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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The First Edition of Value.able has sold out.
Thank you. Thank you for purchasing copies for your family and friends. And thank you for allowing me to share my way of investing with you.
If you haven’t yet purchased your copy, don’t worry. I plan to release a Second Edition paperback in November. The manuscript is with the designers and will soon be on the printing press.
You can pre-order and secure your copy at my website, www.rogermontgomery.com. Or if you haven’t yet done so, join up to my mailing list and I will let you know when then Second Edition is available.
I have received a few emails from investors who purchased their First Edition copies in early September and are patiently waiting for them to arrive. The books are delivered by Australia Post. If no one is home at the time of delivery, a parcel reminder will be left at your front door or in your letterbox and your book will be taken to your local post office. Unfortunately I have heard of occasions where no reminder note was left.
If you haven’t yet done so, please check with you local post office and if you don’t have any luck, please let me know.
Posted by Roger Montgomery, 7 October 2010.
Each Wednesday I write my ValueLine column for Alan Kohler’s Eureka Report. Usually I post a link to my article the following day here at the blog. This week Alan has generously allowed me to republish my insights. Visit the Eureka Report website, www.eurekareport.com for more details about Alan’s newsletter.
ValueLine: Carsales.com
Ever noticed that the biggest and best online businesses are lists? Lists of websites, lists of houses, lists of flights, lists of jobs, lists of hotel rooms … even lists of people!
The business of curating and providing lists can be an extremely lucrative one because there is no need for a warehouse or a manufacturing plant. Nor is there a need for inventory and there is potentially very little maintenance spending required.
But because anyone with access to a server and knowledge of a programming language can imitate the business model, what is needed to be successful is a sustainable competitive advantage. More about that in a moment.
Last year nearly one million cars were sold in Australia; this year the figure is expected to be even higher. Of Australia’s adult population of 19.3 million, 5.3% buy a new car every year. Excluding January sales (when everyone is on holidays) and June sales (with end of financial year run-outs) about 85,000 new cars are sold each month.
That’s a lot of new cars being bought, and one suspects that just as many second hand-cars being sold too. One company leveraged to this industry without having to buy stock, lease a showroom or pay the wages of mechanics is Carsales.com (CRZ).
After a decade of business under private ownership, Carsales.com was floated at $3.50 a share in September 2009 in one of the most highly anticipated listings of the year. As is often the case with such floats, very few retail investors were able to get an allocation.
Today Carsales (CRZ) is Australia’s largest online list of cars, with about 205,000 units available for sale as of June this year.
For the year to June 2010, Carsales reported a profit of $43.2 million, which was $16.8 million less than listed car dealership Automotive Holdings (AHE). Automotive Holdings reported a profit of $60 million but required $1 billion of assets and $376 million of equity to produce it.
By way of comparison, Carsales required just $114 million of assets and $89 million of equity. Automotive Holdings generated a return on assets of 6.5%; Carsales’ figure was 39%.
If they were your assets, which return would you prefer?
For every dollar of sales, Automotive Holdings generates earnings before interest, tax, depreciation and amortisation (EBITDA) of 3.8¢. Carsales generates EBITDA of 52¢ from every dollar of sales.
If you could own one of these businesses, which would you prefer?
Carsales dominates Australia’s online lists of cars, capturing roughly half the market. Its next nearest competitor is the Newscorp-owned Carsguide with 93,000 cars for sale at mid-August, followed by the Trading Post with 69,000 cars.
For the full year to June 2010, Carsales’ revenues increased by 28%, with operating costs rising by less than 12% and net profits increasing by over 41%.
One of the keys to sustaining this kind of performance is a competitive advantage and while many conventional reports cite brands and systems as sources of competitive advantage, Carsales’s advantage comes from what is known as the network effect.
This is arguably one of the strongest sources of competitive advantage and it is evident when the value of a service increases for both new and current users as more people begin to use that good or service.
Think about it like this.
As more people list their cars/jobs/properties on a website, more people visit that website because it has the more cars listed. As more people visit the website, it justifies more people listing their cars there and this virtuous circle continues to work in favour of the dominant site, until an unbridgeable moat exists between Carsales.com and the other brands.
In an effort to break the cycle, one of Carsales’ competitors offered vendors the opportunity to list their cars for free but even that failed to put a dent the growth trajectory of Australia’s leading car classifieds website.
Carsales enjoys the same benefits of the network effect as Seek (SEK) does in job ads, REA Group (REA) does in real estate and Wotif (WTF) does in accommodation. This network effect is as visible and obvious as it is entrenched for Carsales.com and investors looking to buy a wonderful business would be hard-pressed to find many more attractive (for more of Roger’s thoughts on web-based businesses, click here).
Now the reality is that Carsales’ largest shareholder, PBL Media, owns 49% of the company and at some point that stake will be sold. But investors fearing the overhang should be less concerned by who buys and sells the shares and more concerned with whether the intrinsic value of the company is rising or not.
