• Roger chats with Gary Rollo to discuss why Megaport is a holding in the Montgomery Small Companies Fund. Watch here.

How do Value.able graduates calculate forecast valuations?

How do Value.able graduates calculate forecast valuations?

I know of no other book in the world that discusses the concept of calculating future intrinsic values. You may think that is a bold statement, but its true. I have seen many books that claim to reveal Warren Buffett’s intrinsic value formula, but not one that lays out, step-by-step, what investors need to look at to determine whether intrinsic value is rising at a satisfactory rate in the future.

I confess to chuckling recently when one investor told me that they were finding it a little difficult to source the data they needed to calculate future intrinsic values. They also believed that my book lacked an explanation for how to calculate future intrinsic values.

So I asked whether or not they had even thought about future intrinsic values before having read Value.able? Sheepishly, the investor accepted that my book was much more valuable than they had initially concluded and subsequently told other people.

I have not found any other book in the world that has taken that little Buffett quote about finding businesses growing intrinsic value at a “satisfactory rate” and making it part of a clearly explained and defined investing process.

And for those of you who are looking for a reference to forecast equity per share in Value.able…. see Page 188, Step A.

The missing worked example for future equity. It’s easy!

How can you estimate future equity if you don’t have a forecast number such as those readily available in analyst research notes? It’s easy. Take the last known equity per share figure, add the estimated profits, subtract the estimated dividends, add any capital raised through new shares issued and subtract any equity paid back to shareholders through buybacks and you have it.

Here’s an example: In the 2010 annual report for The Reject Shop, equity at 30 June 2010 was $51.543 million (click here to see) and there were 26.034 million shares on issue. Dividing the 2010 ending equity by the shares on issue  ($51.543/26.034) equals equity of $1.98 on a per share basis.

According to Commsec (click here to see), consensus analyst estimates for 2011 earnings per share and dividends per share are $1.028 and $0.744 respectively.

Starting with the 2010 equity per share of $1.98, add the earnings per share of $1.028 and subtract the dividends per share of $0.744 to arrive at an estimated ending equity for 2011 of $2.26. (If you are aware of any shares issued since the end of the financial year, you may want to take the amount raised and divide it by the number of shares issued and then add that result to the $2.26)

Now that you have seen it done, how easy is that?

A global movement begins!

I couldn’t be happier that a small group of passionate Australian value investors are even contemplating future intrinsic values! Nobody in the world is presenting you with estimates for intrinsic values, two, three or four years out and I have never seen any investor ever do it. I know of nobody else in Australia doing that, nobody has written about it before and I haven’t ever come across anyone else in the international business media discussing it either.

And now you are all doing it! It has become part of your vocabulary.

Think about that for a minute… after reading Value.able, investors are now estimating future intrinsic values, posting their estimates at my blog and Facebook page,and  chatting about them online in forums and in boardrooms where previously nobody was.

If before reading Value.able you weren’t discussing future intrinsic values and now you are, then my book has had a positive impact and I am delighted. And all for just $49.95!

Consider how you are now subconsciously framing your investing decisions with future intrinsic values in mind.


Don’t blindly combine numbers with Value.able’s valuation tables to produce intrinsic values. As I say in my book, you MUST understand the business and its prospects. I devoted an entire chapter to cash flow and its calculations. Don’t ignore it. I also devoted an entire chapter to competitive advantages. Don’t ignore that either.

Recently, Buffett sold down his holding in Moody’s because it had lost some of its competitive advantage. He isn’t selling because he has recalculated intrinsic value. It’s the competitive advantage that drives the intrinsic value.

Be careful you aren’t so focused on the intrinsic value number that you ignore all the other important factors.

Its one of the reasons I have my Montgomery Quality Ratings (MQRs). They are my own filter to help narrow the universe of companies to conduct further research on.

I put a lot of effort into writing my book and making an investment plan out of the best of what the world’s most successful investors have revealed, published and taught. And I am delighted that you have allowed me to share that with you. Thank you.

Where do I get the raw data Roger?

I have previously posted a document called ‘Source Data’, where Value.able graduates contributed their solutions to obtaining the data. Because I am receiving so many requests for help finding the data, I thought it useful to republish it. Click here or click the Value.able Source Data button to the right.

I was saddened to hear that one Value.able reader thought getting the data was all too hard and gave up. That’s like knowing there’s silver and gold a metre under your feet but saying that grabbing a shovel and digging is just too hard. If you don’t want to do the work that’s fine, but please don’t blame the guy who gave you the map, the pick and the shovel.

Using the information in my Source Data document, you should now be in a rock solid position to start estimating future intrinsic Value.able values.

Take a look at the Source Data document and you will see that the raw data is freely available. Indeed every single number you need to estimate the current intrinsic value is also available in a company’s annual report, and its all free at ASX.com.au.

With sources like Commsec and the formula I have given you for future equity, you can now freely estimate the forecast intrinsic value as well. Just go to ASX.com.au, click on the announcements link, select the company code and the year you need and voila! All the information is there in the annual report.

Value.able outlines the way I invest. I don’t have a green button that I press each day that automatically goes and buys the best opportunities. Value investing requires research and analysis. We can build devices that give us some short cuts, but they don’t replace the need to understand the business and the risks.

Why are my valuations different to Roger’s?

If everyone uses exactly the same inputs, our Value.able valuations will all be identical. Any differences therefore are due to different data. Some examples of sources of variation are:

  • Online brokers’ ROE numbers are calculated differently to the way I suggest in Value.able. They use ending equity and I suggest average equity.
  • Generic net profit after tax figures available on various online summary lists may or may not remove abnormal/significant or non-recurring items. Intrinsic values should be based on recurring profits, revenues and expenses. (Yes there is some subjectivity in this).
  • I have noticed many of you using 10% discount rates for all companies. As I suggest in Value.able, this may be too low in some cases.

There are a variety of reasons and your Value.able valuations are different to mine.

Recently on TV I indicated that my valuation of Telstra was closer to $2.30-$2.50, but one Value.able graduate produced $3.68. I suspect that the difference is simply the choice of discount rate. Many investors will use a low discount rate because TLS such a big company with plenty of liquidity and very low risk of significant change. I however might use a higher rate because I want compensation for the fact that its future prospects are opaque and its profits haven’t grown a dollar in a decade.

Thinking about differing results, I am encouraged that many Value.able graduates were able to replicate my results exactly, or within a couple of cents.

Value.able will stand the test of time because it is based on a method of investing that works. It is a method of investing that requires time to demonstrate its value. And in time I look forward to hearing many more of your success stories.

Only a few First Edition hardback copies of Value.able remain. So if you haven’t purchased your reserved copy yet, now is not the time to ponder.

There was only one print run of the First Edition hardback. The paperback Second Edition will be available in mid November.

Posted by Roger Montgomery, 1 October 2010.


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than three decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. 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.

Why every investor should read Roger’s book VALUE.ABLE


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  1. I was wondering how Table 11.2 (the equity multiplier table when company retains 100% of earnings) is derived on pg 184 of the first edition book. From my understanding Richard Simmons’ method is used which divides the square of the ROE by the square of investor return. However the table is made more conservative by including a margin of safety – what is the mathematical formula behind this margin of safety?


  2. Graham Thompson

    Hi Roger, I enjoyed the book on my kindle however I cannot read all the tables on this device. Can you refer me to another source that would allow me to find a readable copy of both of the tables.
    Maybe there is a kindle tip someone can help me with to enlarge the tables.
    Much obliged and thanks for the great read and sound information.

  3. Hi Roger,

    Just wondering – what is the formula underlying valuation table 11.2? As soon as the return on equity exceeds 40%, the table doesn’t work. Or is it your view that if a company has a higher return on equity, it’s unsustainable and so better to avoid?

    Much appreciated.

  4. Hi Roger / team,
    I recently purchased the Value.Able book and thought it was very easy to read, particularly for a novice investor like myself. I tried out the valuation on a couple of businesses that I had reviewed and thought that had quite sound economic characteristics; Webjet and Carsales. I was disappointed to see that my valuations came out quite low compared to the current prices.
    It took me a while to work it out but I think it is because the equity per share is very low. There seems to be a lot of shares on offer. Does that sound right?

    • Not a lot of bargains around at present Peter. That of course won’t prevent their prices rising further. Valuing a company is not the same as predicting its price.

  5. Roger
    How do I calculate from the Comsec site the analyst’s forecast for the whole amount paid by a company in Dollar amounts for Dividends paid, the not just the cents per share.


  6. Russell Robinson

    Thanks to Roger’s blog, getting the source data for previous years is easy.

    And getting forecast EPS and DPS are easy too.

    Also, estimating EQPS is covered elsewhere on the blog, so that’s easy too.

    Forecast NPAT is much harder. I usually just multiply previous year’s NPAT by forecast EPS growth, and then check for recent earnings guidance, half year report, etc. to get a “feel” for a reasonable NPAT value.

    Does that sound right?

    But, when I valued two recent companies BRG and ORL, I have real trouble getting anywhere near Roger’s current valuation.

    Based on Roger’s Eureka Report article on 25th May, he has:
    BRG MOS: -11%
    ORL MOS: -16%

    I value ORL at between $7.03 at an RR of 10% and $6.19 at an RR of 11% giving a MOS range of -11% to -26% based on it’s closing price of $7.79 on 24-May.

    Since Roger doesn’t say what RR he is calculating his MOS on, I can accept that I’m wiithin the ballpark for ORL, but it’s still a significant difference either way.

    It all goes very bad with BRG…

    I value BRG at between $2.22 at RR=10% and $1.94 at RR=11%, giving a MOS range of -51% to -72% based on it’s closing price of $3.35 on 24-May. Even at RR=9%, the MOS is -30%.

    So, this tells me there’s something really wrong with my NPAT, Outstanding shares, and/or Shareholders Equity.

    But, I’ve scoured the recent documents for BRG and cannot find the problem.

    I have:
    Share: 130mil
    Sh Eq: $165mil calculated from EQPS of $1.27, based on last years EQPS plus forecast EPS – forecast DPS
    NPAT: $27mil (which seems reasonable given the strong first half)

    Any ideas where I’m going wrong or what I might be missing?

    • Hi Russell,

      I can see reasons for the difference. I trust someone might help. All the best and I hope you aren’t one of those people trying to reverse engineer everything. Strange how some people would rather spend a months trying to nut it out instead of paying a few dollars and have it done.

      • Russell Robinson

        Hi Roger,

        No reverse engineering.

        Really? Do people hang round here trying to figure things out rather than buy your book?

        I bought and read Value.able last year.

        Here’s me: http://www.facebook.com/photo.php?fbid=10150311973187788&set=a.10150161072792788.319220.162035452787&type=1

        I’ve re-scanned chapter 11, but I can’t find why I seem to be getting the wrong numbers.

        I plan to re-read the entire book over the coming weeks.

        If you have a hint, I’d really like to know – you can email me if you prefer not to publish it.

      • Hey Russell,

        Delighted to hear it. The difference is simply the way you are estimating forecast profit. But of course, the way I calculate intrinsic value is quite different to the Value.able version which is simplified to make it easy to understand and adopt. Of course, in its simplified form, it remains very effective.

      • Russell Robinson

        Right. So you think they are going to make a lot more profit this year?

        Yes, that’s fair enough.

        I’ve now noticed the Value.able method can be very “lumpy” (I think “discrete” is the mathematical term) because the difference between 16% ROE and 18% ROE on BRG is $0.53 in IV.

        And to get that change in ROE, requires a significant jump in NPAT.

        If one was to provide more entries in the Value.able tables between the ROE figures, then it would be more continuous.

        I can see how your more complex calculation would do this sort of thing.

        It’s always good to know I’m *understanding* the concepts and procedures more as I progress through this.

        I appreciate the guidance and the after-book support.

        BTW, I sold down my crappy portfolio to be 60% in cash last week. Lucky timing as it turns out.

        All buys (except for a small portion in truly speculative stocks) from now on will be according to your method.

        That’s why I’m so keen to make sure I’m getting sensible numbers out of Value.able.

