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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Telstra had consistently failed to perform. Roger Montgomery says the company has had virtually no growth in profit in the past decade. Read article.
The airline’s profit is a quarter of what it was ten years ago. If it had not managed to slash its staff costs, Qantas would have made a loss this year. Read article.
Here we are in the midst of reporting season and there are some reasonably predictable results. Qantas reported a profit today that was less than a quarter of its profit more than ten years ago. The airline reported a $112 million profit but that was boosted by $1 billion of revenue from its Frequent Flyer program and a $300 reduction in employment costs. For those of you interested in the real numbers, the company actually lost $302 million (see my chapter in Value.able on cash flow) and this can be explained by the very wide gap between the depreciation item in the profit and loss statement and the real expenditure on property plant & equipment. Depreciation looks backwards, but new planes cost more.
Separately, JB Hi-Fi’s result was excellent but my concern is that its $94 million of cash flow (of which $67 million was allocated to dividends and $20 million allocated to paying down debt) is superfluous to its needs. Take a look at the biggest asset on the balance sheet – Inventory of $334 million. Then take a look at the creditors item in the current liabilities section. Almost the same amount!
Think about it this way; the suppliers are funding the inventory so the company doesn’t even need cash to pay have the stuff it sells and that are on its shelves. Actually it really does, the gap is about what is left over once we subtract the debt repayment and dividends from the cash flow. It is small though. Once the debt is gone and the cash keeps growing it may do something that could harm intrinsic value.
Now don’t get me wrong; JB Hi-Fi is an amazing business that retained its A1 status in this result and the risk associated with its plans to roll out more stores is very low. I also think intrinsic value will continue to rise at a satisfactory rate. The concern for me with all this cash (and there is no evidence of it yet) is that the company increases the dividend payout ratio again. This would mean a reduction in the rate of growth of intrinsic value. It could stop being the “compounding machine” it has been to date. Return on equity also appears to be flattening, which could mean within the next few years, the valuation may plateau (but at a higher level than the current price).
On an unrelated issue, I note that back on 4 May 2010, I put together a list of the companies that I though represented the last of value in a blog post entitled Do these three companies represent the last of good value? ITX was one of the companies listed and I note the company has announced “itX confirms that it is in discussions with an interested party regarding a preliminary non-binding indication of interest to acquire 100% of the ordinary shares in itX.”
I’m pleased to strike another one up for the quality rating and valuation approach advocated here at my Insights blog!
Posted by Roger Montgomery, 12 August 2010
JB Hi-Fi released its full year results in early August and Roger Montgomery has some interesting insights about the future of the retailer. Can JBH continue to generate very high rates of return on equity? Watch the interview.
Peter Switzer values Roger’s advice, but he often plays devils advocate. In this appearance on Switzer TV Roger Montgomery talks about the kinds of stocks invests should and shouldn’t have in their portfolios. Roger also shares his thoughts on modern portfolio theory and diversification and reveals his reasons for selling or holding. Watch the interview.
Qantas CEO Alan Joyce joins Lateline Business live to discuss a tough year that included Eyjafjallajokull. Tiki Fullertson asks “…one of the reasons that you’ve cited for not paying a dividend this time round is for capital expenditure. But no dividend for over a year now – those long-suffering mums and dads. Is Roger Montgomery right that this isn’t a retail stock?” Read the transcript.
Its shares are still at a discount to their intrinsic value, so they won’t be sold out of the ValueLine portfolio anytime soon. But JB’s years of fast growth have slowed. Read Roger’s article at www.eurekareport.com.au.
Thank you for your encouraging comments about Value.able and all of your generous feedback. You have indeed given me enough suggestions for Value.able#2, or at least a workshop/lecture. While I consider these and in the meantime, I have received a number of questions (some of which go beyond the mandate for the book) that I think, if answered, could benefit everyone. Besides, I suspect if there is one person that has written me a question, there will be others who have the same query but didn’t write. In the interest of efficiency and to avoid repetition, here are what I believe represent the most likely questions you could have and the corresponding answers.
Question 1: Historical Information
In terms of valuations, is all the requisite historical information on individual companies freely available? You mentioned you look ahead 2 or 3 years when estimating intrinsic value. How do you go about getting the information for this? Can you recommend a source of financial data.
Answer 1: I have discovered that all the data you need to estimate intrinsic value and apply the steps in Value.able is available on Commsec, Westpac and E*trade (Thanks Ashley for the latter!). Here is the link to a demonstration of where EXACTLY to find the data. Or click on the Source Data button just to the right.
Financial data is also available for free on Google Finance and Yahoo Finance and you can also purchase publications that have up to ten years of historical information (I am currently trying to negotiate a special price for owners of Value.able).
Question 2: Analyst Forecasts
Where can I get analyst forecasts?