Carsales’ intrinsic value is rising. My forecasts suggest intrinsic value will rise 19% for each of the next three years and, let me assure you, there are few companies that can even promise that.
But a rising intrinsic value is just one of the characteristics the ValueLine portfolio seeks. The other is a discount to today’s intrinsic value. And that is the only test that Carsales.com. does not pass.
Carsales.com is an A1 business with a strong competitive advantage that is generating excellent returns on assets but, according to my calculations, its intrinsic value is $3.77. If we compare this to yesterday’s closing price of $4.72, it is approximately 25% overvalued.
In 2012, my estimated intrinsic value for Carsales rises to $4.65 and in 2012 to $5.24, but disciplined value investors need to make sure that everything lines up perfectly to pursue a successful investment strategy.
Carsales is not currently trading at a discount but it is a great business to keep in mind, should the market temporarily change its mind.
Posted by Roger Montgomery, 7 October 2010
The upcoming float of QR National may be the second-biggest sale of an Australian public asset, but Roger Montgomery warns investors against investing in capital-intenstive businesses with low returns on equity. Read article.
Roger Montgomery applies his famous valuation technique to one of the most heavily oversubscribed floats of 2009 – Carsales.com – and discovers it is a business in excellent shape and delivering astounding returns. But does it meet Roger’s rigorous standards? Read Roger’s article at www.eurekareport.com.au.
With apologies to Molly Meldrum, if you own shares or plan to one day own shares on ASX-listed companies, do yourself a favour and buy Roger Montgomery’s new book Value.able. Read review.
It’s the biggest float since the Telstra T3 offering of 2006, and next Sunday the prospectus begins hitting in-boxes and mailboxes. Roger Montgomery told The Sunday Age ”The return on equity I’m currently estimating to be in single digits, and arguably in 2012, based on the forecast, it’s going to earn a rate of return on its equity of 6 or 7 per cent.” Read article.
Very few books get me this excited.
The anticipation I had when opening my package upon receiving Roger’s book was huge! Boy was I not let down!
Roger’s book literally reignited my interest toward fundamental valuation of firms. Investors should rejoice, finally a logical approach to valuing ANY company that literally ANY investor can use. I have put many friends and family on to this book! I have no doubt that Value.able is going to take the nation, possibly the world, by storm.
I really enjoy Roger’s simple approach to valuing companies and the way he explains his concepts in the book are commendable. Some of his best concepts involve seeking both qualitative and quantitative margins of safety when using his simple yet very effective valuation method.
Roger gives a lot of value to his readers in this book. I personally never accept anything I read unless I completely understand exactly what is happening, how the concept works and how the assumptions affect the outcome. Subsequently, Value.able was a fantastic read for those reasons; Roger leaves nothing to the imagination, makes no unjustifiable assumptions, and bases his methods on proven and simple logic. Best of all, you don’t need a degree in finance to understand his book.
I honestly recommend you read Value.able. Many people are already looking forward to the second edition of the book, which will no doubt add further value for readers, based on the feedback Roger received from the first release.
If you are an investor, a student, a simple person wanting an easier logical way to make your decisions or even if you are academically challenged, you will understand Roger’s approach.
Well done Roger, I look forward to reading your future books!
Co-founder of Student2Ttrader.com.
Roger Montgomery will present his popular “How to pick the best value stocks and what to buy right now” seminar to value investors and share traders at the upcoming Trading & Investing Expo in Sydney from Friday 29 October. More details. Find out how to get your free ticket.
Supplying miners with the equipment they need to repair their infrastructure is now big business. In his Value.able Stocks column for Money magazine, Roger Montgomery reveals three businesses in the sector that have recently received or confirmed their A1 Montgomery Quality Rating (MQR). Read Roger’s article.
I know of no other book in the world that discusses the concept of calculating future intrinsic values. You may think that is a bold statement, but its true. I have seen many books that claim to reveal Warren Buffett’s intrinsic value formula, but not one that lays out, step-by-step, what investors need to look at to determine whether intrinsic value is rising at a satisfactory rate in the future.
I confess to chuckling recently when one investor told me that they were finding it a little difficult to source the data they needed to calculate future intrinsic values. They also believed that my book lacked an explanation for how to calculate future intrinsic values.
So I asked whether or not they had even thought about future intrinsic values before having read Value.able? Sheepishly, the investor accepted that my book was much more valuable than they had initially concluded and subsequently told other people.
I have not found any other book in the world that has taken that little Buffett quote about finding businesses growing intrinsic value at a “satisfactory rate” and making it part of a clearly explained and defined investing process.
And for those of you who are looking for a reference to forecast equity per share in Value.able…. see Page 188, Step A.
The missing worked example for future equity. It’s easy!
How can you estimate future equity if you don’t have a forecast number such as those readily available in analyst research notes? It’s easy. Take the last known equity per share figure, add the estimated profits, subtract the estimated dividends, add any capital raised through new shares issued and subtract any equity paid back to shareholders through buybacks and you have it.
