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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We have seen Value.able being applied on an offshore oil rig, in a deck chair on one young man’s private island and also a plunge pool in Bali. Here are two more stories from Graduates showing how they are applying Value.able in practice.
Roger,
I was recently in Galle, Sri Lanka, and was able to share some of your insights with a local spice trader, Yasiru. He was particularly interested in your comments on quality businesses and was happy to say that he maintained a competitive edge by controlling costs – he grinds and mixes the spices himself. I can report that his product is excellent and sells at bargain prices (I have no shares or other interest in his business).
Justin
And from Michael…
I felt compelled to shine light the legion of your followers that are not simply reading Value.able while sitting in lazy pacific island deck-chairs, exotic pools-with-a-view or even far reaching oil rigs. I give you the Montgomery Aussie Battler: An 8am-6pm, 5-day-week worker, traveling to and from work via a crammed and smelly public transport system (namely Brisbane’s CityCat). Who smiles to themselves knowing ‘the final salvation’ is possible – an early retirement thanks to Value.able, intrinsic value, margin of safety and high ROE to name a few. Thanks for starting a revolution!
Michael
P.S. Note the studious working scribbles underneath Value.able.
Please keep sharing your Value.able adventures with our community. We are enjoying the journey.
Posted by Roger Montgomery, 11 October 2010.
UPDATE: 13 October 2010
Here is another pic from Matt I received today… ‘Operating Value.Able’
Hi Roger, I don’t have a tropical or relaxing environment from which to share my experience of Value.Able – I send you this picture from the Trauma theatre at 2am after an emergency operation on a car accident victim. Not a place normally associated with relaxing thoughts. However, you may not know how good an operating theatre can be for reading. After all, it has the two most important ingredients: very good lighting and plenty of fresh air (via the ultra clean ventilation systems of course). Your book has been an excellent addition to my investing education and I look forward to meeting you at one of your upcoming presentations.
Cheers, Matt
P.S. the patient is doing just fine
UPDATE: 14 October 2010
Hi Roger,
I was just reading up on the “formula” when some of the guys were curious. Then, just before the game started I was trying to explain to my team mates the difference between a company’s yeild, PE and ROE. Told them to just get the book.
Cheers….Rad
Roger Montgomery teaches investors how to spot the difference between outstanding value and ‘value traps: low or negative ROE, negative cash flow, high debt and share prices far higher than a company’s intrinsic value. Read Roger’s ASX Investor Update article at asx.com.au.
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.
