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Best Buys in the market for 2011

In the Press, Market commentary | Comments (33)

Best Buys in the market for 2011

As more Australian companies start to pile up cash, the mergers and acquisitions buzz is sure to heat up. Roger Montgomery believes that less flashy share buybacks and dividend initiatives are often a better bet for increased shareholder returns and nominates some of his favourite A1 businesses. Read article.

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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.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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33 Comments

  1. Peter M
    :

    I am fairly new to value investing and am still building up knowledge about how to value stocks. The book Valuable is a great help. I was interested in finding more information that can be helpful. I use Comsec for financial information and i see that it varies from some of the information that I have seen in some examples. Also, it doesn’t go back as far as the examples that I have seen Roger use. Roger where do you get your financial information with regard to forecasts?

  2. Mike Hall
    :

    Hi Roger,
    I see that you’ve changed the numbers in the Value Line article on Matrix. That makes sense to me now. Thanks for that. There is no need to publish these two comments now.

    Regards, Mike

  3. John Watson
    :

    Decmil has reported a solid result and the stock has traded up to my current IV of $2.90. I have a 2013 IV of $4.42 assuming a projected 30% ROE, 13% RR and 40% POR. With management’s stated strategy of focussing on oil and gas contract work and diversifying into Queensland infrastructure projects I’ll continue to hold this stock. January 2011 forward order book stands at $200m with $93m of contract extensions awarded during the Dec ’10 quarter.

    • Lloyd
      :

      Agree. Based on the interim results, and the accompanying guidance for the full year, I have it at $3.30 (2011) rising to $4.10 (2012) at 12% RR. However, the key uncertainty attached to this is the payout ratio, given the unquantified statement that “The Board reaffirmed its expectation that it will declare a dividend for the current financial year.” I am assuming a lower POR of around 35% at this stage.

  4. Brad
    :

    REA, SEK and CRZ have become the “Rivers of Gold” that Rupert Murdoch once used to describe The Age / SMH’s classified advertisting revenue.

    Fairfax, with their now low ROE and >$1Bn in debt are really up against it. It’s death by a thousand cuts.

    • Lloyd
      :

      If only it was a thousand cuts! Seems like they’ve already suffered a million cuts in the last decade. Something about “flogging a dead horse” springs to mind.

  5. Eddy
    :

    Hi Roger,

    I saw recently you stated that the intrinsic value for JB Hifi will reduce by 20% over the next three years because of the increase in the dividend payment. I still currently own shares in this company and am interested in your values for 2011/2012/2013 as the company reaches full maturity.

    Cheers,
    Eddy.

  6. Rob
    :

    Hi Fred,
    For my mind I like JB because of the way they run their business. While others bemoan the GFC and online shops for their current doldrums, JB has stuck to the same low price, high turnover strategy. That strategy takes the opposition head on.

    Peter Lynch talks about getting out and getting a feel for the business. If you do that for JB, you’ll see the same thing all year round not just on Boxing Day – lots of bunting, sales pitches and importantly people. You go to JB you expect a good price.

    Along the same lines go to an Apple store. The shopping centre can be dead but the Apple store is abuzz. A different competitive advantage but the result. I was in the Apple store in New York at midnight and it was hectic.

    Cheers
    Rob

  8. Steve
    :

    I might have over inflated the forecast ROE for my valuation above. Looking into it further I am now getting closer to 30% whereas I used around 40% above. This reduces the MOS somewhat. Still interested to hear others thoughts

    • Steve
      :

      Roger would you be so kind as to inform us of your own valuation on Corporate Travel Management? Do you see a current MoS and what is it expected to be going forward for the next few years? They say they have grown by 30% per year over the last 5 years. Thanks

  9. Steve
    :

    I’m very interested to hear everyones thoughts on Corporate Travel Management (CTD). They just came out with an upgraded full year guidance this morning. I am not overly confident using a prospectus to value companies however I had a go anyway. My estimated valuation for 2011 gives the stock a MOS of at least 40% (using 12% RR). What valuations does everyone else get? Any other thoughts on competitive advantages etc.?