Here’s an example: In the 2010 annual report for The Reject Shop, equity at 30 June 2010 was $51.543 million (click here to see) and there were 26.034 million shares on issue. Dividing the 2010 ending equity by the shares on issue ($51.543/26.034) equals equity of $1.98 on a per share basis.
According to Commsec (click here to see), consensus analyst estimates for 2011 earnings per share and dividends per share are $1.028 and $0.744 respectively.
Starting with the 2010 equity per share of $1.98, add the earnings per share of $1.028 and subtract the dividends per share of $0.744 to arrive at an estimated ending equity for 2011 of $2.26. (If you are aware of any shares issued since the end of the financial year, you may want to take the amount raised and divide it by the number of shares issued and then add that result to the $2.26)
Now that you have seen it done, how easy is that?
A global movement begins!
I couldn’t be happier that a small group of passionate Australian value investors are even contemplating future intrinsic values! Nobody in the world is presenting you with estimates for intrinsic values, two, three or four years out and I have never seen any investor ever do it. I know of nobody else in Australia doing that, nobody has written about it before and I haven’t ever come across anyone else in the international business media discussing it either.
And now you are all doing it! It has become part of your vocabulary.
Think about that for a minute… after reading Value.able, investors are now estimating future intrinsic values, posting their estimates at my blog and Facebook page,and chatting about them online in forums and in boardrooms where previously nobody was.
If before reading Value.able you weren’t discussing future intrinsic values and now you are, then my book has had a positive impact and I am delighted. And all for just $49.95!
Consider how you are now subconsciously framing your investing decisions with future intrinsic values in mind.
Warning!
Don’t blindly combine numbers with Value.able’s valuation tables to produce intrinsic values. As I say in my book, you MUST understand the business and its prospects. I devoted an entire chapter to cash flow and its calculations. Don’t ignore it. I also devoted an entire chapter to competitive advantages. Don’t ignore that either.
Recently, Buffett sold down his holding in Moody’s because it had lost some of its competitive advantage. He isn’t selling because he has recalculated intrinsic value. It’s the competitive advantage that drives the intrinsic value.
Be careful you aren’t so focused on the intrinsic value number that you ignore all the other important factors.
Its one of the reasons I have my Montgomery Quality Ratings (MQRs). They are my own filter to help narrow the universe of companies to conduct further research on.
I put a lot of effort into writing my book and making an investment plan out of the best of what the world’s most successful investors have revealed, published and taught. And I am delighted that you have allowed me to share that with you. Thank you.
Where do I get the raw data Roger?
I have previously posted a document called ‘Source Data’, where Value.able graduates contributed their solutions to obtaining the data. Because I am receiving so many requests for help finding the data, I thought it useful to republish it. Click here or click the Value.able Source Data button to the right.
I was saddened to hear that one Value.able reader thought getting the data was all too hard and gave up. That’s like knowing there’s silver and gold a metre under your feet but saying that grabbing a shovel and digging is just too hard. If you don’t want to do the work that’s fine, but please don’t blame the guy who gave you the map, the pick and the shovel.
Using the information in my Source Data document, you should now be in a rock solid position to start estimating future intrinsic Value.able values.
Take a look at the Source Data document and you will see that the raw data is freely available. Indeed every single number you need to estimate the current intrinsic value is also available in a company’s annual report, and its all free at ASX.com.au.
With sources like Commsec and the formula I have given you for future equity, you can now freely estimate the forecast intrinsic value as well. Just go to ASX.com.au, click on the announcements link, select the company code and the year you need and voila! All the information is there in the annual report.
Value.able outlines the way I invest. I don’t have a green button that I press each day that automatically goes and buys the best opportunities. Value investing requires research and analysis. We can build devices that give us some short cuts, but they don’t replace the need to understand the business and the risks.
Why are my valuations different to Roger’s?
If everyone uses exactly the same inputs, our Value.able valuations will all be identical. Any differences therefore are due to different data. Some examples of sources of variation are:
There are a variety of reasons and your Value.able valuations are different to mine.
Recently on TV I indicated that my valuation of Telstra was closer to $2.30-$2.50, but one Value.able graduate produced $3.68. I suspect that the difference is simply the choice of discount rate. Many investors will use a low discount rate because TLS such a big company with plenty of liquidity and very low risk of significant change. I however might use a higher rate because I want compensation for the fact that its future prospects are opaque and its profits haven’t grown a dollar in a decade.
Thinking about differing results, I am encouraged that many Value.able graduates were able to replicate my results exactly, or within a couple of cents.
Value.able will stand the test of time because it is based on a method of investing that works. It is a method of investing that requires time to demonstrate its value. And in time I look forward to hearing many more of your success stories.
Only a few First Edition hardback copies of Value.able remain. So if you haven’t purchased your reserved copy yet, now is not the time to ponder.
There was only one print run of the First Edition hardback. The paperback Second Edition will be available in mid November.
Posted by Roger Montgomery, 1 October 2010.
