Companies

The Woolworths Food and Liquor Division reported 3.8% sales growth to $37.5 billion for the year to June 2012.  Same store sales growth increased by 1.3% for the year.  For the June Quarter, sales growth was 3.8%, year on year, while same stores sales grew by 1.3%.

In comparison, Coles reported sales growth of 6.1% to $33.7b and same store sales growth of 3.7%.  For the June Quarter, sales growth was 4.6%, year on year, while same store sales grew by 3.0%.

Both organisations reported price deflation of approximately 4% in fresh produce, and this masked both their strong volume growth and the increasing consolidation of the Australian supermarket industry.

The Montgomery (Private) Fund is a shareholder in Woolworths, and likes its 26% average return on equity.

by Roger Montgomery Posted in Companies, Consumer discretionary, Insightful Insights.

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As we have been actively commenting since the start of the year, a key thematic concern we hold for investors in both Mining and Mining services businesses was the potential for commodity prices and in particular Iron Prices to begin to fall. In such an environment, falling prices would result in lower profits and cash flows for our miners and hence we could see significant future risk of projects being either scaled back or shelved in future periods.

Our view is anchored by a supply response in two new Pilbara regions coming on stream over the next few years and also falling demand from the world’s biggest consumer of additional supply, Asia (China).

With Iron Ore falling to $123.6/t, down 9% in two weeks; we are now at a critical juncture.

Critical because this is the price considered by many to be the ‘floor’ / the most Iron Ore prices can fall given China’s own estimated cost of production is $120/t. This compares to Australia/Brazil at $40/t and Canada/USA/Europe $65/t. A price lower than $120/t would make China’s Iron Ore production uneconomic and hence, a fall below this level “just cannot occur”.

Our experience with commodity producers is a little different. Our experience tells us that marginal producers are the first to lose when commodity prices fall materially.

And in this light we continue to expect over the coming months and years we will see lower prices and perhaps, marginal / high cost producers suffering and mining services starved of work. Even if they are operating at full steam right now.

To ask a question: is the recent moratorium of all Greenfield exploration activities by BHP a sign that they see the world in a similar light?

by Roger Montgomery Posted in Companies, Energy / Resources, Investing Education.

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I thought the downgrade in earnings by a major stockbroker of the Chinese cement stocks by 20-30% for the years to December 2012 and 2013 was revealing.  Anhui Conch, for example, one of China’s largest cement producers, is expecting its sales volume to grow by 17 percent per annum from 158 million tonnes in 2011 to 251 million tonnes in 2014.  While the average selling price per tonne for 2012 is down 15% to 20% on 2011, and the gross margin has halved.  This drives home the cyclical nature of the industry and in the past year the Anhui Conch stock price has also halved to HK$20.

by Roger Montgomery Posted in Companies, Investing Education, Market Valuation.

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Roger Montgomery certainly thinks so, and he discusses with Ticky Fullerton how his Value.able investing strategy provides much lower valuations of the current market in this interview on ABC’s The Business broadcast 18 July 2012.  Watch here.

by Roger Montgomery Posted in Companies, Insightful Insights, Investing Education, TV Appearances.

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Roger provides details of the sad decline of Hastie Group (HST) in this Money Magazine article for July 2012.  Read here.

by Roger Montgomery Posted in Companies, In the Press, Investing Education.

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Roger Montgomery discusses why excessive focus on High Yield stocks is likely to yield disappointing returns in this Australian article published on 23 June 2012. Read here.

by Roger Montgomery Posted in Companies, In the Press, Investing Education.

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Amid news of Qantas’ latest conniptions and Spain’s arrival on the set of the great euro drama (Italy and France to enter stage right shortly), one Aussie company is quietly going about its business.

That business is ARB Corporation (ARP), and its compelling fundamentals are the reason we have held the company’s shares in the Montgomery Private Fund since inception.

Those fundamentals have also helped to produce acceptable results for Montgomery investors (See Figure 1) amid an otherwise manic, depressive market.

Guided by its founder, Roger Brown, ARB designs, manufactures and distributes accessories for 4WD and light commercial vehicles – something it has focused on solely and successfully for almost as long as I have been alive.

And while producing and selling accessories for 4WDs doesn’t sound like an overly exciting business, consider the fundamentals over the past 10 years.

Since 2002, ARB has managed to grow its after tax earnings from $8.36 million to $37.8 million – a compound growth rate of 18.25% per annum. This is a fantastic achievement and largely organic because it has required just $133.5 million of retained profits and equity – the latter from the issuance of options.

In 2002, $8.36 million profit was generated on $31.2 million of shareholders’ equity, generating a return to owners of 26.8%. Fast forward to 2011 and returns are equally impressive. $37.8 million is being generated on $129.3 million or 29.2%. Many businesses have also grown their profits over the same period of time, but it is far more often that growth has been ‘acquired’ and declining return on equity suggests those acquisitions have been expensive.