    • Adam
      :

      Hi Steve,

      I had a look at this too. Here’s how I went:

      Forcast NPAT is now stated as “$7.75m to $8.5m”, so let’s use $8M.
      Current shareholder equity as at 31 Dec 2011 is $33,323M.
      There are 70.37M shares on issue, so equity/ per share (as at 31 Dec 10): $0.47.
      End FY11 Equity per share I calculate at $0.54.
      This gives a 2011 ROE of 24%.
      I don’t know much about this business, so I will use a possibly conservative 13% RR.
      Payout ratio for 2011: 6.5 / 11.37 = 57.2%

      So I get a valuation of $1.34

      Roger can you give any insights?

      • Roger Montgomery
        :

        The only thing I would add Adam is that if you “don’t know much about this business’ you cannot reduce risk by simply raising the required return. The valuation you arrive at then is not a valuation of the business.

    • Joab Soh
      :

      Hi Steve,

      I had a look at CTD too and I think current prices are trading above IV.

      In terms of competitive advantage, I think there’s some competitive advantage because most corporate travels are booked via a travel agent rather than most of us who booked our leisure travel online (WTF). Additionally, most corporate are slow to changes, so relationships established goes a long way.

      That said, my main concern is on the Intangibles Asset on Balance Sheet, which I suspect most of them are Goodwill as a result of acquisitions. Management claims that they expect significant benefit from synergy, but it could well that management is paying too much for an acquisition. I tend to avoid it unless I can find sufficient evidences to prove the effects of synergy does justify the premium paid.

      • Roger Montgomery
        :

        Hi Joab,

        Is that intangible the result of the travel corp acquisition and arguably the reason for the listing. Whether the price paid was too high, will be determined by the subsequent return on equity.

      • Steve
        :

        Hi Roger. Not sure if my last post went through as I can’t see it listed under ‘waiting for moderation’. Just wondering if you could provide your own valuation for Corporate Travel. Is there a MoS currently and what do you think of its growth prospects?

  10. fred
    :

    Hi Roger,

    I can not understand your and other people’s liking of JB hi-fi limited, if you bought in 08/09 of course it was a great buy but @ 20.00 or so I just don’t get it ! I don’t like to say anything negative about “ANY” company but they only sell CDs and stuff. come on! This is my opinion!

    JB hi-fi lover’s, I don’t mean to be negative so take it easy.

    • Roger Montgomery
      :

      Hi Fred,

      I have written about this company maturing – quite some time ago (and again recently). Most of the emails I receive ask “Roger, why don’t you like it anymore?”

    • David Sinclair
      :

      Hi fred,

      There is a difference between liking the business and liking the price it is currently trading at. JB HI-Fi may “only sell CDs and stuff”, but they make a lot of money by doing that. They are currently maturing, as Roger says, but that doesn’t make them a bad business, just a mature good business. The main difference between a growing good business and a mature good business is the price at which it becomes a good investment. In the case of JB Hi-Fi, you will probably find that most of Roger’s disciples like the business but not the current price.

      David S.

      • Adam
        :

        Hi Fred

        I had my first experience shopping in JBH on the weekend. (I had the unfortunate task of taking my mother shopping for a new computer.) After going into 2 of the large department stores and another store well known for selling TVs and computers and receiving absolutely no assistance, I thought we’d try JBH. If all the JBH stores display the same level of customer service that we experienced then clearly JBH has a competitive advantage over its rivals.

        Whether it is good value at $20.00 is another matter.

        Adam

      • Lloyd
        :

        Adam,

        in response to your last question “Whether it is good value at $20.00 is another matter.” it has a Montgomery calculated IV of $23.85/share (calculated at 23 February 2011) as disclosed in the article “ValueLine: Something special” published in the Eureka Report last night.

        The 20% discount to the Mongtomery IV might be very attractive to some and raises questions as to the wisdom of the assertions of others that there is little or no value to be had in the market at the current time.

        Regards
        Lloyd

    • Andrew
      :

      As David said there is a difference between liking the business and thinking it is a good investment at the current price.

      The business is wonderful, now we are just haggling over price.

