Companies

It has been four days now since the very first copies of Value.able were received.

I am very grateful for your feedback and I am impressed. I have received some requests to check valuation workings and many of the valuations I have seen so far are close enough to ‘spot on’. Congratulations everyone. It looks like the penny is dropping all over Australia as well as in Asia, Canada, the UK and the US.

Rather than continuing to check your workings individually, I thought I would post some calculations in the next few days for you to check your own workings against. A ready reckoner if you will.

There will be ten Value.able valuations for widely-held and well-known companies that you may use to cross-check against your own calculations. I will include the inputs used, so that we are comparing like with like. These valuation examples will be available by the end of the week. They are ASX Ltd, Computershare, Caltex, David Jones, Foster’s Group, Leighton, McMillan Shakespeare, Westpac, Woolworths and Wridgways.

Until then, I wanted to take this opportunity to express my sincere thanks for the overwhelmingly kind emails you have sent me and the positively entertaining comments you have written on my Facebook page.

Here are a few I would like to share and say a particular thank you for.

…Not that I’m complaining, I had planned to wash the car, and watch the rugby tomorrow night, but it looks like I will have more Value.able things to do!
Ben

I’m somewhat of a minimalist and love it when I get a book where it makes me feel like I can throw away all the other books I have on a subject – this is such a book.
Graham

Thanks for the book. It is sooooooo good to finally have a tool to find good companies.
Keith

… I am up to about Chapter 4 in your book. This is my first read and I will start over when I finish it. There is much to absorb in your book. I think its true that I have made every mistake so far detailed in the book. I have repeated some mistakes many times!!!!!
Russell

I am very impressed by your book.  I only wish I had had it in my hands ten years ago!
John

Although I have not yet finished reading your book I have been telling myself to stop speculating and to start investing. I just wish it had been in print when i first began “investing” more than twenty years ago.
Kev

I am just writing to congratulate you on this great book, especially for a newbie investor (or should I say “speculator” having read the first two chapters of the book now!). Yesterday morning when I stepped out of the house (to take my family to the Moscow Circus at Rosehill!) I noticed a package sitting on my car’s windscreen. Little did I know that it was the much-awaited book! I have read the first two chapters so far and couldn’t resist my temptation to jump directly to Chapter 11 – Intrinsic Value! I must say this is one of the foremost reasons why I was so keen on getting this book and I am not disappointed. I am talking all these fundamental/technical terms now and able to make an attempt at calculating the real value of a company…all thanks to you!
Visha

You may already have saved me many times the investment I made in your book.
Geoff

Initial impression is that your book has a particularly pleasant ‘feel’ – font, layout, texture, etc – quite incidental to the subject matter I know, but important in something you spend hours with in close association. I am also enjoying your writing style. So congratulations on both.
Jim

Your book is making my neck really, really, really sore. I’ve just come back from the doctor. He says it is from too much nodding.
Tom

Book arrived today. Where is the address for that deserted island? I need to go somewhere to read it.
young Les

Received your book and just want to say I am enjoying it very much. In fact I am thinking of purchasing another couple of copies one for my son and one for my Dad. My Dad listens in every Thursday night to your Money Your Call and always hope you are going to be on the panel. As we live in different states we then chat to each other about the show via the phone his comment is always wasn’t it great to hear Roger! Again thanks so much for a wonderful informative book which is so well written. (PS My Dad is 83, which proves we can always learn something!)
Lynne

I received your book and read it every spare moment I had. Thank you for sharing your knowledge with me.
Andrew

I just finished the book and I’m very impressed. From 7pm until now (1.58am), I couldn’t put it down. I’m amazed by how simple your calculation of IV is. I like how logical it is and therefore free from fancy arithmetic. Munger once said this: By keeping it simple & logical you have achieved [this] in spades. The margin of error therefore of a person applying it should be minimised because at least hopefully they will understand what they are doing. Very well done & a testament to you.
Matthew

I received the book yesterday and i finished it yesterday! I thoroughly enjoyed it and will recommend it to my enlightened friends! Any plans on an advanced Value.able haha?
Alex

Valueable arrived yesterday. I read until midnight and checked some valuations in my portfolio this AM. Using IV metod most of portfolio is “overpriced”. Will need to think about this for awhile. The book is well written and the example valuations you take us through are excellent. I have been a Buffet fan for a while and read Snowball etc. but you have made his valuatiuon techniques very simple to understand. Congratulations on a terrific book.
Ed

