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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Myer shareholders were sold a lemon. Of course, they can hardly say that they weren’t warned. Arguably Australia’s best investor, Roger Montgomery, told subscribers to his blog before Myer floated it was a dud. Read online.
Newly-listed retailer Kathmandu has exceeded its prospectus forecasts in its first results announcement since being sold by private equity. Read article.
There are many insurance stocks on the ASX but only one is attractively priced. Read article.
When China’s property bubble bursts, what will be the consequences for BHP and RIO? In the first part of his appearance on Your Money Your Call with Nina May Roger Montgomery also discusses Centennial Coal (CEY), Mortgage Choice (MOC), Virgin Blue (VBA), Santos (STO) and Woodside (WPL). Unfortunately none of these companies make Roger’s A1 grade. Watch the interview.
Roger Montgomery reveals his 2010, 2011 and 2012 valuations for Telstra, and it doesnt look good. In the second part of his interview with Peter Switzer Roger also tells viewers the value of Myer and Resmed. Watch the interview. Sign up free to Peter Switzer’s latest personal finance and financial planning news at switzer.com.au.
Roger Montgomery reveals the characteristics of top quality businesses – strong balance sheet, growing earnings, strong competitive advantage. Roger also talks about Toll Holdings and MMS. Watch the interview.
In 1999 TLS was the darling of the market. Analysts described it as a wonderful company, going to $20. One analyst even said it would be Australias first $100 stock. Not Roger Montgomery. He said the business was worth $2.70-$2.80. It was trading around $9. In this interview with Peter Switzer Roger reveals the valuation formula for a business that payout out all of its earnings out as a dividend, such as Telstra. Watch the interview. Sign up free to Peter Switzer’s latest personal finance and financial planning news at switzer.com.au.
Roger Montgomery reveals to viewers of Oriel Morrison’s Trading Matters program on CNBC Asia the businesses that are overpriced and represent a short selling opportunity, including IAG, AMP, WES, LLC, TOL, STO, AIO, RIO and LEI. In this appearance Roger also discusses the future prospects of The Reject Shop. Watch the interview.
Woolworths reported its first half 2010 results in recent weeks and the 17 per cent decline in the share price ahead of the result suggested investors may have been betting that the company was giving up ground to a revitalised Coles story. The price of Wesfarmers shares – being almost double their intrinsic value – certainly suggests enthusiasm for the latter company’s story.
Studying the results and the company however suggests any pessimism is unfounded and premature.
When I study JBH’s results there’s evidence of a classic profit loop. Cut prices to the customer, generate more sales, invest in systems and take advantage of greater buying power, invest savings in lower prices and do it again. Entrench the competitive advantage.
It would be obvious to expect Woolworths, with its history of management ties to Wal-Mart (who also engages the profit-loop) to be producing the same story, however WOW is flagging an arguably stronger position.
Where JBH’s gross profit margin keeps declining and net profit margin rising, Woolworths’ gross margin has increased every year since 2005. Revenues were 4.2% higher and gross profits rose by 6.5% in the latest half year result. Like JBH, WOW’s EBIT growth was stronger at 11%. As analysts we are mystified as to what is driving the increase in gross profit margins but standing back, you realise its a really good thing; if analysts cannot work it out then perhaps neither can the competitors and that’s good for maintaining a competitive advantage. Competitors cannot replicate something if they don’t know how its produced.
Woolworths competitive advantage – an important driver of sustainably high rates of return on equity (I expect them to average 27% for the next three years – subject to change of course at any time and without warning or notification afterwards) – is its scale and its total dominance, ownership of and class leadership in supply-chain management. The result is that a small increase in revenue even if due to inflation, results in a leveraged impact on profits.
From a cash flow perspective the other fascinating thing is the negative working capital. To those new to investing, working capital is typically an investment for a company; a business orders its products from a supplier, pays on 30 days terms and then spends the next few months selling the product it sells. If its takes a long time to sell the product and the customer takes time to pay, then there is an adverse impact on cash flow because the business is forking out cash today and not getting paid for some weeks or months.
In Woolworths case, as you might expect, the company is so strong and its buying power so dominant that it can dictate terms to its suppliers, making sure they deliver the right quantities at the right time. It can pay them when it likes and perhaps even pay them AFTER it sells the goods to consumers who buy with a debit, cash or credit card, which means Woolworths gets its money from its sales activity immediately. The difference of course can be invested.This virtuous cycle is highlighted by a negative number for working capital (WC = Inventory – Trade Payables + receivables – other creditors) which in Woolworth’s case, got even more negative! Don’t go rushing out and buying the shares because of this fact – its well known to the market and suppliers (who no doubt resent the company’s powerful market position). In the latest result, it was also attributable to timing differences in creditor payments.
The steep decline in the share price ahead of the company’s first half results suggests that many investors and analysts may have considered the company “ex-growth” and favoured Wesfarmers. Given the relative performances and valuations, this is likely to prove to be a mistake (more about that in a moment).
The company still has a lot of room to substantially increase sales and profits and the disbelief in this regard reminds me of the decade after decade in which analysts said Coca-Cola couldn’t grow anymore.
It would take a very almost illegally-informed and dedicated analyst to reach the conclusion that the company cannot continue to enlarge its coffers from further improvements to its overseas buying capability, its private label sales (both admittedly to the detriment of many smaller local owners of branded products) or its supply chain management. There’s also growth from acquisitions (speculative and don’t ever base a purchase on it), the Everyday Rewards loyalty card program and the hardware rollout (it will interesting to find out what they think their USP is).
While it will be interesting to find out what has been driving the competitor Wesfarmers sales numbers (basket size of more customers), the fact remains that it is premature to write off Woolworths. Many analysts will also be concerned about retailers cycling (comparing sales and profits to previous results) the fiscal stimulus, this is simply a short-term distraction and does not have anything to do with the long-term value of the company.
On that front, my calculated intrinsic value for Woolworths has risen every year for the last decade. When Buffett says he’s looking for companies with a “demonstrated track record of earnings power”, its because it translates to rising valuations. Woolworths was worth $2.39 in 2000. Intrinsic value rose to $14.84 in 2005 and $25.70 in 2009. Today’s value of $25.80 is expected to rise to $28.00 in 2011 and almost $30 in 2012.
The current price of $28.05 is therefore now equivalent to the valuation 15 months out and the February low prices are perhaps a better reflection of the current valuation that I have.
I have rarely been able to buy Woolworths at any significant discount to intrinsic value in the last decade and while I don’t know what the price will do next, I do know that irrespective of whether Woolworths offers lower prices in the supermarket or the share market, you would be ill advised to ignore them.
Please be reminded that my valuations for the future are based on analyst expectations, which can change at any time.
Posted by Roger Montgomery, 8 March 2010.
Bids to takeover Arrow Energy are very generous, says Roger Montgomery. He shares his view on Royal Dutch Shell and PetroChina’s $3 bn joint bid, with CNBC’s Oriel Morrison. Watch the interview.