      JB Hi-Fi is an entrenched market leader in the selling of CD’s and stuff. Any competitor needs to fight it out on JB’s terms. They have whats called cost leadership or low cost leadership. They have operations set up so that they can consistently cut costs and offer products at the lowest prices whilst raising profitabitlity and their profitability (see ROE) is brilliant. Every competitor needs to lower their prices to match JB Hi Fi or be left behind.

      People know that if you want things at the cheapest price you go to JB, they also have this great brand which i think is pretty unique. They are a big business however with the reputation and image of a independent record store and this helps attract people as well.

      Like Roger and David said, the business is maturing and they will start becoming a bit less exceptional.

      • Manny Sorbello
        :

        JBH – the net cash, ROE and earnings growth say much about this company. Ask an 8 year old, 15 year old 22 year old etc etc where would you go if I gave you $100 to buy an Ipod or video game, answer … You will find 9 times out of 10 it will be JBH. Thats a competitive advantage. BelloWood

      • Andrew
        :

        Hi Manny, you use a very similar tactic i use to measue the competitive advantage of certain companies. I will actually ask a selection of people to name the first company they think of or the first place they will go if they want to do a certain scenario and if the answers are overwhelming towards a company than that means there is potentially a big competitive advantage and warrants further analysis. It’s an amazingly simple tool to use and can be quite useful in regards to specific types of companies.

        Another example of JB Hi-Fi is too look around your local shopping centre. It is not uncommon to see a JB hi-Fi in your local major shopping centre, however how many small independent CD stores or even a HMV or Sanity can be found? Sanity used to be everywhere now i can only think of seeing one and that store is empty especially when compared to the frenzy of the JB Hi-Fi in the same area.

        I like these companies as i can perform analysis on the strength of the business by just visiting the local shopping centres.

      • Peter
        :

        I would be worried about being the market leader for “CDs and stuff” when clearly the most efficient model for flogging media is direct digital. We shd think about Moore’s law and the advances in communication technology that will enable this method of delivery (think 4G and NBN). Given this risk, is it realistic to assume that the company can compound equity at the same ROE ad infinitum?

      • David Sinclair
        :

        Hi Peter,

        No, of course it isn’t realistic to assume that the company can compound equity at the same ROE ad infinitum. They are already starting to run out of opportunities to re-invest earnings, which is why the payout ratio is rising. This is what all the comments about the company maturing mean. That doesn’t bother me particularly. It suggests to me that management are smart enough to know that opportunities to re-invest earnings at high rates of return are running out and that paying higher dividends is a better response than re-investing earnings into lower-return projects. As I said before, it changes the price at which the business becomes (or remains) a good investment, but it doesn’t make it a bad business.

        David S.

  11. Matt R
    :

    Hi Everyone/Anyone

    A good article Roger- thank you for that.

    I guess Acrux would be a reasonable place to start for this blog. Any thoughts on its 2011 IV and current fundamentals?

    Roger had it as an A1 in his 16 Dec blog, with a price at the time of $3.53 and a MOS of 12.5%.

    My attempts at 2011 IV:

    assumptions:
    RR14%
    NPAT 40M (I ignored the 2011 forecast NPAT of 70M as this seems to be an anomaly c/w 2012 & 2013 forecasts, and due to a one off payment from Lilly for Axiron). It is also due to pay a uniquely large dividend in 2011.

    no. shares 165.5M
    average EQ- 67.65M
    EQ/Sh- $0.41
    ROE- 59, use 57.5% (I dropped it down one level, although it is probably not sustainable long term at this level)
    POR- 0.25
    IV $4.32, so currently at a reasonable discount to IV

    forecast IV for 2012 and 2013 is $4.36 and $5.84 using average EQ (73.2M & 116.5M respectively), RR14, POR .25 and NPAT of 40.8M and 60.8M respectively (see link below for analysts forecasts/figures

    So, IV not rising at a rapid clip, but has good growth prospects over the next 5 years, and the analyst stated these figures are conservative.

    (LINK REMOVED. RESOURCE NOT FOUND)

    Anyone else care to comment?

    Matt

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