I’m almost finished reading my copy of your book which will forever change my outlook and approach to investing in the stock market. I’m so impressed with your work, I’ve just ordered another copy for my son.
Peter

I am a chartist and I can see how your book will greatly assist me and complement my charting decisions; especially during these troubled times when seeking good value stocks that are also resilient!
Brendan

I bought a book for myself. Now I have bought one for my son. I am up to chapter 6 at the moment, and it is the most value-able book in my investing collection.
Geoff

Received your book. It’s excellent – clarified so many issues that I have struggled with. Many thanks
Keith

The book arrived and we very much appreciate the gesture of your personal message. As a retired plumber my economic skills extend only to requesting pocket money from Mrs Management.  I am two chapters in and I think my frontal lobe has dropped off but as I plough on and try to absorb the message it becomes clearer that it is a book that is sorely needed by us amateurs outside the economics / equities industries, the plodders if you will.
Glenn & Mrs Management

Yesterday, I received your new book and even though I have not yet completed reading it in full, I wish to congratulate you (IMMENSELY) for your fabulous publication.
Kevin

Just finished Value.able and about to have a crack at a few valuations. The book was truly fantastic, I think in many ways it was the way I have always tried to approach buying shares but you have really managed to synthesize and lay down an excellent framework.
Ben

Great book. I have recommended it to friends and family. The examples, tables, figures etc were easy to understand. I enjoyed reading the examples using data from real businesses. I will never look at PE’s and dividends in the same way again. Thank you.
Patrick

Love the book. I have always thought that value investing made sense, but wasn’t business minded enough to know where to start.  Your book fills a large gap in teaching investors how to become investors and speculators. I’ve also realised a few home truths about my own business….. I have bought another copy for my dad David Graham so he can teach his share club a thing or two about what they are doing that he’s finding frustrating!
Paul

I recieved your book last week and haven’t been able to put it down. I’ve been a big fan of yours on the business channel since starting out in the sharemarket a couple of years ago, and I very much connect to your investment methods AWESOME :)  I have to admit i’ve been driving my wife crazy excitedly repeating everything i’m learning in your book, Haha. Thanks for all your insight and wisdom, it’s great to have a method by which i can value companies myself for our wealth creation.
Adam

I just ordered 2 more copies for my daughters… It is the best! Good luck to you and thank you for disseminating such good information in a really nice style. Well done.
Mike

I have received Value.able and have been reading it non-stop and have to say its one of the best books on investing I have read!
Ben

I’m into my second read of your book. It is sooooo gooooodddd.
Russell

Just finished Valuable – aptly named since its intrinsic value is much greaer than the price. Well done!
Kevin

Just started reading your book –clear ,precise, common sense  knowledge. Wish I had read it years ago. Have just ordered a copy for my daughter.
John

Your book is great, even I can understand most of it. I will now be an investor and not a speculator.
Rod

That little book… its supreme. Thanks, you’ve changed my world.
Tom

Your book is so simple in its explanation and your analogies are fantastic. They really drive home how easy it is to judge a company based on the value of their business not what the share price is doing.
Andrew

I wish I had read your book ten years ago – I realise with some shame that I have been just a gambler all this time – but that is in the past and I genuinely look forward to practising as a value investor.
Bradley

Reading through your book I keep finding myself nodding my head in agreement with what you have written, I think it is called positive reinforcement! It is a good read and I think will be a good reference.
Garry

I have read about 70 pages of your book so far and already have difficulty in putting the book down….very interesting and it caters for simple minded investors very well! …by combining my technical analysis system with yours, I achieve the synergy for greater confidence.
Brendan

Congratulations on publishing your book, I very much enjoyed reading it from cover to cover. I was very impressed that you delivered everything that you have promised, it is very easy to read and more importantly you have explained step by step how to actually apply all your methods in the real world. Now I will have a go at actually calculating some company valuations. Thankyou very much for sharing your knowledge,  I have been searching for a practical valuation model for a long time.
John

I’ve been reading your book, and have really enjoyed it. I think it does a great job of breaking down Buffet’s methods and making them accessible and understandable for Australian investors. I’ve actually already suggested a number of people get a copy, and I’m going to make sure that all of our brokers read it as well.
Peter