        My plan is simple:
        1. Consider the stocks you’ve identified as A1-A3 (I’m looking forward to hearing more about your A1 service!)
        2. Generate an IV for those stocks.
        3. If there’s a chance of them becoming discounted to IV, I’ll then do my research on them and decide whether they are for me.

        Also, that research may adjust the IV (e.g. this *should* happen with the BRG stock once I forecast their NPAT better).

        I guess the best way is to do the research first, but I don’t have time to research stocks that are unlikely to become discounted to IV and therefore I’ll never buy.

        Comments and criticisms welcome!

        When I re-read Value.able, the above plan may change of course.

  7. Does anyone know of a good screening software (preferbly free) so that we are able to input our parameters such as ROE, Debt/Equity and it spits out all companies that meets the set parameters?

    We might be able to find companies which have a ROE of over 15% over the last 5 years or so. This narrows down all the companies we have to research.



    • CommSec and E*TRADE have this kind of function but it is a bit limited in the ratios that you can search (ROE is one of them however)

      Does anyone know of others worth trying?

  8. All the fellow investors

    I am just wondering if some one can help me with a valuation. I just read The Book and am trying to apply some knowledge and value CBA. I have used the following:
    Equity Per Share: 22.73
    Payout Ratio: 81%
    ROE: 16.8%
    RRR: 10%

    If I follow Rogers methods I seem to arrive at the valuation at around $37. I have heard Roger say lots of time that the banks are trading at their intrinsic value. CBA is trading around $48-50. What am I doing wrong?

    I would appreciate any help.

    Thanks in advance


  9. Roger/ Bloggers-

    My confusion continues (my fault). Are these definitions right?

    Margin of Safety- the difference (positive or negative) between the current share price and the intrinsic value

    Required Return- the % appreciation you hope to see in the share price in a given year (e.g. the 8-14% range used in the Value.able tables).


    • Hi Phil,

      Have you read Value.able ? I think this is covered by Roger…

      Margin of safety – correct. The larger the better. Negative means the price is above the value – stay away.

      RR – not quite. With your method I’d be putting a couple of hundred percent in :) Some posters have developed their own quantitative methods of calculating the RR but personally I think RR should reflect a qualitative assessment. I believe there is an appendix in the soft cover version of the book covering RR – maybe get your hands on that to see what Roger says on the topic.


  10. Hi Chris/ Matthew,

    I’m a bit confused by the wording of your question/ response.

    Chris, you say “…EPS and Net Profit. I have noticed that while for most companies they are usually the same or very similar…”. Do you mean if you divide NP by # shares it is the same as the EPS figure? (because obviously EPS is per share and NP is not). Are you asking whether to use NP or NP before abnormals in your EPS equation?

    Matthew, as we know-

    EPS= NPAT x # of shares
    EqPS = end or avg equity / # of shares

    but you say “…calculate what the whole company is worth (in millions/billions) by using annual report profit and average equity figures and then divide that by the number of shares on issue for a per share value.”

    It sounds like you are mixing the equations for EPS and EqPS.

    I’m curious to know why.


    • Hi Phil,

      Sure, I’m happy to explain my thoughts. You can do it many different ways but to me this makes the most sense. Whatever way makes the most sense to you is the way you should do it. But note, I’m not mixing the equations, I don’t use EPS and EqPS figures to calculate the IV.

      The reason I don’t use EPS is that not all EPS is the same. For example you can calculate EPS based on average shares on issue, ending shares on issue or weighted-average shares on issue. Which one is correct?

      Instead, take the more reliable and comparable equity/profit/dividend figures from the annual report and work out what you would be willing to pay for the whole company, then divide that BIG figure by the number of shares on issue at the end of the financial year to get the value of each share.

      Buffett does it this way, so that is good enough for me :)


      • Hey Phil.

        I don’t mix the equations of EPS and Book Value.

        I like Mathew prefer not use the per share values on companies.

        I use NPAT instead of Net profit before abnormals as in my opinion it is the correct one to use. The main reason for my question is that pretty much all the forecast earnings I can find come in EPS.

        As you say it is best to keep everything consistent throughout calculating IVs. So if I am using NPAT to work out the current IV. I don’t really want to use forecast values given in EPS as the are based on net profit before abnormals when calculating future IVs. I currently use an higher then normal margin of safety on companies that have a history of normal abnormal spending to allow for the difference.

        I hope this helps explain what I was getting at. Also does anyone else have any thoughts on my logic?


  11. Hi Roger,

    I have a question regarding what information to use when finding Intrinsic Values. I use CommSec to get my values and have noticed something. In the Source Data information you provided you have circled both EPS and Net Profit. I have noticed that while for most companies they are usually the same or very similar the EPS value actually correspond to the ‘Net Profit before Abnormals’. A good example of this is BHP.

    My question is which figure should i use? Any insight would be very much appreciated.


    • Hey Chris,


      There are many different methods but the most important thing is to be consistent between companies and through the years. On top of that, always demand a margin of safety.

      Most here would recommend going directly to the annual report and using the profit before abnormals (unless abnormals are a regular feature, in which case they are “normal”).

      EPS can be calculated different ways and you introduce more error when you start with that. Instead, calculate what the whole company is worth (in millions/billions) by using annual report profit and average equity figures and then divide that by the number of shares on issue for a per share value.

  12. Thanks a lot Matthew. That was a very detailed analysis and very very helpful.

    And yes as you have mentioned, there are other emotional factors (such as keeping my parents and the in-laws happy :-)) that I can’t put a dollar value on.

  13. Hi Roger,

    I’d be very keen to hear opinions on applying Value.able investing to Property investment.

    I’m currently renting an apartment for $2200 a month and looking to buy house for $900k. With a 20% deposit ($180k) my repayments over a 15 year period are $6900 per month.

    Scenario 1: If I don’t buy a house and keep saving $4700 i.e. the difference between loan repayment and rent, I will end up with a cash lump sum $846,000 in 15 years (before interest). And if I invest the savings regularly into quality shares etc. there is a chance of greater returns albeit at an increased risk

    Scenario 2: Buy the house and repay $7100 to the bank for the next 15 years. The house may (highly unlikely in my personal opinion) double in value $1.8 mil in 15 years

    So, what do you think is a better Value.able investment?

    Look fwd to your insight and response.

    • Hi Kalyan,

      I have done the numbers.

      First of all, the only way to do this is to make a few assumptions. But in investing you do that all of the time, for your information here are the assumptions being made…

      The Assumptions:

      (1) I have set house price growth at the rate of general inflation and assumed that to be 3%. I have not considered whether current house prices are currently above or below that trend line.
      (2) As inflation reduces the value of money you will find each repayment is easier to make, therefore I have assumed that you are a very diligent manager of your money and increased your repayments each year at the rate of inflation. This of course assumes your income also rises at the rate of inflation, which I hope for your sake it does :) Equally, I have increased the rent you pay and the amount you add to your savings account each month in line with inflation.
      (3) I have taken the interest rate on your mortgage for the 15 years as 7.51%
      (4) I have incremented the spreadsheet monthly. If you pay your mortgage off fortnightly, weekly or use an offset account then you will see your mortgage drop faster, and your savings rise faster.
      (5) I have calculated interest before the addition of mortgage repayments / savings additions
      (6) the above are the conscious assumptions that I have made, there may be unconscious one’s I’m not aware of, and I don’t know what they are :-)
      (7) Oh yes, and I’m not an accountant, although I did do Yr 12 accounting about 7 years ago, I’m conscious of that, and I guess so should you be! :-)

      The Results:

      First up, with my assumption of your rigid budgeting skills and therefore your ability to make inflation your friend I have managed to reduce your initial repayments to only $5536 a month. But, in 15 years those repayments will be $8625 a month, although they will feel the same.


      If you buy the house:
      House Value: $1,402,171
      Loan Amount: -$15
      Equity: $1,402,156

      To get the same result from the money you save by continuing to rent you will need to get a 4.6% after tax return. Here are the different pre-tax rates that you would need to get depending on your marginal rate of income tax:

      Tax Rate Pre-tax return required to get 4.6% after tax return
      20% 5.75%
      25% 6.13%
      30% 6.57%
      35% 7.08%
      40% 7.67%
      45% 8.36%

      Next you have to think about whether the house is good value right now. When you can get 6.5% pre-tax in a government guaranteed savings account you have to wonder which is the better investment option.

      In many ways the above just confirms, in a rather long-winded way, the previous discussion that I submitted a link to – houses are not great investments.

      As I’m sure many are aware, buying a house is not all about the dollars and sense. A lot comes down to emotions, stability in the absence of vagaries of a landlord and the feeling of owning where you live. The value of that is harder to estimate, but it is just as real.

      Best of luck with your decision!

      • I’m just re-submitting that last list because it didn’t come out so well

        Tax Rate………Pre-tax return required to get 4.6% after tax return

      • Hi

        Roger, first of all thank you for writing such a easy to read and understand book. I only purchased your book 2 weeks ago and have read it. I must say, it seems like I will be a Value.able convert. I have not done any IV calculations yet but planning to get stuck into it very soon.

        1. The first two companies I was going to do IV calculation was for TRS and TOL. TRS got hammered by shares going down 21% today due to profit downgrades. What are your views on TRS (Reject Shop)?

        2. Secondly, it’s great to see fellow members of this blog contribute in so much detail (like these comments from Matthew on Kalyan’s question). Only to throw my 2 cents worth on this point, I just want to check from Matthew if he took into account the power of sticking extra money in offset/re-draw account if you have a home loan (in my experience it is very useful). If we go only by paying the stipulated mortgage repayment and increase it only by inflation (as you have assumed) over the 15 years, your calculations look ok, but if you throw in extra money in offset the equation changes because you pay much less interest (remember we need to compare interest with rent and not mortgage repayment with rent). For e.g. an extra money in offset is making Kalyan around 12.3% (assuming he is on a minimum 38.5% tax bracket). This is calculated based on 7.5% (your interst rate assumption) home loan interest rate. For e.g. $10000 put in offset saves him $750. To earn $750 after tax he will have to earn $1230 gross. Having said that, I think the shares investment if done based on Value.able will generate more than 12.3% and hence is a better option than property. But I don’t agree that sticking money in the bank at 6.5% and then paying tax on it is better than property. The second point I have is that 3% increase in property is conservative. Historically, I think property has done better than that.

        Anyways great work all and I plan to be active on this site now.


      • Hi Manny,

        Welcome to the site and thanks for your contribution. Regarrding TRS, I did write a column last September indicating that I had sold the stock and weill review that and provide some insights into the downgrade including why I think the announcement might be deficient in explaining all the reasons for TRS missing the mark. I will write again about the company on my return.

      • Hi Manny,

        Thank you for the encouragement!

        You make valid points. Regarding offset, I didn’t include the effect of one on the outcome (and I disclosed this in my assumptions). You are correct, it will make a difference, but I wasn’t sure how to efficiently incorporate it in to an excel spreadsheet estimate each year.

        In reality, the major effect of an offset account is to bring forward repayments. ie, as soon as money is paid in to the offset account (wages etc) the amount is applied against the mortgage (reducing the principal on which interest is accruing), and continues to be applied until it is taken out (ie to pay a bill or a credit card) or permanently applied to the mortgage in the form of a repayment. In addition, there is what I call the “slush” balance of the account which is the average amount in the account, and for most people sits between $1,000 and $5,000 and this fluctuates depending on how much money they have coming in, going out and how much they like to have sitting in “slush”. This is very much up to the individual circumstance and so there is difficulty in quantifying it, so I didn’t.

        However, for my own interest I’ve gone back and incremented the spreadsheet weekly. Choosing a weekly repayment cycle negates an offset accounts advantage of “bringing forward” repayments (unless you are paid more frequently than weekly). It does not account for the “slush” but if you were to take it as $3,000 on average then $642 of pre-tax money would be saved each year. Not a hugely significant sum.

        I did the numbers on weekly repayments and there was very little difference. The alternative investment has to perform between 20 and 50 basis points (1/100 of a percent) better to equal the return from the house.

        Finally, the use of 3% as a long term growth rate is based on inflation, not historical house price growth. You can also base long term house price growth on GDP, which is not a dissimilar figure.

        I agree recent historical house price growth has been (much) higher than that. But I keep thinking about what is the sustainable driver of house price growth? My belief is that it is rental yields but I welcome suggestions.


