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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Last night on the Sky Business Channel with Nina May, I received a few requests for comments on companies that I hadn’t included in my valuation tables. So here are the valuations for those companies – Worleyparsons (WOR), Brambles (BXB), AGL Energy (AGK), Arrow Energy (AOE), Origin Energy (ORG) and SAI Global (SAI):
| Company Code | Price | Intrinsic Value | Forecast Intrinsic Value
(Above Current Price? / above Current Value?) |
Forecast ROE range
>20% preferred |
Net Debt / Equity
<50% preferred |
| WOR | $24.36 | $17.56 | YES/yes | 18%/21% | 30.2% |
| BXB | $6.99 | $3.76 | NO/yes | 30%/33% | 149% |
| AGK | $13.80 | $7.20 | NO/yes | 27%/32% | 14.4% |
| AOE | $3.33 | $0.04 | NO/yes | -0.6%/2.4% | -9.4% |
| ORG | $16.50 | $6.63 | NO/yes | 6.1%/7.7% | -8.1% |
| SAI | $3.74 | $1.88 | NO/yes | 16%/18.3% | 68% |
*Be sure to read the warnings about intrinsic values. See below.
“Would you buy this stock?” is a question I have fielded innumerable times since selling my funds management businesses and leaving them as well as the investment company I listed on the ASX. I am not in a position to answer it – having had 8 months of R&R since leaving, but I will let you know when I am. The following information comes from an earlier post “What would you say about my portfolio?” where I have listed further intrinsic valuation estimates.
When I am asked on air, sometimes without notice -by the guys at the ABC or Ross Greenwood at 2GB or Peter, Richard or Nina on Sky Business – what I think about a company, I will detail the price, the intrinsic value, the ROE, the debt and whether I believe that the intrinsic value will be rising by a decent clip in coming years. These are the things that I believe are the most important determinants of an investor’s return. Happily investors haven’t had to wait very long to see whether prices head towards the values – both Myer and Telstra are recent examples.
ABOUT INTRINSIC VALUES
We’d all prefer intrinsic values that were cast in stone. Unfortunately, they’re not. The valuation depends on the input so to be safer, I always run my model using two data sets. Importantly, I only run ONE valuation formula. My preferred method of investing would be to buy at a discount to the most conservative valuation but if I can’t get that and valuations are rising strongly in future years I might invest a smaller proportion of my portfolio in first class business at a substantial discount to the upper valuation.
AN INVITATION
I would be interested in hearing what you prefer to see. Would you prefer to see 1) the most conservative valuation only, 2) the valuation based on next year’s earnings forecast 3) based on the continuation of the historical performance of the company, or 4) both? Feel free to vote. What I like to use myself may not be what you want to see.
WARNINGS
Firstly, these valuations can change at any time and I may or may not update them here on the blog. A company, for example, could announce a downgrade and the valuation would drop – potentially precipitously and I will probably busy doing something with my own portfolio(s) so do not under any circumstances rely on or expect these valuations being kept up to date here at all.
Second, valuing a company is not the same as predicting the direction of its shares. Just because a company’s shares are lower than my valuation, does not mean the shares will go up. Conversely, a price that is well above my valuation doesn’t mean the share price is going to fall.
Third, my forthcoming book contains the information you need to calculate intrinsic value the way I do, so rather than ask me how I arrived at a valuation above, please register and wait for the book.
Finally, don’t act on this information (which can and is likely to change without warning and without notifying you) – seek a professional advisor’s recommendation, preferably someone who knows you, your financial circumstances and needs.
(Most importantly, don’t act without first speaking to an advisor who is familiar with your circumstances and needs. You must not rely on my musings – they could change in a moment and anyway, they relate only to me. My thoughts here are “insights” into the way I think about stocks and they don’t have you in mind.)
Posted by Roger Montgomery, 26 February 2010.
Here’s a strategy to hedge against each of the four risks to your prosperity.
Whilst most investors are obsessed with earnings and dividends, Roger Montgomery always considers how much money has been put in to a business to get earnings and dividends out. So what does Roger look at when valuing a business? 1. Equity on the balance sheet how much is there? Make sure it isnt full of accounting hot air (goodwill). 2. ROE how profitable is the business historically and looking into the future? 3. Discount rate what return do you want from the investment? 4. How much money is being retained and compounded by the company, and how much is being paid out. Roger also answers a viewer question about Telstra, valuing the business around $3.00. Watch the interview. Sign up free to Peter Switzer’s latest personal finance and financial planning news at switzer.com.au.
Using a bank account as an example, Roger Montgomery explains to Peter Switzer how to value a business that retains all its earnings, and shares his formula for calculating intrinsic value. Watch the interview. Sign up free to Peter Switzer’s latest personal finance and financial planning news at switzer.com.au.
There are actually five, but Roger saves the fifth for readers of his book, Value.able. So what are his first four? 1.When you are wrong 2.When there are better opportunities 3.When price is far above intrinsic value 4.Deterioration in original reasons for buying In his appearance on Market Moves with Richard Gonclaves Roger also analyses IAG, QBE, Asciano and Virgin Blue. Watch the interview.
Roger Montgomery joins Nina May on Your Money Your Call and answers viewer questions about Fleetwood (FWD), suppliers of the China property boom, identifying companies with durable competitive advantages, ANZ, CBA, Highlands Pacific (HIG), and the key ratio to look at when assessing mining companies.Watch the interview.
Origin Energy is trading above value, Oil Search at almost double its value and with a 2012 value of $6.37, Toll is not only mediocre, but also expensive. As for selling out of Wesfarmers to buy into RIO, Roger compares that plan to be like jumping from the fry pan into the fire! In his appearance with Nina May on Your Money Your Call Roger also reveals that of the 1874 businesses listed on the ASX only 600 make a profit, and for him, a tiny 23 fall into his ‘A1’ category of wonderful businesses. Watch the interview.
AGL, like Origin Energy and Arrow, has been expensive for a long time. According to Roger Montgomery this seems to be a general trend in the energy sector. In his appearance on Nina May’s Your Money Your Call Roger also reveals his 2010, 2011 and 2012 valuations for Bluescope and JB Hi-Fi, and discusses the impact of management’s decision to raise JBH’s dividend payout ratio from 50% to 60%. Watch the interview.
In this appearance on Your Money Your Call Roger Montgomery talks about the future prospects of Telstra, QBE, Worley Parsons and compares NAB and AMP’s attempt to acquire AXA to that of WES buying Coles, or Fosters buying Southcrop – disaster! Watch the interview.
The profits don’t justify the share price, which I calculate are trading at more than twice their intrinsic value. Read article.
