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Essential Elements – Tony Featherstone reviews Value.able in BRW

In the Press, Media Room | Comments (28)

Essential Elements – Tony Featherstone reviews Value.able in BRW

Leading BRW and respected Fairfax journalist Tony Featherstone says Roger Montgomery urges investors to ignore share market noise and focus instead on intrinsic value. Tony also reveals nine stocks that meet Roger’s exacting A1 criteria. Read article.

INVEST WITH MONTGOMERY

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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28 Comments

  1. Guy
    :

    Hi Roger,
    I read Tony’s BRW review of your book listed above. Looking at your 9 stocks I was surprised to see the IV results you get for Forge Group (fge). Using an EPS of 1.19 PR of 19% and ending ROE of 30% I get an IV of $7.64 and if I use the average equity to get an ROE of 40% I get an embarrassing $12.59. On other valuations of yours I’m usually only a few cents off. When you have $3.92 for this year and $4.45 next year and I’m getting over $12 I must be doing something very wrong. Or maybe I’ve missed something?

    Also I’ve been looking closely at LYL what are your thoughts. I get an IV of around $6.

    Cheers
    Guy

    • Phil
      :

      Hi Guy,

      I have done the calculations on FGE six ways to Sunday and I am getting similarly ‘strange’ numbers.

      I can’t find DPS and EPS forecasts so I’ve merely done a EOFY 2010 calculation based on the annual report figures.

      EOY equity- 93.38
      # of shares on issue- 78.76
      DPS- 0.07
      EPS- 0.38
      NPAT- 29.45
      BOY equity- 48.78
      ROavgE- 41.43

      These are historical numbers so there is no broker guess work involved. If you put them through the IV method using a RR of 12% you get an IV of….. $10.23 !!

      I share your confusion Guy. The IV result will obviously differ depending on your RR. If you are forecasting then your result for 2011 onwards can vary for several reasons.

      But I’m using old, set-in-stone data for EOFY 2010 and I still get a whopping $10.23.

  2. Rob Walker
    :

    Question Please regarding (KAM),
    I am currently calculating the IV for KAM for 2010, after readng the annual report for 2010 I have reduced their NPAT by 8.5 Million to allow for a 1 off Revenue gain (tax related). Therefore the modified NPAT is now 6.3 Milion, now the problem, Dividends work out to be 10.285 Mill.

    Can anyone suggest what NPAt or Div value should be for 2010

    Cheers
    Rob Walker

      • Rob Walker
        :

        Thanks Roger,

        By the way when is the Roger Montgomery “How to read an Annual Report” workshop starting!!!!!!!. :) :) You could start in Brisbane, we are friendly up here.

        Cheers
        Rob Walker

    • Ken Milhinch
      :

      Rob,

      Dividends for KAM in 2010 were zero. The 4.5 cent dividend is in next year’s accounts.

      Regards, Ken

      • Rob Walker
        :

        Hi Ken,

        You raise a good point with the DIV dates I did not understand this. However I will probably keep the DIV in for 2010, as this was the reported period and can deduct it from actual divs in 2011. Is this just a case of Accrual V Cash Accounting ?
        Thanks for your help

        Cheers
        Rob Walker

  3. rob cane
    :

    Hi Roger…the last 2 of you interviews with Peter Switzer on youtube were the same on my computer ie repeated..& both ended with just 2 of the 3 stocks you intended to mention & none of the 10 you suggested talking about. Will we be able to listen to the last part of the interview???
    ..rob.

  4. Es
    :

    Dear Roger
    I am so sorry to bother you again.
    If you can answer just one more question.
    I have been doing your calculations on US companies. I am getting a lot of them trading at significant discounts to IV. I have tried three big ones TJX, COH and PEP. All these companies have great management, low or nil debt, persistent high ROE and all have low payout ratios. They are all trading well below IV. Are they missing something in the US ?.

    Es

  5. Justin
    :

    Hi Roger,

    I would love to know what’s your take on DataDot (DDT). The annual report showed they have turned a loss business into a profitable business; a loss of $10.98 million (08/09) to a $11.9 million profit (09/10). They have done a good job with cost cutting and at the same time continue expanding their market.

    Interested to hear your expert opinion. Thanks.

    Regards,
    Justin Teo

    • Roger Montgomery
      :

      Hi Justin,

      Datadot’s results demonstrate a good turnaround and the ROE looks great but…. the reason ROE looks so good is because equity has been declining since the $10 million raising in 2007. The reason equity has been declining is increasing losses. If that is at an end, fantastic. Based on the 2010 results its a C1 on the MQRs (Montgomery Quality Ratings) and has a value of about 5 cents. The cash flow is positive but not even close to the reported profits. Thats my first reading of the results and admittedly thats only after 3 minutes.

      • Ashley Little
        :

        Hi Roger

        They have had some success partnering with an insurance company in italy and are trying to roll that out in other regions.

        Had a major impact on the European numbers.

        Great Numbers on GP figures and also cost control.