      • Hi Matt

        Good points. Just some other related comments:

        Well I guess if we apply value.able concepts to property then indeed potential rental income is probaly the only metric that can be used to come up with some type of a valuation. If we go by Roger’s and Warren Buffet’s veiw (which I agree with) i.e. not to factor price when calculating value, then potential rental income (and not rental yield as that relies on price) is really all we have to work out some kind of valuation. Having said that I don’t believe we can still accurately work out a value until we have a few more metrics that can relate to some multipliers for e.g. proximity to CBD (x 2), location/street (x 0.5), major train station (x 2.5) etc etc.

        Second point that I am very much interested in having peoples opinon on (Roger maybe we can have another Blog/discussion for this ) is about “Leverage and Share Investing”. I strongly believe (and have worked numbers too) that individual investors (or mum and dad investors as media calls us) will make more net $ by property investement even though the percentage rate of return on Asset value in property is historically less than Share investing. Reason being people use a lot of leverage (80 to 100 % loan) to buy an investemnt proerty. Whereas shares are either bought fully paid or using margin loan but very consevatively. So even if shares return double the percenatge return the net wealth generation for so called mum and dad investors will be greater with property.

        I suppose we need to get educated on how to use leverage properly for shares, risks, how will IV calculations be impacted etc. I personally think it is a good discussion to have everyone’s view point (unless you have already had that. I wouldn’t know as I am new to this site). I personally do use a margin loan but very consevatively because I am concerned of the risky fluctuations of share price that is in our face everyday (unlike in property that is not listed on any property exchange :-) ).


  14. Hi Roger and all,
    I am new to all of this but I am really interested in Roger’s methods. I have reviewed all of my holdings and judging by the IV I am in reasonable shape except for one. I am currently holding Argo (ARG) and have been unhappy with the performance. Having read Roger’s book I think I can see why (ROE ~5%). My question is, should I be calculating IV for Argo (IV ~$2.60)differently to the rest of my holdings? Is there something special about Argo that I need to take into consideration?

    • The reported statements do not tell the whole story of ARGO’s performance because not all of the profit made by the portfolio is represented.

      For example, company XYZ makes a profit, pays a dividend and retains what is left over. But ARGO only reports the dividend from XZY as their profit. The amount retained is not reflected in the ARGO accounts.

      By the same method, you can also see how ROE of ARGO has nothing to do with the underlying ROE of the ARGO portfolio. For example, if every business that ARGO owns cancelled it’s dividend ARGO’s ROE would be zero, but the portfolio ROE would be unchanged.

      Another way to value ARGO is to look at the NTA. If the portfolio was sold and ARGO closed shop that is what would be distributed to shareholders (the after tax NTA).

      However, the NTA is based on price and as we know here, price and value are not the same. To *truly* value ARGO I would like to be able to value all of it’s individual holdings.

      Warren Buffett discussed this topic in one or more of his shareholders letters. The same problem affects the valuation of Berkshire Hathaway (I don’t remember specifically which letterss but I do recommend all of them as required reading).

      I hope this provides you with some ideas to further your research,


  15. Would very much appreciate any knowledge or insight into companies I am currently researching, WOR and TSM. I am a slow learner and am not there yet on future IVs and could do with some help!! So far for WOR I have got
    2010 : EQPS: $7.49 PO: 64% ROE: 16.4%
    2011: EQPS: $8.04 PO: 61% ROE:??
    2012: EQPS: $8.08 PO: 62% ROE: ??
    I am having difficulty finding forecast equity and NPAT figures. Where do I need to look??
    I have no forecast figures to use for TSM at all and would appreciate any help, feedback or direction. Thanks

  16. Has anyone done an IV calculation for Forge (FGE)?

    Roger I think has a 2011 forecast around $4.80ish

    Another IV advocate on YMYC said he thought it was worth at least double it’s current price (he said that when it was about $3.70ish) but of course he doesn’t use exactly the same method.

    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

    Using a RR of 12% I got an IV of….. $10.23 (gulp!)

    Can anyone share their thoughts on this?

    Mucho thanks!

    • Hi Phil

      I don’t know if you have found them yet but there are several calculations of IV for FGE on this blog starting with Nic on 1/10/10. Have a brows higher up the page.

  17. Hi all,

    Im very new to investing and shares but am very keen to learn. I followed the steps in the book and just picked BHP as an example. But feel that the calculations are way out for some reason. I used the figures from CommSec. Ive tried to explain each step so that I can get some feedback where I am going wrong. Here are my IV for 2010 and 2011.

    EQPS: 10.18 (56934/5589)
    EPS: 262
    DPS: 102.1
    Payout: 38.97% (102.1/262)
    NPAT: 14926
    Avg Equity: 53087 ((56934+49240)/2)
    ROE: 28.12% (14926/53087)
    RR: 10%
    Multiplier 1: 11.90 (10.18*3.000*.3897)
    Multiplier 2: 44.88 (10.18*7.225*(1-.3897))
    IV: $56.78

    EQPS: 12.79 (56934/5589)+3.573-0.963
    EPS: 357.3
    DPS: 96.5
    Payout: 27.01% (96.5/357.3)
    ROE: 26.22% (14926/56934)
    RR: 10%
    Multiplier 1: 9.5 (12.79*2.75*0.2701)
    Multiplier 2: 57.66 (12.79*6.177*(1-0.2701)
    IV: $67.16

    Any advice is greatly appreciated.

  18. Hi Roger,

    Since moving to a Value able approach I have found myself investing much more in small and mid cap companies which is where much of the value seems to lie. My portfolio now seems much more volatile with larger daily swings than I am used to from the blue chips. Is this an inevitable consequence of value investing and anything to worry about?

    • Hi Roger G,

      Volatility in the short term will be greater the more heavily weighted you are in more volatile companies. Position sizing and portfolio construction is something that is worth reading up on or preferably taking personal professional advice about that is relevant to your financial needs and circumstances. We haven’t addressed portfolio construction and it is an essential part of investing.

      Recently the mid caps and small caps is where the value has been but that is not always the case. Woolworths was recently trading at its intrinsic value and earlier in the year at a slight discount. I wouldn’t consider being fully invested in small thinly traded issues. Only time and patience will ensure that your portfolio has much larger companies included.

      Seek and take personal professional advice to ensure you aren’t taking on more risk than you can handle. For me volatility is not risk, but not everyone will see it that way and it sounds like you are watching your portfolio daily which is not what I do. If you have bought the right companies you can be comfortable with the market turned off for a long time, or the mail being three weeks late. Do chat to your adviser – someone with knowledge of your risk profile, financial needs and circumstances.

      • Thanks Roger,

        Your book is a great book and does a lot to give us all improved confidence to go out there and make our own investment decisions. I like many have been to financial advisors/planners (and a few) and found them, well, find me a polite word for pathetic. I try and balance risk, requirement, circumstance and opportunity and look forward to volume two hoping that you will lift my portfolio management to the degree I believe that you have lifted my share selections and management. You have given yourself a lot to live upto if you do try another book!!

      • Hi Roger Gibson,

        They’re very encouraging things to take the time to write so thank you very, very much. What an advisor should provide that you need but won’t find here, is advice related specifically to your needs and circumstances.

  19. Currently looking at the mining services area and came across ANG. Looks like it is trading at a considerable dicsount to IV, with great future earnings growth. Could you please advise of a MQR for this business, and also MIN.

    I am surprised that there is not more discussion on MIN, with it also trading at a relatively large discount to IV. It to looks quite attractive.

    • Hi Leigh,

      Thanks for taking the time to post your comments. Austin engineering is a B1 and I have its intrinsic value rising at 6.1% per annum for the next few years. Given the companies from this sector that I own are A1 and have intrinsic values rising at much faster rates, I have preferred them. MIN on the other hand is indeed one worth looking at.

  20. Hi Roger/ fellow bloggers,

    In your article above about forecast valuations you note that your IVs and our IVs can differ for different reasons.

    After working with someone to try and create a spreadsheet for the Value.able method I’ve noticed the following:

    – once you enter historical data for the previous FY as a ‘base’ year, the only variables that need to be sourced and entered into the equation are really the DPS and EPS forecasts.

    Of course if things change during the year then several elements of the Value.able ‘equation’ might need adjusting…

    BUT, as of the moment that you sit down to do the forecasting, DPS and EPS forecasts seem to be the only numbers you need to project IVs past the ‘base’ year.

    Having said that, I would expect that if you and I and anyone else were to chose a company, enter our 2010 EOFY info to create our base year, then the IVs we come up with should be very close if not the same to one another. This assumes two things:

    – we both chose the same RR
    – we both follow standard round-up and round-down practices

    Now, after saying all that and boring you to death, here is the actual practical example/ question I have:

    – you just posted an article in the Eureka Report where you value carsales.com:

    2011 -$3.77
    2012- $4.65
    2013- $5.24

    Assuming everything I have mentioned above, I’ve tried to re-create the same numbers. This is what I got for 2011:

    (ROE 60% by your tables; 61% by forecast)
    DPS 0.184
    EPS 0.232

    RR- 10% $4.41
    RR- 11% $3.86
    RR- 12% $3.41

    The 11% RR number comes the closest but unless your DPS and EPS numbers are different, considering what I’ve mentioned above, I would have expected to get the same $3.77 as you.

    This is a heck of a long winded way to say… I didn’t get what you got but I’m hoping by laying out my reasoning you might see where I went wrong.

    A final question- do you chose your RR based on a company’s market cap? Or is it something you intuit based on cash flows, stability of returns, management history, competitive advantage, etc.?

    A MASSIVE thank you in advance to you (and any other blogger who has the patience to help me out). Cheers!!

    • Hi Phil,

      I can think of a bunch of reasons why our valuations differ beyond EPS/DPS. Firstly of course, one thought is that we may actually have quite different EPS and DPS figures which produce different returns on equity. My ROEs are lower than yours, particularly FY2011. We also may have different figures for required returns (you are increasing the RR in future years presumably to compensate for less certainty about the future). Why bother? If you are less certain about teh future for this company, move on to a company you are more certain about. And I may be plugging in an estimate for new shares being issued – 2.5 million were issued and $2.1 million raised in 2010. Is there a reason why you think that wouldn’t happen again (exec options/incentives/DRPs etc)? By the way, who was the “someone” you are working with to try and recreate the spreadsheet? That sounds even more intriguing.

      Matching my numbers is not the point of the book. Spend time thinking about the competitive advantage of the company, whether its sustainable, getting stronger or weakening. Carsales’s is getting stronger. I can get $4.25 for 2013 valuation using my extrapolation method (remember that I always have two valuations to produce a range – see very early post comments on this blog).

      • Hi Roger,

        Thanks for the quick response. To answer some of your questions:

        – I can see how us having different DPS and EPS forecasts can also change the NPAT forecast which will change the ROE forecast….bit of a cascading effect.

        – In my above blog entry I showed what I got for different RR calculations because I was trying to find the RR that best matched your numbers. That was my way of testing myself to see if I was calculating things correctly.

        – I didn’t know forecasting the number of shares was part of the method. I wouldn’t have a clue how to go about that. Any tips?

        – the ‘someone’ helping me create a spreadsheet is my girlfriend :) I have no clue how to use them and she does plus she’s a business management analyst so she’s also checking my Roger homework lol.

        Thanks again!

      • Howdy Roger,

        Yeah, sorry, no great conspiracy there :) Just my partner- the smarter half- lending a hand.

        Did you have any thoughts about how to forecast ‘shares on issue’?

        Hmmm, what about this….. if I look at the annual report to see how many options are outstanding and when they are expiring could I use that as a guide of sorts? Not everyone will exercise their options but if the company has enough cash and thus no reason to issue more shares it might be a rough guide.

        (I’m very new at all this so this is just a guess)

        What do you think?

        Thanks again!


      • Hi Phil,

        A shame really – just the smarter half. Regarding forecasting shares on issue, you do need to get the best number available. Exec options need probabilities applied to determine their chance of exercise but there’s a simple approximation and that is to assume roughly the same proportion as the previous year and the same can go for DRPs. Its not perfect but the more you add the more conservative the valuation.