Fig. 1 Results are net of all fees.

As the business has grown and developed its economies of scale, returns have actually improved. This is a rare achievement in practice and a development which creates significant value for shareholders.

If you were a part owner of the business in 2002, your shares would have grown steadily in value (not share price) from $1.91 to $8.09. If you believe Benjamin Graham’s observation that in the long run, the market is a “weighing machine’, then you must agree that prices follow valuations over the long run. Provided you can see which businesses are able to increase their per share intrinsic value, there is no longer any need to try and predict share prices! Simply buy high-quality businesses – with rising intrinsic values – at discounts to that intrinsic value.

Figure 2 reveals the change in the ARB’s valuation mapped against its share price over the last decade.

Fig. 2  Skaffold Line ARB and its Intrinsic value 2002-2014*

*Source:  www.Skaffold.com 2012-2014 valuations are estimates
(If you have been thinking about becoming a Skaffold member, having a chart like Fig 2 above for every listed Australian company and a chart that is updated automatically and daily coming up to a Greek election, a Spain bailout and a very crucial reporting season is more than just a little helpful. I find it essential. So if you are thinking about a membership to Skaffold, go to www.skaffold.com and take advantage of the 13-months-for-the-price-of-12 “It’s Time” celebration promotion (and be sure to chat to your accountant about any pre-June 30 tax benefits)).

This represents a total value increase over the period of 353.93%. Including $1.76 in fully franked dividends, the business has generated a total return over the past 10 years of 446.1%. Suddenly selling bull bars gets a whole lot more exciting doesn’t it?

Fig. 3

ARB Corporation’s rising valuation and share price clearly reflect the high-quality nature of the business and superior investment fundamentals. You can understand why it’s something we have been attracted to for some time.

Last week we asked whether Thorn Group’s (TGA) recent outperformance was sustainable. The reason to ask is because it’s not the results of the past that will deliver returns to new shareholders, but whether the future matches that which is currently estimated.

To some extent, this question was answered for ARB by its management at the start of May – “The Board expects sales for the full year to be up by about 4% and for profit after tax to be in line with the previous year.”

While it is a slightly disappointing development – the market was expecting more – we think that any growth sans acquisitions in the current economic climate is not something to sneeze at. The business has faced challenging conditions this year following the Japanese earthquake, tsunami and Thailand floods, which together dramatically impacted the supply of new 4WDs. The key risk ahead is what proportion of their sales is impacted by declining iron ore prices feeding into a lower level of capex by mining companies.

Conversely, there is pent-up demand from a lack of vehicles being available for sale in the first half. May car sales data continued to show a strong rebound and indeed a record 38,000 new 4WDs sold out of a total 96,000 in total new cars in Australia. A record and, of course, ARB’s most important business segment.

Add to this the associated pent-up demand of accessories to fit out these new vehicles and what ARB is faced with is a current order book heading into the last three months of the financial year where demand is outstripping supply. An enviable position to be in.

Coupled with a highly capable management team who have not only controlled the businesses operating expenses at a time where sales and revenues were severely impacted, but have also used their conservatively managed and high quality balance sheet to continue expanding their production and distribution capacity to support future growth plans, we think the business has not hit its straps. And remember there are less than 50 stores worldwide.

Until our view changes, which is currently unlikely, this remains to us a business that is already succeeding in expanding overseas, a business that we will happily hold and a business for whom any share price weakness (provided intrinsic value’s remain unchanged) is a signal to accumulate more.

Posted by Roger Montgomery, Value.able author, Skaffold Chairman and Fund Manager, 14 June 2012.

by Roger Montgomery Posted in Companies.

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With a downgrade in forecast profit of 90%, what should investors be thinking? Share Roger Montgomery’s insights into this latest bad news for Qantas in this interview of ABC Radio’s The World Today broadcast 5 June 2012. Listen here.

by Roger Montgomery Posted in Airlines, Companies, Investing Education, Radio, Value.able.

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In this edition of ABC1’s Inside Business Roger Montgomery discusses his insights into the causes of the recent market losses and how Value Investors should be interpreting the changes – Roger appears commencing 3:27. Watch here.

This program was broadcast on 3 June 2012.

by Roger Montgomery Posted in Companies, Investing Education, TV Appearances, Value.able.

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Learn Roger’s insights into the near-term future for Fairfax Media (FXJ) as Gina Rinehart increases her shareholding in this discussion with 2GB’s Ross Greenwood broadcast 30 May 2012.  Listen here.

by Roger Montgomery Posted in Companies, Investing Education, Market Valuation, Radio.

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