My son was excited to see a package with so many stamps he can put into his collection! I was extremely pleased to see that it was signed twice and the message. My sincere gratitude for taking the time to respond to my emails and taking the time to sign my book. It will be chrished for many years to come, particularly for the boys when they are suitably old enough to understand. I am up to chapter 11, was up to 3am this morning and have been reading it in between screaming kids etc. I am hoping for quiet 3hrs from about 10pm when everyone is in bed and the red wine absorbed in the system to take in the rest of the book.
Seb

Value.able received in good time and I have now finished my first “read through” to get a feel for it. Very much impressed by the ease of reading and now look forward to reading it on a serious basis, starting later this week.
Bill

Congratulations on the book. I am finding it very valuable in my daily work and can get the valuations down in a few minutes. When you are dealing with other people’s money you want to now what you are paying for and while our analysts do a very good job, having a “valuable” overlay just gives me that peace of mind or otherwise.
Frank

I would just like to thank you for your book. I received it in the mail late last week and have been reading it eagerly. I appreciate the depth with which you have gone into your investing approach and hope it will serve me well in my investing career (as I am sure it will many others)… Thank you gain for your amazing book.
Julian

Your blog was most helpful and I am madly using your method to value companies that I am interested in. Unless I am wrong I am finding less companies worth buying? In the past I would have bought them and therefore speculated. So thanks again for your great book and look forward to hearing more from you.
Gina

Thank you very much for your book. It is one of the most helpful books I have ever read. You have also managed to simplify it enough for us laymen to understand (a pity I did not have it prior to investing all of the family’s super into ABC).
Steven

Only have one word to say to you and that is brilliant. Thanx for the effort. Thanx for the knowledge. Thanx for the honesty.
Hayden

Your book was a very good read and well presented. Whilst I have looked at ROE to help myself “value” a company in the past, I have been painfully guilty of using dividend yield, p/e ratios, PEG ratios etc to determine if I should buy shares in a company. I’ll never look at prices again when trying to determine value (only when obtaining my valuations first and then checking the market to see if I should buy or not buy). The insights I have gained from chapter 11 in your book are extremely valuable to me and can only thank you so very much.
Edward

I have just finished reading `Value.able`. It is an understatement to say I am thrilled. You have taken Buffet’s concepts and written in an easy to understand, up-dated and Australian version. Having previously read `the intelligent investor` by Ben Braham I just found your book so much clearer and precise. I do need to go back and `re-visit` some parts for a better understanding but I wish to say thank you for all your efforts in writing this book. I know that my portfolio only stands to benefit and we all need reminding that those `zig zags` on the ticker are actually businesses not stocks, thanks again.
Peter

Thank You Roger. Finished the book. It is one of the best common sense books on investing that I have read.
Peter

Received your book last week and couldn’t put it down. I now look at share investing from a very different perspective
Nancy

Finally I finished your book, this is the only book I read from begin to end in my life.
Henry

I’ve finished reading your book and just about to begin a second read. Fantastic and thoroughly enjoyable. Congratulations, an absolute credit to you. I’m certainly looking forward to Value.Able 2 if it ever eventuates.
Michael

Great book, wish I had it 5 years ago, would have saved a lot of money.
David

I just want to say thank you for the book. I’m really enjoying it – you should be proud of the contribution you have made to the investment process.
Wayne

I ordered your book prior to the launch and, after reading it through once and now going into it in much more detail, I am very certain of one fact. That is – That I have been on the wrong track for a long, long time when choosing my share investments. I always knew that something was ” MISSING” AND YOU HAVE SHOWN ME WHAT IT WAS. Thanks for showing me the light at the end of the tunnel. Great book, it has really got me fired up again!!
Kev

Thankyou ever so much for writing an easy to understand investing book.
Monica

I really enjoyed your book. Must be the best investment book I have read.
Andrew

A comprehensive well written piece on investing, written in plain English with valid and humorous analogies. A book valuable (excuse the pun) for both the neophyte & expert or professional on (what is termed) Value Investing, both in general & how it relates in Australia. I have never seen DRP (Dividend Re-investment Plans) covered anywhere else & the relevant references to tax implications/advantages for Australian’s can only be found in an Australian book. The fact that it only took 8 months to write, and is in such detail, truly demonstrates Roger’s thorough understanding of investing. Well done, only wish I had it sooner.
Quenton

And a few from my Facebook page

I got my book this morning, totally made my day!!!! Can’t wait to get stuck in to it this weekend, read a bit just very quickly at work and had trouble putting it down. There goes my sleep plans for the weekend.

