Insightful Insights

by Roger Montgomery Posted in Insightful Insights, Investing Education, Value.able.

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Over the next 20 business days, approximately 1,250 ASX listed companies will be reporting their full year (or interim) results to 30 June, 2012.

Twelve months ago, the consensus forecast for the year to 30 June 2012, was for 20% growth in earnings per share.

Over the past twelve months that number has been progressively downgraded to nil, nought, nothing.

For the year to 30 June 2013, the consensus forecast currently stands at 15% growth in earnings per share.

Insights from the outlook statements will be interesting and it wouldn’t surprise us to see consensus earnings per share growth forecasts for the year to June 2013 to follow the same downtrend as those for the year to June 2012.

At Montgomery, we will be using our proprietary fact-based investment process to analyse the results.

We hope this reporting season will alert us to some new companies which own extraordinary businesses trading at a discount to their estimated intrinsic value.

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

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Roger Montgomery discusses how the latest data reveals that the mining boom has ended, and he discusses the implications of this on mining stocks with Ticky fullerton on ABc1’s The Business.  Watch here.

This program was broadcast 1 August 2012.

by Roger Montgomery Posted in Companies, Insightful Insights, Manufacturing, Value.able.

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We had a wry smile this morning after reading Macquarie Equities daily newsletter.

China Rongsheng Heavy Industries’ net earnings have been downgraded by 37% in 2012, 68% in 2013 and an astonishing 79% in 2014.  Forecast 2014 profitability is now one-sixth of the the level recorded in 2011.

A significant factor which had come to light is the fact that Rongsheng has provided highly attractive pre-delivery finance to customers to win market share.

As Rongsheng has had operational (and credibility) issues, it has had to increase its working capital and gearing to meet expenses during during the shipbuilding construction period. With the fast decline in their order book, from US$6.6 billion in 2011 to an estimated US$3.6 billion in 2014, cash flows are under pressure.

The extraordinary rise and fall of Rongsheng and the outlook for the Chinese shipbuilding industry lends support to Montgomery’s caution with respect to the materials industry.

We will become more positive on materials stocks when the outlook from the Chinese steelmaking, cement and shipbuilding industries is less pessimistic.

by Roger Montgomery Posted in Insightful Insights, Investing Education, Manufacturing, Value.able.

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Do Newcrest Mining (NCM), Breville Group (BRG), Commonweath Bank (CBA), Westpac (WBC), Wotif.com (WTF) and CSL (CSL) make Roger’s coveted A1 grade? Watch this edition of Sky Business’ Your Money Your Call broadcast 1 August 2012 to find out, and also learn Roger’s current insights into the Mining Services sector. Watch here

by Roger Montgomery Posted in Companies, Insightful Insights, Intrinsic Value, TV Appearances.

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In his August 2012 Money Magazine article Roger discusses how company weighting in Australian market indices distort the overall performance.  Read here.

by Roger Montgomery Posted in In the Press, Insightful Insights, Intrinsic Value.

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Earlier this year we had the opportunity to visit China Rongsheng Heavy Industries, one of China’s leading shipbuilding companies.  Rhongsheng was founded in 2005 and floated in November 2010 on the back of winning an enormous order from Vale to build twelve ore carrier vessels each 360 metres long, 65 metres wide and 30.4 metres deep with a deadweight tonnage of 400,000.  The ambitious founder, 46% shareholder and Chairman, Zhang Zhi Rong, was desperate to challenge the global leaders, South Korean based, Hyundai Heavy Industries and Daewoo Shipbuilding & Marine.

Back in 2008, Rongsheng represented all that is good and bad in China.  With Government support, Chinese corporate support, recently announced offshore diversification and the cost of shipping dry goods such as grain, coal and iron-ore at US$55,000 per day, the outlook was superb.

Let’s fast forward to July 2012 and the price of Rhongsheng’ shares have declined from HK$8 to HK$1.  For the six months to June 2012, China’s 1,536 shipyards have announced a combined 50% decline in orders.  The cost of shipping dry goods has crashed to sub US$10,000 per day (-82%), and Rhongsheng is experiencing a number of operational and credibility issues.

With the global slump in ship orders caused by a glut of vessels, Rongsheng is trying to diversify from shipbuilding and earlier this year they won a contract to build an offshore support vessel for CNOOC, one of China’s largest government controlled oil production and exploration companies.

Last week CNOOC announced a US$15 billion offer to acquire Nexen, a US listed Canadian based oil company.  Nexen rose 52% on the announcement.  The US Securities and Exchange Commission (SEC) just announced various traders had stockpiled shares of Nexen in the days leading up to the takeover bid.  The SEC has claimed US$13m of illegal profit was realized and the finger is being firmly pointed to a Hong Kong based company controlled by none other than Zhang Zhi Rong.

The development of China has seen some extraordinary national champions in industries like ship building, however we wonder how many of these companies will ultimately become global champions.  With several front page newspaper disasters associated with misfeasance, we continue to be wary of China’s corporate governance record.

In the meantime we believe a lot of companies in commoditized industries like shipbuilding, steelmaking and cement production are likely use their upcoming results presentation as an avenue to downgrade their outlook.

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

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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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In late 2008 Steve Keen, Associate Professor of Economics and Finance at the University of Western Sydney had a bet with Rory Robertson, who at the time was Interest Rate Strategist at Macquarie Bank. The bet was Australian housing prices would decline by 40% in two years, and the loser would walk 200km from Canberra to Mt Kosciuszko.  Despite losing the bet, Steve Keen still has his supporters. Last week, Dean Baker the co-founder of US based the Centre for Economic and and Policy Research said the housing bubbles of the United Kingdom, Canada and Australia, are larger, relative to the size of their economies,  than the one that collapsed and wrecked the US economy. In each county, there has been a sharp increase in the sale price of homes that has not been matched by a corresponding increase in rents. In Australia’s case, Baker claims house prices rose by more than 80 per cent between 2001 and 2009, a period when rents rose by roughly 30%.   Baker argues the price of the median house in Australia is 225 per cent of the median house in the US.  Given that wages in the US are higher it is difficult to see how this huge gap in house prices can make sense, said Baker.

by Roger Montgomery Posted in Insightful Insights, Property, Value.able.

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Shareholders in the 135 year old London Metal Exchange (“LME”) voted overnight to sell to Hong Kong Exchanges & Clearing for US$2.1 billion.  The LME will help the HKEx, whose focus has until now been almost exclusively on equity markets, challenge the Chicago Metals Exchange (CME) and the Intercontinental Exchange (ICE) for dominance in commodity markets.

The CME and ICE and the NYSE Euronext were all trying to acquire the LME in a wave of consolidation that has swept the global exchanges industry.

The concept of traders gathering in the coffee houses in the City of London (in 1877) with an open outcry system is rapidly being taken over by 24 hour electronic trading!

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

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