      • Hi Roger,

        Thanks for the tip on shares on issue forecasting.

        We’re still working on that spreadsheet. I think I’ve seen you and others post on the blog that you use one too. It sure would save a bit of time. Just making sure we’re able to input variables whenever they change so we can keep the forecast up to date. I’m going to have to take my partner out for a few extra romantic dinners I think to thank her for the help with Excel.

        Question- if you were to put a ‘Recommended Reading’ appendix in your book, what would some of those titles be?

        Have a nice weekend!


  21. Gurkamal Kanwar

    Hi Roger

    Thanks for the article. I enjoyed your book very much.

    In regards to calculating the intrinsic value, any reason why you don’t use operating cashflow or Owner’s Earnings (as described by Warren Buffett) to calculate the intrinsic value. Wouldn’t that be a better measure than Net Profit?

    Looking forward to your response.


    • Hi Kamal,

      Many A1 companies generate cashflow (recall my chapter on the subject) that equals or even exceeds the profits. In those cases profit is a proxy for cashflows. In other cases using cashflow or owners earnings (Profit + depreciation – maintenance capital expenditure) is required. What interesting to observe is the success of the method even just using reported company profits (but only for those companies that do generate ample cashflows).

  22. Hi Roger and All,

    This is my first post here. Congratulations on the book Roger. I enjoyed reading it and I learned a lot. One thing I might have missed was the timing of a valuation.

    I calculated IV using 2011 forecast figures. Can I compare it to today’s closing price to determine if it is trading at a discount? Or should I compare the closing price to the 2010 IV calculation?



    • Hi JS,

      Welcome to the blog and thank you for posting. I am delighted to hear that you liked my book and hope it has a positive impact. Regarding the timing of use of the valuations, you can go any way you like but be consistent across companies and across time.

    • Hi Edward,

      When the payout ratio is zero the first component is zero and since the process adds the two components together, the remaining value will be equal to the value of the only the second component.

  23. Hi Roger,

    Taking wealth management course at uni this semester. Seems like I finally found a finance course with some practical use in real life!

    Just interested in your thoughts on an upcoming IPO, Maca Limited. High ROE, debt is a concern for me but seems well priced.


    • Shuo,

      I have heard good things and will run through the prospectus soon. It will have to be superior across many measures to the mining services companies I already own. Why buy the fourth best thing when you can buy more of the first best thing at a discount to intrinsic value?

      • Hi Roger

        I have just skimmed the prospectus and it looks good. On the surface of it, the company is trading at a discount to I.V. and it is a high quality business after raising money to strengthen the balance sheet. Now, I will have to look at the prospectus in more detail.

        Compared to its bigger competitors whom you have mentioned as A1/A2 companies, it appears to be in the next rung down the ladder. However compared to NRW Holdings (possibly its closest competitor) which also services second tier mining companies, Maca Limited seems superior.

        I am worried about declining net profit margins from 2009-2011. However, a strong order book of $540million suggests there is plenty of scope for winning and delivering contracts at reasonably attractive margins. The order book underpins ‘bright prospects’ for revenue growth in the medium term. As the company grows, economies of scale and increased brand recognition may enable the company to gradually increase margins it the future??

        I would be very interested in a MQR rating, I.V. and thoughts from bloggers!
        P.S. It appears there is an art to crushing rocks!!

  24. Roger,

    Industrea, a company I believe you follow recently announced it would pay back $35.8 million dollars worth of convertible bonds at a price of 44c per share and another $4.6 mill worth at 39 ents per share.

    The repayment will be supported by a new $40.4 million debt facility from a member of the syndicate of existing lenders.

    Could you please explain how this would affect 2011 IV for the company.

    Best Regards,


    • Hi Brent,

      Regarding industrea; ‘convertible’ is not the same as ‘converting’. Borrowing money to pay down a debt is generally driven by better terms. In the first instance, one would expect the repayments to be lower, which should boost profit. In the second instance, the cancellation of the securities removes the prospect of a potentially dilutive issue of shares upon conversion. The impact on intrinsic value of the first factor is positive, the second appears to be neutral because the securities weren’t equity.

  25. Hi Roger,

    I first would like to personally thank you for all the time and effort you put into helping investors like myself in this blog. I have really enjoyed reading your book and watching you on the Business channel and I am finding the whole process very educational and invalue.able.

    I hope I am not repeating a question you have already answered but I would like you to verify if my forecast intrinsic value calculation process is sound. I am only very new to these concepts and some of the terminology slows me up, but I am very determined to work my way through everything until it becomes second nature to me.

    I understand how to work out the forecast equity as you have shown in this blog. To work out future ROE I have used the formula: future NPAT= Future Earnings per share multiplied by the Shares Outstanding. Then I have worked out the future ROE in the standard way: future ROE= future NPAT divided by future Shareholders Equity. Is the future NPAT formula correct. I can’t remember seeing this anywhere and I am only guessing that this is correct.


    • Hi John,

      Your process for future ROE is sound however you may want to consider switching to a calculation that uses average equity rather than ending equity. Thank you for your encouraging words about my book and this blog. I think its all of you however who are making this blog so useful and valuable!

  26. Hi All,

    I also had a go at building the intrinsic value calculation in excel. I thought it would be a good idea to build a range of forecast IV. This can be based on analyst forecast or extrapolation of historical results. Not trying to be too scientific about it, but a range allows me to have a better feel of how wide the forecast IV is. Let me know if anyone thinks i am over complicating it

    Agree that IV is only one component, understanding the business and it’s competitive advantage is equally important.

  27. Thanks everyone for posting their calculated IV for DWS. Interesting…. Although varies, we are still very close to Roger’s calculation. (depending the RR we select i suppose). I’m happy with 10% return for most of my calculation.

  28. Hi Roger

    I’ve valued Wofit at 3.24 and subsequently knocked it out on the I value.

    The kicker I’m finding is despite the very very good ROE’s, it’s the div payout ratio that is the kicker. If the payout ratio is > 50%

    My calculations based on Commsec data

    ROE 68% – excellent
    However, payout ratio of 86%!. Why aren’t they retaining a greater portion with an ROE that high

    Equity per share .41 (End equity 86M/210M shares oust)
    Table 1 multiplier of 5 (using 12%) for payouts = 2.05
    Table 2 multiplier of 25.158 (using 10%) for retain = 10.30

    Apply 86% 2.05 = 1.76
    Apply 14% 10.30 = 1.44

    Add the two and I get 3.20
    Shares are trading at 4.85

    Now I know Wotif is a brilliant on-line, award acheiving business but is it a good time to buy them ? or what am I doing wrong

    BTW Quick ratio shows .6 quick ratio



    • Hi Rex,

      You are thinking along the right lines. Have a think about what these numbers mean for the business as well. In order to add value for owners, WTF would need to be able to generate returns on retained earnings that equal or exceed the current ROE, otherwise the ROE will fall.

      What does this mean for a business like WTF that has low capital requirements? Are there opportunities to grow the business by retaining more earnings and also maintaining the current ROE? If there are, why are management not pursuing these opportunities?

      If retaining more of the earnings does not add value to the owners, then they should pay them out and let the owners reinvest the capital themselves.

      • Hi Ray,

        Thanks for answering Rex’s questions.

        Just to clarify Rex, where Ray says “If retaining more of the earnings does not add value to the owners” it means retaining profits at a high rate of return on equity and certainly higher than the required rate of return. You will find all of this in Value.able.

  29. Hi Roger and fellow bloggers,

    Firstly great article Roger regarding future yr instrinsic values. I have a far better understanding now of the process going forward and are setting very conservative RR’s but am finding it difficult to know ROE to use in future years.

    Can you or any other bloggers give me some help.

    • Hi Greg,

      There are a dozen different ways to do this and its worthy of a blog post in its own right. How is everyone else doing it? To my mind, nothing beats a conservative adjustment of the number that comes from a very good understanding of the business’s prospects and earning power.

  30. Hi Roger,
    I note Infomedia is one of your top rated companies. I was wondering whether you think its profits can grow in future years as they have been stagnant/declining for the past few.

    The CEO has a significant stake in the company (and has been buying more shares recently) and the dividend yield is attractive.

    It’s ROE is consistently high also, and it is being priced as though its about to go bust.

    Do you think it will grow in the future or is it headed for a slow and painful decline?

  31. Hi Roger and all,
    Lets not forget analysts have a vested interest in all these predictions number one is their job. The more buy and sell contracts the more commission the more secure is their employment. You wont see many Sell recomendations from a sponsoring broker.

  32. Hi Roger

    Re your 4 picks – big bet on the resources boom and China / India continuing?



    PS I read Pigs in the Trough on the weekend after you mentioned the author last week. I thought the Chapter on VRL to be the most “interesting”.

  33. I watched a movie on foxtel last week “Executive Suite”

    Made in 1954, story of a properous company that had lost its way – the CEO dies and a fight for control ensues- board room politics, backblackmail, but what really struck me was that nothing has changed in 56 years (let alone the past 5000 or so………..)

  34. Hi Roger,

    I was wondering if you had any type of rules regarding how many times a company’s book value you would be willing to pay (i.e. no more than 10 times its book value.)

    The reason I ask is that I would think it would be more risky to pay 5
    times book value for a company with a ROE of 30% for example than a company trading at twice book value earning a ROE of 20%.

    Even though you would make a greater return in the first example (in the
    long term) would it be more prudent to go with the second one due to the fact that if the first companies ROE drops suddenly, you have less to fall back on in terms of book value?

    For example Oroton is arouind 10 times BV at the moment – and whilst this is justified due to the 80% ROE; what if the ROE suddenly drops by half?

    It’s value will diminish and you will have less safety than if you bought a
    lower ROE company but trading at a lower multiple price-BV. You would make more in Oroton over the long term (if it maintains a high ROE) but may be taking more risk in doing so?

    • Hi James,

      Its an excellent thought. Are you proposing that in addition to estimating intrinsic value, you override the result and the gap between price and value, with the application of a rule limiting the maximum multiple of equity paid?

      • I think it would be more conservative and may provide a further margin of safety to only pay XYZ times the amount of a company’s book value. This rule would perhaps work best for companies with a low payout ratio because once the business starts to mature and the payout ratio increases, the intrinsic value may halve or worse. Do you have any such rule or do you just require a higher margin of safety for these types of businesses whose value may halve quickly if their payout ratio increases?

      • Hi James,

        I don’t but now that you suggest such a rule, I think I might. It can be covered by overriding the payout ratio with an assumption of a much higher one. I note JBH in the last 12 months increased its payout ratio and while the intrinsic value still rises in the future, it obviously rises to a lower number than it did previously.

    • Hi James
      You may wish to read Jain Prem’s book “Buffett Beyond Value” he has some interesting research when you combine a portfolio of low P/B Value compared to a portfolio of high P/B Value. and what a large differents it makes over time. Regards Ken G

      • Great reference Ken G,

        Studies showing the performance of univariate models over time, do indeed help to reinforce what we are doing here. Picking low price/BValue portfolios with only A1s will work even better. Have a look at the book What Works on Wall Street too.

      • Hi Roger,

        Apologies for my ignorance, but this talk about book value per share, are we talking about equity divided by shares on issue?


  35. Hi Roger,

    I too got an I/V in the $3.60s when I ran TLS. However I then saw a comment in one of your blogs about how TLS had capitalised around $1Bn of software development which therefore did not show up in the NPAT figure. I atributed the difference in the calcs to this.

    I am in the process of being “bundled” with TLS services. I’ll be paying a lot less for a 300% increase in broadband limit and a 1000% increase in the capped calls limit from our family’s mobiles. All this with a T-Box and Wi-Fi modem thrown in for free. We’re certainly happy and I’m looking forward to what all this largesse does to customer retention, market share and, of course, profitability.

    Regards to all, John S

    • Thanks John S.

      I have recently discussed cash flow and abnormals. Whether its a $50 million market cap company or Telstra, you have to make the same adjustments. Telstra’s profits have to be adjusted like any other company. Having said that, TLS cash flow is the highest its ever been. Thanks for your insights about the home bundling.