The book arrived, whoopee some solid reading for the weekend. I hope it rains.

Woo Hoo! I got it. I was woken up by my wife singing happy birthday (it’s not my birthday) and giving me a parcel.

Yeah! I got it today. So happy right now, I’m like a kid in a candy store!

My Book arrived, and you can’t wipe the smile off my face! A new road map to my investing success.

Just chiming in great content from what I have read so far… Great book. Recommended to all my friends and family. =)

I got the book, thanks Roger…. I will have to send the wife and kids away for the weekend so I can read it!

Got mine just then! On my way to uni, but I think this will take preference over financial statistics….

Thank you Roger for my edition of Value.able. It arrived in perfect time today to greet me at the door for my birthday. It looks a lot easier and much more fun to read than other books. I’m confident I’ll fully be able to understand and apply the principles.

Hi Roger, your book has safely arrived and the cover looks very stylish. I am sure the guts are even better. Looking forward to start reading it

Got the book today. Great cover and even looks good without the cover. Am busy reading it now. Looks great so far. Can’t wait to finish it to be honest.

I received my book today – my assignments can wait. I’m doing some Value.able bedtime reading.

Just got your book yesterday and have been reading it when ever I get a spare few minutes. So far the only thing that comes to mind is this. If Ben Graham’s Security Analysis is dubbed the “investment Bible” then Roger Montgomery’s Value.able is the “New Testiment” of that Bible. A great job!

And some already on the blog

Got it yesterday. Couldn’t put it down last night even with the footy on the tv. Clarity through knowledge and understanding – that’s what this book is offering me.Thanks so much.
Mani

Value.able was delivered last Friday. Took it (and my wife) away for a weekend up the coast. Roger, your book is a brilliant effort and importantly, for the value of the concept you deliver, it is entertaining and easy to read. If Value.Able – Chapter 6 – ROE, had been available before I bought shares in two companies on a tip sheet recommendation, I’d also be a few $$ better off.
Ivan

Congratulations on the book, have given it a quick skim and will be giving it a more thorough going over in the weeks ahead, but have already recommended it to a few friends based on the quick read. Looks like a pretty thorough and commonsense treatment for investors and an excellent addition to the bookshelf! PS: Saw you running like a maniac down George St at lunch time today – I immediately decided to start carrying your book with me to get that elusive autographed copy!
Jake

I got your book today.  The bad thing is I now have to work for eight hours before I get to read it!!!!!  Thank you so much.
Terry

I have had the book for a couple of days now, and my impression is that it is the best book I have so far read on investing. It’s a fantastic distillation and a voice of perfect reason. Your valuation method is very easy to follow.
Robert

Click here to read more comments and see the first photographic evidence of Value.able in action.

Thank you for your kind feedback and encouraging words.  If you would like to keep adding your thoughts, inights and stories, please Leave a comment here at the blog, or join me on Facebook.

Posted by Roger Montgomery, 3 August 2010

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

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While share prices move every day, valuations move much more slowly.  But move they do.  Especially in the next few weeks as companies report their annual results.  Many analysts however and a great deal of the commentary will focus on earnings growth, revenue growth and dividend growth but all that matters is whether return on equity is being maintained and the company is increasing in intrinsic value.  Once you have established that and found a company that ticks every box, then all that matters is buying at a big discount to intrinsic value.

I have been saying for some time that the vast majority of A1 and A2 companies appear to be expensive.

In response to several requests to be more specific on the subject, I thought I would list a few companies that I believe are currently above their intrinsic values.

The following companies are those that come immediately to mind and that I believe are both very high in quality AND very high in price:  Servecorp, ERA, Seek, Navitas, ASG Group, Domino’s Pizza, Fleetwood, Carsales, David Jones, Cochlear and Reckon.