        Major change of focus from previous years but only time will tell if they slip back into the bad old ways

    • Ashley Little
      :

      You are a hard marker Roger,

      I give it a B1

      Potentially A1 next year, New management are doing a fantastic job

  6. Es
    :

    Dear Roger

    Sorry to bother you again.
    In an earlier post under the category Value.able, you posted a table with 10 value.able valuations. Did you post the answers somewhere so I can check with my answers ?.
    Thanks again
    Es

  7. Es
    :

    Dear Roger

    I have just finished reading the intrinsic value calculation section of the book. I have read many financial books, but not many that provide the retail investor with a method of calculating value or returns. The only other comparable book is Mary Buffet’s Buffetology. That is a great book, but Mary uses 10 year ROE average as her main input. For me its a great combination as you use future ROE.
    I have a question as to how you obtaine the 2 year ahead book value for the 2 year ahead ROE calculation. The online brokers readily provide 2 year ahead consensus EPS and DPS forecasts but not book value. Could you use the companies own 10 year book value growth to extrapolate one year ahead for this value. For example in your brochure about where to sourse this informatuon and the FWD example use th F Y09 book value and the Fy 10 EPS consensus. But how do you get the F Y10 book value.
    Great read nevertheless !

    Es

    • Roger Montgomery
      :

      Hi Es,

      Thats a very common question and one that I have answered here before but I still need to find an app that will allow you to search comments. Begin with ending equity this year (you can divide it by shares on issue to arrive at a per share value) and then add the EPS subtract DPS and add any capital raisings. That will give you a future estimate.

      • Matthew
        :

        Hi Roger,

        I have often wished we could search comments as well.

        The great thing about your blog is that any additional features that you could ever want are free. Open source is great, but it does make it hard for companies who write software to maintain a competitive advantage – but that is outside of this post’s purpose….!

        To get search up and running email me and I will help you get it up and running. A free plugin will take you (less than a minute to install. It will allow searching of everything on your website straight away.

        Cheers

      • Roger Montgomery
        :

        Matthew,

        You are a generous genius. Thank you for sharing your skills so freely. Its encouraging to see a community grow with such a strong spirit of generosity. I will install the plugin in the next day or so and ask my site manager to integrate it visually.

  8. Lloyd Taylor
    :

    Roger,

    I am surprised to read that the reviewer found Part III of Valu.able “heavy going at times”. I thought it couldn’t have been expressed more lucidly, or easily.

    I found the summary of his meeting with you a bit more informative, particularly his wariness about “buying stocks after they soar”. I suspect that this is a common problem for value investors, because it seems to potentially put you in the same class as a momentum trader. Its taken me some time to overcome it and the key is to realize how rapidly IV can grow off a small base for a small company. On this aspect, the calculation of historical IV and its change over time can be quite informative. Marrying the potential IV growth with the concept of an appropriate margin of safety in the investment decision is the toughest part and I am not sure that the reviewer understood this. He fails to mention the term “margin of safety” in the article. Rather any “gap” between IV and share price seems sufficient from his perspective.

    I see MIN made the cut to become a top nine value-stock pick. I am intrigued. Although it looks very attractive on recent past performance, I have reservations (previously expressed) over its new strategic direction and I wonder if I am missing something, or being too cautious on this. I’d love to read more of your views on the business if you can share them at some time.

    Regards
    Lloyd

    • Roger Montgomery
      :

      Hi Lloyd,

      There are two ways to answer the first part of your question. It is true that it can be difficult to overcome the resistance that exists when you discover a company AFTER it has already risen. You are right that the key is being sure the rise is justified (by a significantly higher and rising IV). Part two however is to read the last line of the third column (I think) that says they qualified some time ago. The list comprises companies that have been mentioned here (and on radio, TV and here) for quite some time – mineral resources included.

    • Greg Mc
      :

      Always enjoy reading your contributions Lloyd. An observation. Your comment about buying something after it has started to move potentially lobbing you in with the momentum traders is something I agree with in part, although I think that from a value investor’s perspective, it is often more about having ‘missed the boat’. It can be hard to make an investment in something when you can look at the chart and say to yourself “I could have bought this 20%, 30%, 80% cheaper only, if only, had I looked at it a month ago”. The temptation then might be to watch and wait and hope that it falls back a bit or turn away disconsolately and look for something else. This would of course be allowing your emotional response to interfere with what should be a cold clinical decision to move or not based on your available facts ‘here and now’ and your interpretation of value based on them (I willingly concede that this latter point is one that many of us, me included, have some work to do on).

      FGE appears to be a very good example right now. If I recall correctly, FGE was brought to Roger’s attention on this very blog by a contributor and Roger’s valuation was around $4 compared to about $2.70 odd at the time, and it was considered for the Valueline portfolio at one point. FGE had already gone from 20c at the start of last year. If only!!

      Of course, even that $2.70 is now a very healthy 50% ago for those who valued it higher, and were satisfied that the discount was sufficient to justify any risks in buying this particular company. Others may well even now be looking at it saying “if only” and wrestling with their emotions while trying to work out their current and future valuations.

      Investors need to disconnect emotional disappointment about ‘missing the boat’ – the past – from their decision making process which should be based upon what the price is now (what you can buy it for in the present if you choose) relative to where the value is now and in the forseeable future. We’re all human though, aren’t we?

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