  36. I am wondering if it is possible to work out a valuation for Strathfield Group? Their latest results are a good start with promising returns on equity and capital. I have bought some which I calculate as being under their intrinsic value. The big question to me is will they return to their bad old ways or go on to become another JBH? Look forward to others thoughts.

    • Hi Craig,

      Regarding Strathfield, what do you think is their competitive advantage? What do they offer that will make people cross the street and buy from them, goods they can buy anywhere else?

  37. Hi everyone,

    Roger has also devoted an entire chapter on selling. One of the reasons to sell include being fully invested but found another company of better value. And also, the company has risen well above value.

    I can’t help but think if I’m the only one who has invested companies at a price way higher than its intrinsic value before coming across Roger. One in my portfolio reads NHC – I bought it 5 times its intrinsic value, which if sold, I’ll incur a big loss. I wonder about REX as well. I bought it because I love aeroplanes (a boyhood obsession) but I’m now wondering if that’s a good investment. Intrinsic value of REX, I had $1.89 (2010) rising to $2.07 (2011) at 12% RR – straightforward calculation as the company does not pay dividend. I also have a WDC and MTS, both of which I’ve bought way above their intrinsic value.

    Sorry about the whinge, but just want to share a thought and wonder if there’re others the same.

    Best regards,

    • Thanks Paul,

      I am confident you will get a good response to that one! No doubt people have some real horror stories to share. Be sure to seek and take personal professional advice.

    • Paul,

      You say REX is a straightforward calc, but I get $2.63 for 2010 and $2.33 for 2011 using the same RR% as you. I note that Commsec have the NPAT before abnormals at $17, but I can’t find any mention of abnormals in the annual report so I have used the $24 number. My figures are as follows;

      LY Equity $125.4
      TY Equity $150.6
      Avge Equity $138
      Shares 112.9
      EQPS = $1.33
      NPAT $24.6
      Divs $0
      ROE% 17.83
      ROE used 17.50%
      RR used 12%
      IV for 2010 = $2.63


      PS I also got a shock when I did an IV on MQG, QBE etc etc. All gone now though.

    • Hi Paul,

      I reckon if everyone was honest with themselves, they would acknowledge that half their portfolios are not A1’s purchased at compelling prices. I certainly have WDC, PXS (oh the shame) and CWN (5 times IV loaded to the gunwales with debt). My objective is to put all that behind me, and build a quality portfolio of quality businesses. 20 years until retirement, here we go.


  38. Hi all

    For all of you that blindly using ananyst forecasts here is an article about how accurate they are in the USA.


    I understand (but don’t quote me) that the aussie analysts are better. In fact the best in the world at estimates for Industrial stocks.

    They are also totally hopeless at estimating resource stocks future earnings which is understandable given this biggest part of the earnings is the price of the commodity.

    I can’t find it at the momonet but I have a record of the analysts forecasts after the June reporting season for the last 5 years for BHP. They make interesting reading and to say they were close would be like saying Roger and I are neighboors.

    By the way I live in rural Qld and I believe Roger is in Sydney. Not in the same ballpark

    For those interested in earnings growth Warren Buffet wrote a cracking article in fortune magazine in November 1999. Makes fabulous reading. Just google Buffet November 1999 fortune magazine.

    Highly recommend you all read this one

    Hope this helps Guys

  39. Hi Roger,

    Seems to be a lot of quality/value in the mining services sector at the moment. If you find a number of A1/A2 companies in the same sector under IV are you happy to be overweight in that particular sector or do you “pick the eyes out of it”?

    Also MND is undoubtedly a fantastic company and in my opinion has everything a value investor should look for in a company.

    Commsec has forecasted EPS at a ‘satisfactory rate’ for MND and i have a 2010 IV of $15.64. What IV do you and other bloggers come up with for 2010,2011 and 2012?

    • Hi Callan,

      I think if a sector appears cheap, it might just be. I do prefer to buy the best in the sector (why buy the 4th best if you can have more of the 1st best) but some diversification is important too. Be aware of the correlations/co-variances.

  40. Alfred Pensini

    I Have been hesitant to proceed with a program I have set up in EXCEL to determine the IVs of the Companies I own. After going through the latest blogs I now feel more confident that the program I have set up has no flaws. When I 1st started comparing my figures with yours & others that have been posted I was concerned because my IVs seemed to be “out” by large amounts. However with some of the post putting in the figures that they used to determin their IV I found that therein laid the problem. I suggest that when anybody quotes the IV they obtained they should put in the raw figures they used. Also the comments about not going to far with the number of decimal points is sound. A workshop would be most appreciated.

  41. Hi Roger

    I have some BBG shares from my pre Value-able investing days, Do you have any thoughts on this company and the deal with General Pants.
    I have calculated Intrinsic value for BBG, but don’t believe there has been sufficient data published to determine if this is a value adding or destrying aquisition.
    Thanks and Regards

    • Hi Bruce,

      sometimes we have to wait until the half year or full year results before the impact of an acquisition is known. WOuld any like to share their BBG valuations please?

      • Like you, I also bought some Billabong shares from my pre Value.able days. My opinion is that this is a good company and it has performed well in the past, earning a reasonable ROE (averaging 17.5% over the last few years). However, Billabong has made several acquisitions and the results of this (&/or the GFC) has effected returns – ROE dropped to 15% in 2009 and currently it is at 12%. Time will only tell whether these acquisitions will be successful and we will see ROE returning to the previous levels. I get current intrinsic value for Billabong as 7.21 increasing to 7.54 in 2011 and 7.94 in 2012. (This is using ROE 15%, payout ratio 65% and 11% RRR). So, certainly not at a discount to intrinsic value at present but not too overpriced.

    • Bruce,

      BBG over the last 10 years have increased their equity by $1.7B and their debt by $360M for a $104m increase in NPAT. That’s about 5% return on the money. Further, their ROE has been declining for the last couple of years, as has their profit margins. They have recently been acquiring a number of businesses,(Rush Surf, West49, Surf Dive ‘n’ Ski, Jetty Surf) , but have not disclosed the price for any except West 49. A public company refusing to tell shareholders how much of their money is being spent on such matters rings very large alarm bells in my head. Suffice it to say their debt facility has been increased from US$485M to US$790M. Personally I regard BBG as unsuitable for any kind of investment.(My IV for 2010 is $5.07)

      Regards, Ken

      • To which I would add… Look at the ex-FGL connection on the Board and who drove the abortive FGL acquisition strategy that drove the company into the ground? A leopard does not change its spots. You have been warned.


  42. Geoff Cruickshank

    Hi Roger
    I have been trying to organise for myself a standard spreadsheet to present the information on each company to aid my understanding.
    In doing so, I found it illuminating to add a line for long term debt, Funds Employed and Return on Funds Employed.
    You make the point in your book (if I have understood correctly!) that repaying debt is investing equity at the rate of interest paid on the debt; thus the ROE will fall a little. It seems to me that ROFE is some measure of how good the basic business itself is. In fact there might be some value in using your valuation technique, but using Funds Employed and ROFE as inputs, for comparison?

      • Hi Geoff

        I love what Roger has done to my brain; I’ve mushed the same thoughts around! My (simple?) understanding of things if it helps…

        ROFE is the same as ROCE (return on capital employed or simply return on capital: ROC); ROFE = ROC

        Capital is made up of debt and equity, so if no debt, then capital is all equity in nature. So ROC = ROE (All capital employed is equity capital)

        To go a bit further, accounting equation is A – L = E, so no Liabilities (debt) means Assets = Equity; Therefore ROE also = ROA (Return on assests) when there’s no debt.

        So with NO debt, ROE = ROFE = ROC = ROA

        For debtless companies, ROE certainly seems to be the mother of all metrics; four ratios for the price of one, and less work to do :)

  43. Hi Roger,

    This is my first time posting on your blog. Firstly I’d like to say congratulations on a great book. It was an enjoyable read. Secondly I would like to thank you for all your hard work with your blog. It is one of those sites that I choose to visit everday. Your book combined with the blog has completely changed my investment technique.

    I have recently been looking at one of your A1’s in DWS and I’m interested in your IV and thoughts on the company. My 2011 IV is $2.10 and 2012 IV is $2.27 using RR of 11%. I note that it is currently trading at $1.56.

    Thanks Jimmy

  44. Great Post Roger, thanks again.

    Based on your initial print run, I’ve already calculated the future IV of my hard back version (to 0 DP) and it looks like a winner :-)

  45. Hi Roger,

    Some of the retail companies look good value (NCK, SFH), but their profits seem to jump around a bit over the years, not as consistent as I’d like to see. The outlook statements were quite cautious. I was just wondering do you have some general things you look for in retail stocks?

    • Hi Damian,

      The question I ask is do I think the company can be much larger than it is now? Can the concept be big? Once a company has demonstrated high returns and great management, thats the next question.

  46. Hi Roger,

    I’m interested to know what it is specifically about companies such as MIN and DCG that made them stand out to you as possible investment opportunities. I can’t see either of these as being at big discounts to IV, whereas FGE does appear to be at a discount (which therefore makes it easier to understand the interest in this stock). I’m not sure what jumps out about MIN and DCG compared to others (I assume you’re seeing more than just low debt/high ROE) but would be very interested to know so that I, and other Value.Able graduates, can pinpoint similar opportunities. I’m also very curious to know what you see as being the competitive advantage possessed by these companies as there seems to be a lot of mining services companies out there.

    Thanks in advance!

    PS I found your Source data info VERY HELPFUL (I know you attached it to a much earlier post – I have been using it since then). I have since signed up to an Etrade account which helps with lots of the info needed

    • Hi Steve,

      Delighted to hear that the Source Data document has been helpful. Regarding MIN and DCG, they weren’t always at the current traded price. They were originally mentioned when there was a much larger margin of safety. They also offered diversification in terms of contracting style and customers and forward orders underwrote forecasts. Did see DCG as a potential MND and preferred this exposure to the CHina resource boom than via miners. All A1/A2 and I hope that puts the current favouritism into perspective.

      • Thanks Roger.

        I noticed that your IV estimation/forecast for MIN is around $15 for 2012. Can you quickly explain why there is such a big leap in estimated IV in the years going forward, much higher than the other companies in your list of 9 stocks? If we believed this could occur then would this be an example, in a general sense, of a situation where it might be sensible to purchase a stock at the current price (without any large discount to current IV) as the forecast increase in IV is significantly higher in years to come?

      • Hi Steve,

        The further out you go forecasting intrinsic value, the less reliable the results because the more prone they are to change. As a result I still want a discount to current intrinsic value – although I can be swayed occasionally.

    • Hi Steve,

      If I may Roger, I like quoting Buffet and Twain et.al but the best Montgomery Quote is “I like businesses who’s Intrinsic Value is rising at a good clip”

      So Steve If you forecast the IV for DCG and MIN out a few years you will see them rising at probably more than a good clip.

      Your are right and as Roger says they are no longer at a discount to current IV.

      It is important guys that we not only buy businessees at a significant discout to IV but that IV is “rising at a good clip”.

      For example if Fleetwod fell 20-30% below IV then I probably still would not buy as it’s IV is doing not much for the next few years. A 50% fall may be a different story as I love things at half price.
      Thanks for this quote Roger and am going to add it to me other Buffet Quotes

      Hope this helps others

  47. Hi again Roger
    Must give you a bit of back ground and say how delighted I am with your book
    I have read a lot books including The Snowball, Buffett The Making of an American Capitalist, The Real Warren Buffett, The Intelligent Investor, The Essays of Warren Buffett and The New Buffettology as well as others. Two “must reads’ are The Intelligent Investor by Benjamin Graham and The Essay of Warren Buffett, Mary Buffett’s Buffettology is also worth going through but leaves you hanging. Her calculations are somewhat complex and can vary considerably, but if you are conservative as with your assumptions then a reasonable return can be forecast.
    I would definately recommend your book over Mary Buffett’s. Will order two more shortly for Christmas presents.
    After reading all the above books plus more i have known the direction i wish to take with investing and i am delighted to find with your book, it has achived to define the way to value investing.
    Another satisfied Investor.
    Do you have a Category with a list of the most useless CEOs Directors or others you would not want in your company. Just finished reading Pigs at the Trough
    Regards Ken G

    • Hi Ken,

      Delighted to hear you enjoyed my book, would recommend it over Mary Buffett’s and also clearly got something valuable from Adam Schwabs book, Pigs at the Trough. I don’t have a list of most useless CEO’s but I am sure Adam Schwab and Stephen Mayne could put a very comprehensive list together.