Obviously, I will be interested in the full year results for these companies and indeed every company, which may change the intrinsic values dramatically.  Moreover, I am NOT predicting that the shares of these companies will fall in price.  As much as I would like to be able to share that information with you, I just do not have it.  I am not able forecast share prices and as I have repeatedly noted, estimating the value of a company is not the same as predicting their share price.

For now however, those listed above look sufficiently expensive for me to conduct research on other companies.  Be sure to seek and take personal professional advice BEFORE undertaking any activity in shares or derivatives or any securities.

Posted by Roger Montgomery

31 July 2010

by Roger Montgomery Posted in Companies, Investing Education.

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Last week on the Sky Business Channel Peter Switzer asked me for one ‘blue chip’ stock that I rate as ‘A1’.

So I asked… what is a blue chip? Peter described such businesses as having a very good reputation and great brand name, pay a good dividend and have stood the test of time. Such businesses, Peter said, also tend to go up with the market.

Whilst I couldn’t name an A1 blue chip, I can name plenty that fall in my C4 and C5 categories.

Last night I revealed 18 ASX-listed businesses that some investors consider ‘blue chips’, yet don’t make my A1 grade. Westfield, Transurban, Asciano, Lend Lease, Ten Network and Virgin Blue are just a few.

Switzer TV with Peter Switzer was broadcast on 22 July 2010 on the Sky Business Channel. Visit www.rogermontgomery.com to secure your First Edition hard back of Value.able, my step-by-step guide to valuing the best companies and buying them for less than they are worth.

This video is provided by Switzer.com.au, an online portal for retail investors and small business owners. Switzer also provides Financial Planning and Business Coaching services.

Posted by Roger Montgomery, 23 July 2010.

by Roger Montgomery Posted in Companies, Investing Education.

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Bipolar markets appear to be the anticipated outcome for the next few years. Investors seem to be in the middle of a tug-o-war between inflation and deflation, recovery or double dip recession.

Pimco’s Bill Gross says we have entered the era of the “new normal’ – expect low aggregate returns. Jeremy Grantham at GMO says that attributing the chance of recovery at 25% is “generous” and the US will be lucky to achieve 2% economic growth over the next seven years. And David Rosenberg at Gluskin Sheff says deflation is more likely than inflation, describing the stock market as meat grinder – “No return for a decade and yet plenty of sleepless nights on this roller-coaster ride.” Keep in mind David is a perennial bear. I remember during my days as trader being told; listen to the bears but don’t sell until they turn bullish!

Over at the bullish camp PuruSaxena says “the ongoing range trading should conclude with a bullish resolution” and cites Intel’s best quarter ever and JP Morgan’s analyst estimates-beating performance as justification.

At Montgomery Inc. ‘we’ don’t claim to know how the world’s debt issues will be resolved. What we do know is that you cannot solve them with more borrowing.

In Australia many ‘analysts’ are pointing to the fact that the recent rally has not been accompanied by much volume. Indeed, one of my friends who is a broker said they can “hear pins drop” in their office. But before you rush out and sell in anticipation of some imminent correction (I am not forecasting anything), have a look at the volume that accompanied the beginning of the bounce from the March 2009 lows. They were relatively light too. Perhaps that means the whole thing will indeed end in a massive correction that will see even lower lows! (I am not forecasting anything).

Stock market investing however need not be so mysterious and confusing. Instead of focusing on stocks, focus on businesses. Instead of focusing on prices, focus on values. When bargains are available it is obvious. When the banks were at their lows, there was no justification and large discounts to intrinsic value were evident for three of the big four. Their prices were following the pattern of their global peers that were each losing billions and being bailed out or nationalised. While their prices were on their knees, their values were being driven by the fact they were reporting multibillion-dollar profits. Focus on the business – don’t take your cues from share prices.

More importantly, when bargains are available you are writing to me with requests to value high quality companies. “What is the value of CBA Roger?” “What do you think of CSL and Cochlear at these prices?” “They’re pricing QBE like it is going out of business, that’s just crazy.”

Today, value is not so obvious and once again that is reflected in the general quality of the companies that you are asking me to value for you. While you have requested a few decent businesses, there have been a few raised eyebrows at Montgomery Global.

With those thoughts in mind, I offer another Value.able update from Montgomery Inc, along with the relevant MQRs – “Montgomery Quality Ratings”. At some point I will publish, somehow, the entire universe with the A1, A2, A3, to C3 C4 and C5 MQRs.