Answer 2: Consensus analyst information is available on Commsec and E*trade. Yahoo finance also provides consensus analyst estimates for 6000 companies updated weekly and the 2 year forecast EPS and DPS growth can be found under the Key Statistics tab. Not wanting to be left behind, Google Finance also has consensus estimates for Sales Profit and Dividends. Click here, then click on “More Ratios” under Key Stats and Ratios over on the lower right hand side of the page. Of course, if you use a full service broker you should be able to ask your adviser for access to the firm’s online research repository. Given analyst forecasts come from the analysts, they will have estimates as well.
Question 3: What tools can I use?
Perhaps you may know what I can use to filter the “good businesses” from the “not so good businesses”?
Answer 3: Sure, I do it right here! For my Insights blog (and for me) to remain independent I will not discuss any third party products or services.
Question 4: The retention rate
Calculating the value of an infinite life asset that has a 100% retention rate and a lower ROE than the required return is a mathematical impossibility.
Answer 4: I wouldn’t ever buy such an abomination! The most technically adept of you have suggested that where Retained earnings =100% and ROE<RR, my estimates are not conservative enough. I can see why – in theory – some of you would like to treat it more harshly with the valuation formula. However I prefer to treat it even more harshly than you – simply throw it in the bin! Why would you want to own a business where, through your inputs, you have assumed wealth destruction? The question about whether to invest or not is made in the head instantly. You don’t need a calculator for that.
Considering a margin of safety, I look for companies likely to sustain an ROE that far exceeds my required return and avoid businesses whose management retain profits at unproductive rates.
Question 5: Is value investing becoming too popular?
My concern is if there is a possibility that the rising popularity of value investing, by purchasing at a discount to intrinsic value, could spoil this method of investing?
Answer 5: There are a lot of people who worry that finding gold will immediately mean everyone else will find it at the same time and render it valueless. Don’t worry, there are vastly more investors speculating than there are investing. Even Buffett observed that after 40 years of teaching it, he has seen no migration towards value investing.
Question 6: Forecast Equity per share
How do I calculate forecast equity per share, I cannot find it anywhere?
Answer 6: Forecast equity per share is:
Forecast Year Equity Per Share = Previous Year Equity per share + Forecast Earnings per share – Forecast dividends per share + new share capital(per share) – buybacks(per share)
The last two elements can be deduced from any announcements the company makes about capital raisings or buybacks.
Question 7: Referencing others
You refer a lot to the work of these investing giants but as a successful former fund manager, you should have had more “Roger” in it.
Answer 7: As I say in my introduction, what I have been able to accomplish has been thanks to the writings and teachings of others. In my own investing I have adopted and adapted the frameworks suggested by many investors and academics and combined them in a way that is unique, suits me and works of course! I have for example not found my final approach to valuation anywhere else – it is an amalgam of the work of those mentioned in the book. I have not read about the extension of the margin of safety concept anywhere else either and the list goes on. There is a now a rather fruitful garden but the seeds were borrowed from the great and celebrated mathematicians and investors. Indeed I think even Buffett picked up a few pointers from others, especially Walter. To that end here’s a well known Buffett quote that I should have included in the book: “I don’t think I have any original ideas… I’ve gotten a lot of ideas myself from reading. You can learn a lot from other people. In fact, I think if you learn basically from other people, you don’t have to get too many new ideas on your own. You can just apply the best of what you see.”
It is my hope that now that you have the answers to these questions, you won’t have to wait for me to try and reply to emails with the same requests.
Roger… please check my valuations!
Finally, many of you asked me to check your work! I really am humbled by how many of you are launching straight into the application of value investing. Well done! Instead of going through everyone’s examples, I thought it would be much better to give you some worked examples for you to try yourself. Take these inputs and run them through the process in my book. By the end of next week I will release the answers for you to check your work against along with the substeps. The inputs are in the table. Print it and fill in the blank columns to arrive at your answers (click on the table to enlarge the image).
Ten Value.able valuations
Posted by Roger Montgomery, 10 August 2010
Click here for the answers… no cheating.
Discover the fundamental data you need to create your own Value.able valuations.
Click here to download Roger’s step-by-step guide to finding the Source Data.
Posted by Roger Montgomery, 10 August 2010
Don’t be mislead by conventional wisdom again. Find out how Roger Montgomery identifies A1 businesses trading at D-grade prices to produce returns that have significantly outperformed. Discover his “true cash flow” calculation and ten businesses that have the highest probability of success. Listen to Podcast.
The Formula That Works was recorded at the Australian Investors’ Association National Conference, Surfers Paradise Australia, 28 July 2010 and was rated by investors as the second best overall presentation of the Conference.
Listen to Roger’s keynote presentation What works on Wall Street?