  48. G’day Roger, You have given us all but one of the secrets for calculating Intrinsic Value, the one that remains is how are the multipliers calculated for the equity retained by the company (Table 2).

    • Geoff,

      Table 11.1 is simply the ROE (as a number) divided by the RR (as a number).
      For example ROE 37.5 & RR 10 = 3.75.

      Table 11.2 is more complex, but once you work out the differential, you can extend it to whatever ROE you want.

      regards, Ken

    • Hi geoff,

      I have said this before on this blog but worth repeating If you have kids in high school then give the book to their maths teacher.

      If the maths teach can’t work it out then think about taking your kids out of the school

  49. Hi all

    So with Buybacks and looking at CMJ as an example.
    I have there 2011 IV as $3.854
    To date they have bought back 43.56m shares of a maximum of 73.77m shares with a cost so far of $142.33m.
    So do I divide 43.56 by $142.33 which = 0.306 and then deduct this from my IV which gives me a new IV of $3.548.
    If thats the case, with WOW how do you adjust for them as the only known figure is the total buy back cost of up to $700m, we will not know the share quantity until the buy back begins.

    Cheers Calvin

    • Hi Calvin,

      No. If a company is buying back shares, it is using equity to reduce the number of shares on issue. The effect is on intrinsic value but not directly as you have stated. The change is to the equity on a total basis and on a per share basis potentially. For example a in the CMJ example you give, the equity will be reduced by $142.33 million and the shares on issue by 43.56 million. If there was $1billion of equity to begin with and 100 million shares on issue, the new amounts would be equity of $858 million $1000 – $142) and shares on issue of 56.44 million (100 million – 43.46). On a per share basis there was $10 of equity per share and now there is $858/56.44 = $15.20. I hope that helps.

  50. Hi Roger,

    Again, many thanks for your work and illustrations of the hollistic approach needed to be taken to investing using the IV strategy. The aspect that will always ‘grey’ this strategy is the determination of what is a ‘competitive advantage’.

    A true competitive advantage is sustainable and one which competitors are unable to replicate.This gives the organisation a clear ‘leg up’ on its competition. A competitive advantage can be through technological innovation, control of key resources, patents on innovative processes, significant barriers to entry, product differentiation or cost effectiveness to name a few. In most cases competitors can imitate processes, products, systems over time and erode the competitive advantage. My question is at what point (or maybe what process do you use) to differentiate competitive advantage from a shorter term strategic benefit? I like ORL and I do own the stock. I see product quality and management as key differentiators in their ability to consistently deliver impressive results, but I see these as strategic benefits, not necessarily competitive advantages. What ‘competitive advantage’ have you identified in ORL? Another example would be WOW where I see a clear competitive advantage in their logistics management. Others have tried to replicate it, but no-one has come close yet.

    I appreciate your help and thoughts in this challenging area.

    Again many thanks for the book and creating a forum where many like minds can bounce ideas and thoughts off each other. I certainly enjoy these dialogues.

    Kind Regards,
    David V

    • Hi David V.

      Oroton’s competitive advantage is one S.MacDonald. Don’t forget my chapter on the subject in Value.able. There you will find the measure of a truly valu.able competitive advantage.

      • Scuttlebut before becoming an ORL shareholder: went shopping with wife and daughters, online and at a store in Melb’s. My impressions were the staff were helpful and knowledgeable but the products really sold themselves. I walked away with a new wallet and belt made from very nice smooth leather. The wife got a very well crafted handbag(there goes the divvy). Competitive advantage is also in their product line as well as management. It reminded me of the quality you always see at RM Williams. I am no expert on handbags but my girls know a bit and they loved it there – product differentiation? Margin of safety and competitive advantage, tick tick.

  51. Bloggers,

    I notice a lot of people seem to be getting hung up on the minutiae of “extremely accurate” IV calculation and/or small difference to IV’s posted by Roger. I think there is a danger that some may be missing the point in doing so.

    A Buffetism (The Essays of Warren Buffett : Lessons for Corporate America (2001), p. 183) worth remembering in the context of this discussion:

    “Managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation.”

    Any IV calculation is an approximation, so second decimal point accuracy is a total delusion. Moreover, the future IV path only as good as the forecasts. Moreover, forecasts involve the prognostication of the future and the future is a very uncertain place.

    Again Buffet (The Essays of Warren Buffett : Lessons for Corporate America (2001), p. 200):

    “Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised.”

    So don’t get hung up if your IV calc doesn’t mach Rogers to the first, let alone second decimal place. More often than not the margin of safety you seek is going to be almost an order of magnitude larger than any such difference.

    As Buffet said its not simply about the IV but also:

    “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”

    In answer to Roger’s question: How do Value.able graduates calculate forecast valuations?

    For my part, I ignore the analysts and make my own forecasts based on my understanding of the businesses I invest in and the competitive dynamics that surround each of them. (Un)Surprisingly (depending on your perspective), I tend to be closer the mark in terms of annual profit and business performance in the majority of cases than the consensus analyst forecast for each business.


    • Following on from the last post I just came across some similar wisdom from some local talent, Kerr Neilson, MD of PTM who on page 6 of the annaul report makes the observation that:

      “It is self-evident that not all are cut out for the the calling of funds management; describing a company is very different from understanding it, painting with numbers does not work particularly well in the hurley-burly exchange of markets.”

      Sage words indeed, in my opinion and a caution to not simply focus on the question of relativity of share price to an estimated IV, or even worse to to believe that any IV is anything more than an estimate, containing all the inherent uncertainty that any projection of future cash flows entails.


      • Thanks Lloyd,

        As I say, calculating intrinsic values cannot replace a solid understanding of the business. Don’t ignore all those other chapters in my book. Delighted some of the fund managers mentioned throughout this blog have purchased my book too.

      • Great Stuff LLoyd and Roger.

        and may i add the most important ingredient of all.


        Thanks all

    • Hi Lloyd
      I would agree with you on trying to match Roger IV is pointless to some degree. It is good to see people trying to value stock to help them invest and not pay to much, but the real use for me is what price I would pay that would satisfy my investment risk. My IV is usually a lot lower than others but i prefer less risk. If you can buy $1.00 for 80 cent it is far riskier than at 40 cents.
      To your last comment on forecasts. A lot of analysts work for companys that require turnover. You often see EPS in the last 5-10 years at a consistant 10% then forecast to rise to 15%?. I remain near the historical figures. I know if history told you everything the top 100 rich list would be made up of librarians.
      A lady called up our local radio station today on a financial 30 minute talk back, she wanted to know what she should do with shares in Pacific Brands the stock adviser said they made a profit last year and gave no advice as they don’t cover it. All she had to do was buy rogers book, she would never have owned them. PBG trades at 1.09 no div. roe 5.5 put the money in the bank
      Regards Ken G

      • Ken,

        I think that history is a good guide to future performance. To depart from it its necessary to understand the reasons why the business will perform differently in the next few years and then plug this into your valuation model, to the level of confidence that you have in the future business direction.

        An example of this effect is businesses (such as funds management) where the proportion of fixed costs in the business is high, so that incremental revenue growth flows disproportionately to the bottom line. As a result ROE (and thus IV) is leveraged more strongly to demand than might otherwise be the case and in good years IV really gets a lift over what the historical average might suggest (of course the corollary applies in bad years).

        Similarly resource companies where the biggest determinant of IV in any year will be the commodity prices you project for the next year or two. If you believe that iron ore and coal prices could fall by as much as 40% in the next twelve months, then the recent short term ROE history of BHP, RIO, etc., is meaningless as guide to the future IV. In fact the long run average ROE is even problematic in such cases, because in commodity booms costs rise dramatically and essentially irreversibly, so that a massive margin squeeze (and ROE collapse) is set up for the moment when commodity prices loose their head of steam (as inevitably they do).

        On the subject of analysts forecasts of earnings growth in any business this usually starts each financial year 50% optimistic for the next twelve months and then is ratcheted down under company guidance through the year, so that in the last six weeks before the annual reporting period they align with the reported result. The analysts then proudly proclaim the accuracy of there models and that the company concerned met expectation….yet that expectation was only established days before the financial reporting period ended!!!

        My advice is to consider the earnings growth analysts are predicting at the start of the financial year for each business, then reduce the predicted growth by at least 33% before you put it into your IV calculation. You are more likely to be closer the mark in terms of year end performance when you do this than just blindly accepting the optimism of analysts. By the way, there are plenty of academic studies which confirm the 50% optimistic bias in analysts growth forecasts each year.

        Hope this helps see the wood from the trees when it comes to predicting the future IV path for any business.


  52. Hi Rojer

    Great book, well done.

    Would you be able to publish the equations that you use to generate the tables in the book, it would be a lot more convenient than having to refer to tables all the time.

  53. Hi Roger

    I am one of the culprits of using 10% RR for all IV calcs. I have put a lot of thought into this and especially while reading value.able(a masterpiece up there with Graham and Fisher).
    When purchasing a company I want to apply a margin of safety, a discount to assessed value of course, so why double up on this discount process by using different RR, why not use one RR and have a level playing field then increase the MoS depending on quality, liquidity and consistency. I am not saying you are wrong and I hope it doesn’t come across that way, I’m just trying to add some independent thinking.

    We (a mate and I) use two valuation methods in our spreadsheet, the first we developed prior to value.ables release. The second method is of course value.able but at 10%. The two have similar results for median payout ratios but show some variability beyond that range. I reckon I’m about 85% Montgomery and 15% originality and maybe I’m not completely right but I’m also not precisely wrong either. It has lead me into some very profitable investments, one being ONT late last year and another being MCE back in May.
    My calculations for MCE using both methods, the first using value.able and the second being our intrinsic value calculator or IntValCal: 2010 9.45-12.50 2011 14.40-18.87 2012 13.91-16.50 2013 14.63-16.55. Outrageous of course but so is the MoS.
    Another example is WOW (1st Value.able then IntValCal) 2010 23.14-22.39 2011 24.98-24.38 2012 27.19-26.46 2013 29.53-29.13 (no adjustment for buyback yet). In this example value.able is slightly higher.
    Thanks Roger for your time and knowledge thus far. I am evolving but am I steering in the wrong direction? All bloggers opinions welcomed both positive and negative.

    • Hi Craig,

      Thanks for the contribution. I am delighted to hear you were already on the value investing path. Your work here will inspire many others so thanks for sharing.

  54. Hello Roger
    I was wondering if you thought of developing a worksheet template that can be utilized in each valuation.I understand the principles in Value.able with its upfront honest approach and thanks very much.Also are you thinking about having a workshop(the Montgomery group)shall we say……again thank you Roger.

    • Hi Anthony,

      A workshop would be a great idea. Yes I am very keen to do that. What would be the main outcomes you’d like to see from it? Everyone else? I have received many templates from investors who have turned Value.able into spreadsheets. They are all submitted on the basis that they will be put up on the blog for free for everyone else to critique and dissect. Stay tuned!

      • I think a workshop would be a great idea. The main outcome would be a better or clearer understanding of:

        a) Future value IV’s such as working with analyst forecasts and raw data from Comsec

        b) Future IV’s taking into account: buybacks, bond repayments and Insto Placements.

        c) A better understanding of A1 to C5, the difference between A1 and A2 or A1 and B1

        Thanks Roger

      • Hi Roger and readers

        The workshop I suggest would also do a comparison with all other forms of investing or products (such as hybrids) with value investing if that is the name for Roger’s method



  55. Hi Roger,

    Good stuff, I think a slow and quiet revolution is happening in Australia as more and more people become aware of value.able. I for one have been looking around for a few years to find a book that provide a decent methodology to help in valuing shares.

    Many have suggested DCF. Whilst it is a good way, I find them a bit too tedious and the number of unknowns just made the calculation too untrustworthy. The method you suggested whilst requiring some key assumptions (e.g. dividend payout ration, forecast ROE) is a lot more user friendly and highlights transparently the most important issue which is ROE. I can easily use your method to filter dozens of companies before doing more research as opposed to the other methods.