Don’t forget that the valuations you are seeing here are based on inputs that include analyst estimates. As some of you have indicated, analysts are notoriously bullish and particularly at the beginning of a reporting period tend to have estimates for earnings that need subsequent downward revision. I will discuss this and my observations and insights in a future post.

For now, know that the studies conducted by McKinsey, for example, into the persistent excess bullishness among analysts, aggregate and average the data which can produce a result that does not reflect any particular year. Stick your head in an oven and your feet in the freezer and your ‘average’ temperature will be about right, but of course you won’t be feeling so good!

The point I should make however is that my valuations for CBA, WBC, NAB, ANZ, QTM, CAB, HZL, FLT, SOL, MMS, CPU, AXA, BLD, CFU, DYE, DMX, ISF, VLA, QHL and CLQ (especially the 2011 estimates) will be revised over time. They will change. And having just been calculated they may also have changed from any previously published valuation and supersede them.

WARNING: Not recommendations or advice. Didactic exercise only. Seek personal professional advice before doing anything!

* Quality Score shown for last full year results. May change dramatically. May have been one good year – a flash in the pan. There is more to know. If for example, a company makes a debt-funded acquisition, its quality score could change.

++ 2009 Valuation. No forecast information available
+++ No forecast information available
^ US Company listed in the US

Your copy of Value.able will be delivered soon. I’m looking forward to comparing you’re valuations here on my blog.

Posted by Roger Montgomery, 22 July 2010.

by Roger Montgomery Posted in Companies, Financial Services, Insightful Insights, Investing Education.

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Peter Switzer invited me to join him on the Sky Business Channel last Thursday evening. We discussed the market and my way of thinking about businesses. Then he asked me to reveal which A1 companies are the best value right now. Here is the interview.

by Roger Montgomery Posted in Companies, Investing Education.

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Did you receive my email update earlier this month about the complexity of the gold coin on Value.able’s dust jacket?

Take a look to the left. See the One Dollar coin on the cover? I never imagined a little gold coin could cause so many headaches.

Some of you have told me to ‘forget the gold – its what is inside that counts’. I agree with you. However I went to a lot of trouble to get permission from the Royal Australian Mint to use the coin, so I don’t want to give it away.

I have also agreed to a production process with the printer that, at this late stage, I cannot change.

Whilst we are adept at digging gold out of the ground, refining it, looking at it and sticking it back underground again, replicating Australia’s One Dollar coin on the cover of my book has proved to be a far more difficult challenge.

Here is what my printer emailed to me last week…

“The foil on the green case won’t have the black printing over the foil. The coins have been made black and the image will be suitable for foiling. This method is the quickest way of producing the books. [however] Given the complex nature of the gold coin on the jackets and case cover with several runs through the press, we have to allow drying time to achieve the desired result.

If you have a hard back book in your collection take a look and you will see what I am alluding to.”

So I did. I looked at every hard back in my collection and wasn’t able to find one with a picture printed on it. When I briefed the designers I asked for something unconventional. I didn’t realise what they created for me had never been done before!

Your book will arrive in the week commencing 2 August.

Thank you for your patience and understanding. I am confident Value.able will become a valuable addition to your investment education and am looking forward to hearing what you think of it after you have read it.

Posted by Roger Montgomery, 13 July 2010.

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

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Did you buy an iPhone between October 2007 and December 2009? Over 41 million people did. Maybe you and 1.7 million others queued outside an Apple store because you had to have the new iPhone 4 in its first week of release, or you are one of the 45,000 people per day buying an iPad? The numbers are astounding.

If you are like Forrest Gump of River Road, Greenbow Alabama, who owns Apple shares, and even if you are not, you may be interested in my estimate of the company’s intrinsic value.

For those faithful to the PC, your loyalty may soon be tested. Apple’s strategy of dominating the home entertainment market is converting the world to its products, and is eating into the business world too.

While the number of sales are amazing are they enough for Apple to replace Microsoft? In the fast changing world of technology, why not?  But in the slow-moving world of value investing, who knows?  And thats the difficulty – working out if Apple will dominate in ten years time and betting that there aren’t two young guys in a garage somewhere cooking up the next apple, dell, windows or microsoft office.

