the high quality businesses listed above.
The returns stand even higher above the Index when the selection is ranked by those that I regarded as offering the greatest margin of safety at the time the stock was mentioned: Oroton (up 37.5%), ARB Corporation (up 29.8%), JB Hi-Fi (bought and then sold the next month (up 5%), Monadelphous, Forge, Decmil and Matrix (up 44%, up 59%, up 35%, and up 37% respectively). The average, six month, price-only return of these businesses is 34.8%. And some of these A1 businesses, a margin of safety still exists.
If you are new to value investing you will, when searching around, find many commentators, portfolio managers and investors who may disparage value investing generally. They may question the method of calculating intrinsic value or even dismiss the valuations produced, but quite seriously, the proof is in the eating. And the returns offered have been nothing short of mouth watering.
But six months is NOT enough to hang your hat on, as Tony and Adam recently pointed out on my Facebook page. So if you have been an investor in any of these companies, following a conversation with your adviser of course, remember that the change in price over a year or two shouldn’t excite or concern you. It’s the change ahead in the Value.able intrinsic value of the company that matters.
If you haven’t already purchased your copy of Value.able, I commend it to you. It will change the way you think about investing in the stock market for the better, and as the many independent comments elsewhere here on the blog can attest, it may also materially improve your results. Value.able is available exclusively at www.rogermontgomery.com
Posted Roger Montgomery, author and fund manager, 2 February 2011.