    Your book has definitely changed my investment philosophy and I use it as my first point of reference.


    • Hi Frank,

      I am positively excited to hear that Value.able is changing your approach to investing and making a difference. Everyone be sure to seek and take personal professional advice too.

  56. Hi Roger,

    I must say my knowledge has improved out of sight since coming across your blog and reading your book. It almost makes me ill to contemplate how some of the investment decisions by those managing my super may have been made. And I wonder if the words “return on equity” have ever passed their lips while they choose my investments?


  57. Hi Roger,

    Do you look at revenue growth as well as the ROE? While Oroton has an impressive ROE, its revenue growth of 7.9% is a bit lower than I would expect for a growing company, and down on the prior year. This makes me question the sustainability of its ROE.


    • Hi Michael,

      You have to look at like-for-like. This is a business that has been a round for a while and to still be achieving 10% LFL sales growth is great. They have just opened a store in HK this week so overseas expansion beckons and we will see (at very low cost) how that goes.

  58. Hi Roger,
    The book has well paid for itself. no dog stocks left now. Blog confirms I am on right track with future IV’s – looking forward to you writing your next book.
    Brian Garrett

    • Hi Ron,

      Halcygen gets a B2 and there are some very obvious optimistic forecasts for the next couple of years. The relatively recent capital raising and doubling of shares on issue is currently expected to be put to very profitable use (seek and take personal professional advice). I need to take a closer look. Can you share your insights?

    • they bought the old mayne pharma business from hospira for what seems to be a cheap price. they specialise in super generics and also are contract manufacturers for several drugs (FESS, Betadine etc.). management is very experienced ( roger aston) and also has astute property/pub pokie investor Bruce mathieson. management currently predicts earnings equal or greater to this years.they also mention that next year cash flow will pay off debt completely. competitive advantage seems in their R&D for soon to be launched drug pipeline and their certified manufacturing contracts for well established drugs. high ROE and i believe next year their rating might improve to maybe an A2. i have IV at 72c rising to $1 in fY12.

      • Hi Ron,
        Your message prompted me to do a big of digging and I thought you might find the following useful in your research.

        Hospira bought Mayne for 2.1 billion in 2007 because they were interested in their Oncolytics (cancer fighting drugs). Mayne had generated sales of AUD $800 million in the year ending 30 June 2006. Oncolytics comprised of roughly half of Mayne’s product portfolio.

        While it looks like HGN acquired Mayne for a cheap price, they didn’t acquire as much. It looks like Hospira have integrated all the oncology products into their own business and now have divested the rest of Mayne.

        As it stands now, 60% of Mayne’s revenues are derived from a product called Doryx (a delayed release antibiotic used in the treatment of acne). There is pressure mounting from competitors to enter this space – 5 companies have applied to the FDA requesting approval to manufacture generic versions of Doryx prior to the patent expiry date (2022). There is plenty of upside if all goes well with this product and they increase their market share. But you are definitely relying on this one product at least now in the early stages. This is a risk since more than 50% revenue is derived from Doryx sales.

        From my own personal experience working in the biotech industry, it is high risk but can be highly lucrative if it works out. A bit like mining exploration. The company I work for (prior to being bought out by a US pharmaceutical company) started with 5 or so employees and was struggling financially. They went into administration at one stage but was rescued and subsequently bought out by a US pharma. Our competitor down the road was seemingly doing well in the early years, the carpark was full, they had 100 or so employees. They too were acquired by a large European company but operations have since been scaled back significantly (roughly 3/4 of the business is gone). Now our carpark is overflowing and we have to use theirs! :D

        I would definitely have a higher RR when calculating the IV of small biotech/pharma companies like this one. 14% as a minimum is what I would adopt (just my personal opinion). And if you have a larger margin of safety you can sleep at night!

        It would be interesting to read others’ thoughts on this business.


      • Hi Kathy,

        Wonderful insights! Thanks for sharing with everyone. I am sure most people here will be more interested in what you have to say. May I encourage you to continue posting. What are your favourite companies in the space?

    • hi Kathy,
      thanks for your thoughts and input. i would like to mention that Doryx antibiotic is under patent in the US until 2022. HGN’s marketing partner, Warner Chilcott, is under patent challenge in the US courts from generics rivals. It seems that such actions are common and tend to be unsuccessful. bare in mind that if the challenge is successful and FDA approves generic versions than this company will be under pressure. they are currently 20% under IV but that wont be rising enough unless they manage 10%+ profit increase.
      interesting one to keep an eye on.
      while we are in that space. i would be very interested in your thoughts on Alchemia (ACL). their generic version of fondaparinux is due to be approved any day!! now by the FDA. forecast profit in 2 years from this will be about 25million. during that time they are in phase3 trials for their HA-irinotecan (HyCAMP) drug for colorectal cancer. their board is quite experienced also.
      cheers Ron.

      • Hello Ron,

        I am aware that Doryx is under patent till 2022, however this is a very long time and anything can happen during this time! There’s a risk that another company could release something on the market that is more effective. It is impossible to know what will happen.

        ACL, looks promising on the surface but as an investor I know very little about what management want to do with their profits (ie payout ratio?). I can’t calculate forecast IVs because there is no forecast EPS data available. This is hard to predict. Can IV keep rising at a fast rate year in year out? Can they keep increasing revenues? ACL is high risk just like HGN for the same reasons I mentioned earlier on.

        The problem with this industry is you really have to understand what the company does. I work in the industry and I don’t have a clue most of the time! You end up working on one specific project and that becomes your area of expertise. It is impossible to keep up to date with everything-science has many niches. Technologies also always change. It is a big race out there between many research groups (both private and public) to find the greatest cure for an illness. If I were to invest in a speculative biotech, I’d have to read all the scientific literature to understand their drug or treatment. I don’t think this is necessary with large companies like CSL due to their large drug portfolio. Another thing we don’t know is what the raw data is like. How are the experiments being conducted in these biotech labs? How do you know the research isn’t poorly designed? How do you know results aren’t being fabricated/fudged? There was an Australian biotech company that did this. This would be very disappointing for investors.

        But who has time for all that research? Unfortunately I don’t. I find it hard enough at work, so I don’t see any point in complicating my investment life! I am just being honest about how I see it. However you may have a far better understanding than I do. I was never cut out for science. A GP would most certainly have a greater insight than I do. That would be a definite advantage. :)

        I problems I have with small biotech companies:
        – Management of companies these sorts of companies have the view to release a drug or two, make money and then reinvest some or all profits back into their R&D. R&D costs big bucks though and it doesn’t always work out favourably for shareholders. Large pharmaceutical companies (like Pfizer, Hospira, CSL et al.) have the cash to pump into R&D without it being detrimental to the company. They also have a large range of drugs in their portfolios so the risk is spread between them.
        – New drugs that have not been tried and tested in the marketplace can be problematic if people experience adverse side effects. It is not always known until it is too late. Drug companies have withdrawn medicines from the market for this reason. The most recent one is Reductil (weight loss medication) due to the risk of heart attack. Antidepressants and hormone treatments are also a bit hit and miss with different people. Some individuals just don’t respond well to some medication whereas others do.

        Sorry to sound like a downer. I think it is tough finding a “Reject Shop” equivalent in the biotech sector. If you would like some exposure to health care there are some great options (Roger these are my favourites):
        – CSL
        – Cochlear
        – Blackmores
        All have a great track record, and a competitive advantage. CSL has many products, so its not so important for you to understand all the science nitty gritty. Just look at their track record. It speaks volumes.
        (PS: I am a shareholder of CSL and COH)

        Happy investing guys,

  59. Hi Andrew,
    re WOW, this is what i did –

    EPS 7570/1232 = BV 6.14
    POR ave of DPS/EPS over 2010 – 2013 = 70%
    ROE 2020/6812 (09) =30%, 2020/7270 (10) = 27% ave = 28.5% ( so use 27.5 in tables)
    RRR I chose 10% for large retailer

    then from Table 11.1 use 2.75 as multiplier
    from Table 11.2 use multiplier 6.177

    so steps
    1. $6.14 x 2.75 =$16.88
    2. $6.14 x 6.177 =$37.93

    3. $16.88 x 0.7 = $11.82
    4. $37.93 x (1-0.70 = ) 0.3 = $11.38

    add $11.82 and $11.38 = $23.20 to get IV.

    All my data came from Comsec.
    each time I do this my IV comes out slightly different. Using slightly different figures last time I got $24.15.

    I hope this helps. I’m still teaching myself. Jim Caine

    • Hi Jim

      Great work seems to me your are approximately right

      Yjay is the important thing

    • Hi Jim,

      For WOW I have them at 2010 $26.09; 2011 $29.22 and 2012 $31.71. One thing to remember whne doing this is that you are not trying to match everyone else’s valuation but create your own IV based on your risk profile, your assessment of the company’s risk profile, potential ‘de-valuers’ in the companies financials ………. There are many variables and ultimately you just need to feel comfortable you are in the same ball park and can see IV growing through a competitive advantage. I used a POR of around 70%; ROE of 30% and RR of 10%. The only difference I can see is that I think you selected the wrong values from the tables – 10% and 30% should give you factors of 3 and 7.225.

      Keep up the efforts and don’t de-value the fact that you are on the mark!

  60. does anyone have valuations for bhp for next year
    i am getting 100.5 !, for next year using e trade estimates and rr of 11

    • Hi E

      mine is not quite that high but it does look silly.

      Aanlaysts for resource stocks over time have been exactly wrong instead of approimately right

      Hope this helps

    • Hi Es

      My initial IV for BHP in 2010-11 was around $60 using an RR of 12%. I decided to be a bit more conservative with the ROE and my current IV for that year is $47.21 (ROE 30% – probably not too much of a reach since ROE has averaged 28% over the last decade and profit has increased on average by 38% per annum). I don’t want to get too hung up on the IV as it is not an exact science. Suffice to say that even on a very conservative valuation on my amateur figures BHP looks underpriced for the coming year assuming all goes well in Asia.

      My estimates for 2011-12 and 2012-13 are $57.58 and $48.26. So the IV may be declining in the out years, (which makes sense given that new supplies will come on line from investment elsewhere and Asia may also cool, especially if the US, Japan and Europe remain flat). For me these values indicate that there may be some upside in BHP possibly giving some compensation for the many things that could go wrong.

      Interested to see what valuations others get and whether you think I am being much too generous?


    • Hi Es
      I used RR of 12 to give a higher margin of safety but have run the numbers with RR of 11 to come up with:
      2010 ROE 30% $48.35
      2011 ROE 35% $77.23
      2012 ROE 35% $94.07
      This is using Commsec forecast’s and a payout ratio of 30%.

      • Thanks guys
        I think its all about tinkering with the numbers, but it does appear BHP is better value than most resource companies. It does have consistent high ROE for many years now for a resources company, suggesting it does have a durable competitive advantage probably because of size.


  61. Hi Roger and fellow valuers,
    I am very pleased to see this post as I sometimes find the number of variations overwhelming. Some of my valuations seem to be correct but some differ significantly. I think I’ve got the basic method down pat and I’ve recently added the idea of margin of safety. I’m still working on future intrinsic values though. As others have said this blog has been enormously helpful in that I can see the same numbers that I get as well as differing valuations. Roger is to be commended for his generosity and willingness to help. I take some comfort in the idea that, as Roger says, I’ve learnt so much is a quite short period of time.

    I’lll post some figures for Andrew on WOW shortly.

      • Hi Jim
        Don’t be overwhelmed, you have embarked on the value investing journey and it looks like you are on the right path. Not everybody gets it straight away and some never do but you have, fantastic! Don’t worry if your values differ a bit the Margin of Safety is the central concept and that’s what we are looking for.
        and Ashley yes three cheers to Roger and helpers but also to you, you’ve put in some great effort and it should be commended.

    • Thanks Craig,

      will hold you to that beer at the Aussie woodstock for capitalist convention if it gets off the ground

      • Definitely Mate, hopefully Roger can see the value in such a gathering.
        Judging by the popularity of the blog Roger would have no problems filling a venue.
        Any thoughts on the subject Roger?