Apple’s resurrection started with the return of its founder and prodigal son, Steve Jobs. Whilst off in the ‘wilderness’, Jobs kept himself busy acquiring a little animation studio called Pixar for $10 million, building it up and selling it to Disney for more than $7 billion. He also developed and subsequently sold to Apple his NeXt operating system – for $427 million.

Apple has a market capitalisation of $228 billion. It’s the second largest company in the US – currently bigger than its nemisis Microsoft and about $60 billion behind Exxon Mobil.

Yet as we know from Australia, market cap means little. It is Return on Equity, margins and revenue that reveal the quality and performance of a business. And in these areas Apple and Microsoft are similar.

It is however Apple’s revenue-per-employee number that truly causes the jaw to drop.  Microsoft’s revenue divided by its employees equals US$630,000. Apple’s is an astounding US$1.5 million.

Despite the company’s success, things haven’t always been rosy at Apple. In the 1980’s Apple lost the personal computer war to the PC and Windows became the standard.  This was in part due to the fact that the Windows platform had attracted the ‘killer app’ – Office. But dud Windows revisions and costly software upgrades left unhappy consumers to explore alternatives.

Re-enter Steve Jobs, as interim CEO of the company he co-founded twenty years earlier. Apple’s staff called him the ‘iCEO’… seriously. It was July 1997 and Apple had lost $1.8 billion in the previous 18 months.

Jobs set about replacing Apple’s board, dropped a case against Microsoft in return for Microsoft developing Office for the Mac, edified the grandeur around the brand, killed off the white labeled versions of its products that were cannibalising the company and most importantly simplified the product pipeline, killing every product except four top-end machines. This last move got the [remaining] staff more focused and inventory fell from $400 million to $100 million in one year.

The category killing machine for Apple in the late 1990’s was the iMac –  in fruity colours.  Remember those? And Jobs was serious about simplification. These iMacs did not even have a floppy drive. The user downloaded software from the internet and they were the first computer with a USB port. iMacs were thought of as being ahead of their time.

And being ahead of their time meant Apple could charge premium prices and generate better margins. The additional cash funded research that ultimately launched the iPod. Coinciding as it did with the emergence of the “digital life”, the iPod re-launched Apple.

Fast forward to 2010 – what is the intrinsic value of Apple? And is that value rising? Can Apple live up to the iPad’s promise that ‘…this is just the beginning’.

Apple’s Return on Equity from 2001 to 2005 looks like this: 22%, 24.4%, 27.2%. 29.6%. 28.4%. 29.3% and 27.1% forecast for 2011. I have access to a range of forecasts. While some analysts have projected iPad sales will continue for a year at the current rate of growth, others suggest that once the Mac aficionados have purchased, sales will slow significantly. Revenue estimates for 2011 range from $18 billion to more than $45 billion.  The 2011 estimated decline in ROE needs to be seen in that context.

As you may know I rate companies on a quality scale from A1 to C5, using metrics designed for bank credit departments. Apple is an A1, and that A1 has been consistent for several years. Microsoft, by comparison, is an A2, but its performance has recently been declining.

Why is Apple an A1? It has no debt and even though equity has grown (from retained earnings not capital raisings) from $3.5 billion to over $10 billion, returns have been maintained. This is exceptional.

Buffett says that he likes big equity and big returns on equity and on that score Apple makes the grade.  But Buffett avoids fast-changing sectors like technology because he cannot say with confidence where the company will be in terms of competitive positioning in, for example, a decade’s time.  And who knows that there isn’t a couple of university dropouts in a garage somewhere building the next apple, dell, office suite or google!

So with the share price at US$258, does a discount to intrinsic value exist? Moreover, is intrinsic value rising?

On the first score the answer is yes slightly. Apple’s intrinsic value is US$262.56.  On the second score intrinsic value is rising to a 2011 estimate of $305.03 – a 16 per cent increase.

For the last five years, intrinsic value has indeed increased substantially. Below is a little table to show you Apple’s share price and intrinsic values since 2005.

*Estimate. Not a recommendation. Seek and take personal professional advice.

Only a very small margin of safety exists today and while you may be optimistic about the fact that Apple’s intrinsic value is rising at a satisfactory rate, you do need to remember that the business is in a fast-changing industry. Future performance and intrinsic value will depend on whether Apple continues to strengthen its competitive advantages.  Thank you to the many investors who emailed me and asked for a quick look at Apple.

