Is Myer’s intrinsic value really $2.90?
That is the question I have been asked by some investors. Putting aside the many individuals who have written to me to say they have recently had a less than encouraging shopping experience at Myer, meeting with disinterested casually employed staff, it seems there are those who are taking the current price as a signal that a $2.90 valuation is too conservative.
If ‘price’ is what you pay and ‘value’ is what you get, then your job as an investor is simply to pay a lower price than the value you receive. It is essential therefore that your valuation is completely independent of price.
When I bought JB Hi-Fi at $8.50, the valuation was much higher. When I bought Fleetwood at $3.50, the valuation was much higher. Had I taken my cue from the price of Fleetwood and JB Hi Fi, I would have been fearful that the price was correctly reflecting the possibility that the GFC would roll into something much more damaging.
The Myer valuation of $2.90 is based on the facts presented in the prospectus. The only subjective part of the valuation is the selection of the after tax Required Return. If I adopt a 12% required return I get a $2.85 valuation. At 11.5% the valuation is $2.99, at 11% is $3.19 and at 10% is $3.65. You can take your pick.
In any event, even an optimistic Required Return produces a valuation well below the current price and remember, you want to buy shares at big discounts to valuations. I adopt a policy of simply saying I want to buy the very best businesses when they are trading at substantial discounts to even the most conservative valuation. Compromising this standard in the attempt to generate more activity or valuations that are closer to the current price has the effect not of making you more money, but of making you more active!
By Roger Montgomery, 5 November 2009
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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