  62. Roger,

    A hypothetical if you will.
    You have $1M to invest in the Australian share market, but you can only choose one stock.
    Dividend payments are not a consideration but capital growth is.

    Which one would you choose ?

    regards, Ken.

      • Roger,

        Nice try, but you don’t get away that easily. Naming four is cheating !
        Remember this is a hypothetical and I stipulated you could only choose one. ( and at today’s prices I should mention)

        Regards, Ken

      • Hi Roger,

        Could you share some further insight into DCG? Currently has a low ROE of 8.7% (commsec), didn’t think such low ROE would fit your criteria.

        Is there something in their accounts which may be skewing the figures.

        Eager to hear your views,


      • Hi Callan,

        Grap the accounts and look at profits from continuing operations niot the net profit figure.

        Hope this helps

  63. Hi Roger
    Great post and very helpful examples.
    Can you shed some light on how the EPS and DPS forecasts published on sites like Commsec are done? Do these figures usually come from the company itself or from independent analysts who study a company, so may come up with varied estimates. I expect the accuracy of estimates may differ widely depending on the company, eg if profits depend on commodity prices or other unpredictable factors like currency. So like the weather the forecasts may not come true.

    • Hi Steve,

      There is some terrific research available about the accuracy, optimism or otherwise of analysts forecasts. The numbers on Commsec would come from an independent data vendor that receives the analysts forecasts and the consensus number is an aggregate/average.

  64. Hi Roger,

    I devoured your book last month the day after recieving it and have since been dipping in and out of it as I continue my investment education. Is there a derivation of the unmodified equation you could point me towards?

    Thanks for entertaining my mathematical leanings :)

    Also, what is your take on CBA – it’s exposure to the housing market, the recent iffy data used in a presentation to assure oveseas investors, and the recent managerial renumeration increases?

    • Hey Austin,
      Using ROE of 35, RR of 12% & PR of 80% I’m getting
      FY2010 = $1.52
      FY2011 = $1.67
      bit more conervative, so i have it at current value.

    • Hi Austin
      I may be to conservative.But i like the company
      I used ROE 30%.
      RR 12% which is rather high but it is small company with 100% franking
      Payout 80/20
      Y10 – 1.31
      Y11 – 1.40
      analyists 2 year forecast 13.6% which seems high when us look at the last 4 years but they may think it will continue.
      would like to hear rogers comments.
      this is only my 2nd day ever of blogging quite enjoy reading others comments no doubt will get bombed if i make a mistake.
      Ken G.

      • Hi Ken G,

        You won’t be ‘bombed’ here. You can feel sure about that. It is very important that new value investors are not intimidated by any Value.able graduate and all posters need to check their comments against that measure.

      • Hi Ken,

        We all appreciate your thoughts and efforts and no one gettings bombed hear because as Buffet says ” Your are neither right nor wrong just because people disagree with you”

        Keep up the good work

    • Hi Austin,

      Good shot I would be happy with that, I have
      2010 $ 1.77
      2011 $ 2.11
      2012 $ 2.47

      As at 1500 hrs today I have DWS trading at approx 25% discount to IV
      but as Roger says get Advice.

      Rob Walker

      • I get 1.85 I value as opposed to trading at 1.58 (14.5% Margin of safety) for 2011 and it is a great company

    • Hi Austin
      Just a quick look from Morning Star figures, previous 3 years EPS pre abnormals is 3.30% a bit lower than forecast.13.3%

  65. Hi Roger
    Personally I haven’t had any problems finding the data through Commsec but have noticed that in some cases there are discrepancies between that data and Annual Reports. I guess it comes down to if you want run your numbers on data that is quick and easy or go to the trouble of digesting and pulling data from the Annual reports.
    I do notice for instance there is no Commsec forecast info for ORL so some further digging on the web got me something.

    I take your point that coming so far that we are confident to even be discussing this is a big step, and it wouldn’t have been acheived for most of us without a) Your book and b) The support you offer through this blog.
    Many Thanks

  66. Roger,

    So you do or don’t personally construct pro-forma financials when doing your analysis??

    Also, because you are suggesting treating a business like a bond with recurring earnings if we want say a 20% compound annual return we really should stick with companies that consistently generate on average a 20%+ return on equity each year like say 1300Smiles (ONT)??

    • Hi Matt,

      Yes, to get a better understanding of how the cash flows through the business. And sections for new floats. Not for every company though. Bonds all have recurring earnings. We are aiming for a rising coupons. Extending the margin of safety concept would suggest aiming for businesses that can generate returns higher than your discount rate. I hope that helps.

    • Hi Matt,

      For every single company I map all the variables that I believe are vital to analyse. You can do that without rebuilding the proformas for every company. Reconstructing proformas doesn’t help analysts for example to predict what capital will be raised – note the line in their research that has a row of zeros for capital raised in the cash flow statements for FY1- 3. To understand how cash flows through the business however its worth doing. Bonds all have recurring earnings. We are aiming for a rising coupons. Extending the margin of safety concept would suggest aiming for businesses that can generate returns higher than your discount rate. I hope that helps.

  67. Hi Roger,

    Most of my evaluations have been very close to your evaluations (with 5-6%) – As you say even Warren and Charlie get different IVs. Although I’m not comparing myself to Charlie. There is one stock that I am way off. I was wondering if you or someone else could give me a hand as the business looks good and my IV is way above your IV and share price. The company is FORGE GROUP LIMITED. You have the IV at $3.67, share price is $3.90 (there abouts) and I have IV at $9.90. This worries me as I would probably have been close to investing in this share if I hadn’t known your value. Company looks good, debt $6m while profit is 29m (and rising), there’s more return earnings than common stock, there’s good cash stocks to cover current debt and current assets are almost double current liabilities. I have used 35% ROE and a RR of 10%(because I can’t see much risk – although I did run RR at 13% and still got a value of 7.00) and payout rate of 18%. Really need some advice on this one. Thanks.

    • Hi Nic Arena,

      If I use the analyst forecasts I get $8.71 so don’t worry too much. The lower valuation is a function of a really conservative version of extrapolated historical performance – see and take personal professional advice. Its important that you understand the way the company charges on its contracts and how it integrates itself in the projects rather than in the businesses of its customers.

    • Nic,

      You don’t say whether you are talking about 2010 or 2011, but I presume it’s 2011. I get $6.63 using 12% RR & 27.5% ROE.

      Regards, Ken

    • Nic
      I seem to be able to get more than anyone. With average equity of (93+48)/2 = $70.5M, 37.6c/sh for 78M shares I have a ROE of 41.6% and a Equity/sh of $1.19. For 10% return and PR of 19% this $0.94 for first table and $12.57 for the second, or and IV of $13.57. If earnings and PR retained for the next year ROE is 31.5%, Equ/sh $1.50 and the resulting IV $10.48. I find it easier to use exact answers for the data and calculations and incorporate margins for decision makings once only at the end. Does anybody agree with the above?

      • Roger,

        The first figure I differ on is the dividend payout. The dividends paid were $3.4 against a NPAT of $29.45, which is a POR of 11.6%, not 19%. I also calculate the ROE using this year’s equity when the difference between the two years is so great. That gives me an ROE of 31.5% compared to your 41.6%. I then would not use 10% RR for a mining services company as I believe the risk warrants 12%, but that’s just personal choice. Having said all that and allowing for a 20% increase in NPAT next year, I get a 2010 valuation of $6.67 and a 2011 valuation of $6.63.

        Hope this helps.
        Regards, Ken

      • Roger,

        I also get a high intrinsic value for FGE as well. IV of $12.58 for the 2010 FY. I too arrived at an ROE of 41.6%, however i have used a selected ROE of 40% and a RR of 10% as I like my estimates to be on the conservative side.



      • Ken

        I hate accountants! At first I was convinced that you were right on the POR. Sure enough FGE show $3.4M divs 09/10, but reading note 7 and looking on the Commsec site then 7 cents/share are the divs that are attributed to the 09/10 earnings which is what gives the 19% POR. I read the $3.4M paid or provided for in the accounts as the amount paid in the financial year (covering the final 08/09 payment and the first 09/10 payment) rather than the amount that relates to the income for the year. Perhaps Roger will comment. If I’m wrong, and I don’t rate my interpretation as better than 50/50, then it could make a big difference to the way many of us are using the figures off the Commsec site.


      • I’m not sure there is a conflict. The following is from Commsec for FGE and the question is should 5 cents or 7 cents be used to calculate the current payout ratio?

        Payout Ratio

        The percentage of net profit paid out as dividends. It is calculated by dividing the total dividend payout during the year by net profit before abnormals.

        Ordinary Dividends
        Dividend Type Cents Per ShareFranked % Ex-Dividend DatePay Date
        Final 5.00 100 06 Sep, 10 24 Sep, 10
        Interim 2.00 100 15 Mar, 10 31 Mar, 10
        Final 3.00 100 07 Sep, 09 25 Sep, 09

        Company Historicals
        6/07 6/08 6/09 6/10
        Sales($) 40.65 1.90 2.22 3.15
        Cash Flow(cents) 242. 7.5 34.3 39.9
        Earnings(cents) 147.0 8.8 20.5 37.6
        Dividends(cents) 3.0 7.0
        6/07 6/08 6/09 6/10
        Return on equity(%) 17.9 18.6 31.9 31.5
        Payout ratio(%) – – 15 19

        Thankyou Roger for the really good piece on QR National.

  68. This is the one area i am having trouble with and i think it stems from the figures i am using which i am getting from Commsec.

    One thing i am having trouble with is coming up with the per share amount for capital raisings and buybacks.

    Can anyone who has run a forecast figure for WOW let me know what they used for the buyback input and how they came to it? I was reading the booklet they sent out and saw i think $3.08 mentioned. I know i have not worked something out correctly here as i ended up with an intrinsic value of $20.00 which is a big decline (i have a 10% RR on WOW)

    Also, in the case of ORL. Comsec has nothing in forecast information, where is a good place to get this, would something like Investsmart or another site have similar forecasts?

    Also, i believe alot of the Comsec figures for Dividends are far higher then they should be. Anyone else have any thoughts on this? I have looked at WTF and they have the forecast payout being about 80% (i got this by dividing the DPS by EPS).

    • Hi Andrew

      The $3-odd numbers represents the capital return and the rest is paid as a fully franked dividend. So you wouldn’t use the $3’ish number. If the DPS figures may vary based on whether they are calculated using declared dividends or actual dividends paid. Consistency is more important than precision. Investsmart gets their EPS and DPS forecast information from Aegis so perhaps they will have some consensus information for ORL – they certainly do for other companies.

    • Hi Andrew
      The data I pulled off the web for ORL forecast profit was 2011 $25.2 M and 2012 $27.72 M, hope this helps.

    • Hi Andrew,

      The WOW are spending 700m on the buyback and they have 1.233b share on issue so equity per share falls 56.7 cents

      Hope this helps

  69. Hi Roger,

    That’s all well and good for companies covered by several analysts, but what do you do about companies that aren’t covered by analysts, or covered by 1 or maybe 2? 1 analyst’s forecasts doesn’t make a consensus, and who knows if thats a reasonable forecast?


    • Hi Mike,

      I run two valuations and one is based on an adjusted extrapolation of historical performance continuing. Of course speaking with the company can work, because companies not covered by analysts are often very keen to see investors interested in their stories. Of course they cannot reveal anything to you without having disclosed the information publicly. What they may however tell you is what their revenues are expected to do and balance sheet items like changes in working capital (inventory, receivables and payables) and margins. Form this you can engineer a forecast EBITDA or EBIT number and then with a few more simple calcs derive an NPAT forecast.

  70. Thanks Roger, I have to say that your book reminded me of some pretty basic investing fundamentals I got distracted away from awhile back. The tables were particularly useful because it helped understand what multipliers I should been arriving at when calculating appropriate BUY price ceilings.

    Looking forward to your next edition.

  71. Reading this post reminded me (along with alot of research) of how much I like MCE with the forecast eps and dps.

  72. Wow! Thanks for this post Roger. I have just finished reading Value.able and am looking forward to have a go crunching some numbers! I am at the start of my investing life, and am finding all your writing ‘in-Value.able’.

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