Posted by Roger Montgomery, 12 July 2010

by Roger Montgomery Posted in Companies, Technology & Telecommunications.

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Peter Switzer invites me every Thursday fortnight to join him on the Sky Business Channel. 4 June was like any other show. Except once Peter and I had finished discussing investing and stocks and the market, he invited me to stay on for his interview with OrotonGroup CEO Sally Macdonald.

For readers of my blog, you will know that Oroton is one of my A1 businesses. And I have often said that Sally Macdonald is a first-class manager.

Below are the highlights from that interview.

Each time a new video is uploaded to my YouTube channel I post a note at my Facebook page. On Facebook will also find my upcoming talks, editorial features, TV interviews, radio spots and the latest news about Value.able.

If you are yet to pick up the latest issue of Money magazine find it at the newsstand now, there are a bunch of terrific columns. Click here to read my monthly column. This month I write about ‘Great Retail Stocks’.

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

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If you recently ordered my book Value.able, thank you and welcome! You have joined a small band of people for whom the inexplicable gyrations of the market will soon be navigated with confidence and far more understanding. If you have ever had an itch or the thought; “there must be a better way”, Value.able is your calamine lotion.

Its hard to imagine that my declaration to Greg Hoy on the 7.30 Report that Myer was expensive as it listed at $4.10, or elsewhere that JB Hi-Fi was cheap and Telstra expensive has anything to do with the 17th century probability work of Pascal & Fermet.

The geneology of both modern finance and separately, the rejection of it, runs that far back. From Fermet to Fourier’s equations for heat distribution, to Bachelier’s adoption of that equation to the probability of bond prices, to Fama, Markowitz and Sharpe and separately, Graham, Walter, Miller & Modigliani, Munger and Buffett – the geneology of value investing is fascinating but largely invisible to investors today.

It seems the intrinsic values of individual stocks are also invisible to many investors. And yet they are so important.

My 24 June Post ‘Which 15 companies receive my A1 status?’ spurred several investors to ask what the intrinsic values for those 15 companies were. You also asked if I could put them up here on my blog so you can compare them to the valuations you come up with after reading Value.able. Apologies for the delay, but with the market down 15 per cent since its recent high, I thought now is an opportune time to share with you a bunch of estimated valuations.

I have selected a handful from the 15 ‘A1’ companies named in my 20 June post and listed them in the table below. The list includes CSL Limited (CSL), Worley Parsons (WOR), Cochler (COH), Energy Resources (ERA), JB Hi-Fi (JBH), REA Group (REA) and Carsales.com.au (CRZ).

If you are surprised by any of them I am interested to know, so be sure to Leave a Comment. And when you receive your copy of my book (I spoke with the printer yesterday who informed me the book is on schedule and will be delivered to you very soon), you can use it to do the calculations yourself. I am looking forward to seeing your results.

The caveats are of course 1) that the list is for educational purposes only and does not represent a recommendation (seek and take personal professional advice before conducting any transactions); 2) the valuations could change adversely in the coming days or weeks (and I am not under any obligation to update them); 3) these valuations are based on analysts consensus estimates of future earnings, which of course may be optimistic (or pessimistic, and will also change).  They may also be different to my own estimates of earnings for these companies; 4) the share prices could double, halve or fall 90 per cent and I simply have no way of being able to predict that nor the news a company could announce that may cause it and 5) some country could default causing the stock market to fall substantially and I have no way of being able to predict that either.

With those warnings in mind and the insistence that you must seek advice regarding the appropriateness of any investment, here’s the list of estimated valuations for a selection of companies from the 15 A1 companies I listed back on 20 June.

Posted by Roger Montgomery, 6 July 2010

by Roger Montgomery Posted in Companies, Investing Education.

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Value.able can now be pre-purchased online at my website, www.rogermontgomery.com. My book is on the printing press and will be delivered in about 21 days.

There will only be one print run.

In Value.able I share my stock investing rules for long-term value investing and online trading that you can follow to reproduce my excellent stock market returns (have a look at the June issue of Money magazine).

Click here to pre-purchase your copy today.

Posted by Roger Montgomery, 30 June 2010.

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

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