Is your stock market still turned off?
At this time of year, well-meaning articles on the subject of how to invest in the year ahead abound. Indeed I have contributed to the pool of wisdom in my recent article for Equity magazine titled Is your stock market on or off?.
Value.able Graduates know to turn the stock market off and focus on just three simple steps. Even if you have read Value.able, or joined in the conversation at my blog, its not just me that believes they’re worth repeating. Ashley wrote about the article ‘More of the same stuff for the Value.able disciples but the more you read it the more you will practise it’ and from David ‘’twas a good refresher indeed!’.
Step 1
The first step of course is to understand how the stock market works. Once you understand this, turning it off is easy. And you do need to turn of its noisy distraction.
Step 2
The second step is to be able to recognise an extraordinary business (Go to Value.able Chapter 5, page 057).
I have come up with what are now commonly referred to by Value.able Graduates as Montgomery Quality Ratings, or MQR for short. Ranking companies from A1 to C5, my MQR gives each company a probability weighting in terms of its likelihood of experiencing a liquidity event.
Step 3
Finally, the third step is to estimate the intrinsic value of that business. Use Tables 11.1 and 11.2 in Value.able.
Three simple steps. If you get them right, you too can produce the sorts of extraordinary returns demonstrated and published, for example, in Money magazine.
The key is to buy extraordinary companies. To save you some time, I would like share a current list of companies that don’t meet my A1 rating. Indeed these are the companies that receive my C4 and C5 ratings, the worst possible. Avoiding these is just as important as picking the A1s because even diversification doesn’t work when your portfolio is filled with poor quality companies or those purchased with no margin of safety.
Whilst the eleven companies listed above are low quality businesses, they won’t necessarily blow up. This is not exhaustive, nor is it a list of companies whose share prices will go down. It is however a list of companies that I personally won’t be investing in.
If your first question is what are the chances of loss?’ then my C5 rating represents the highest risk. But of course risk is based on probability. And a probability is not a certainty. Nevertheless, I prefer A1s and A2s. More on those lists another time.
Posted by Roger Montgomery, author and fund manager, 3 February 2011.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Rainsford
:
Hey Ashley, thanks for your great posts. Your cut based on ROE 20% and Debt/Equity 25% was interesting. Don’t suppose you have done that exercise for the New Zealand market? My work to date has come up with very few NZX stocks that meet that criteria. Also hard to find stocks trading below IV.
Rainsford
Ash Little
:
Hi Rainsford,
No I have not looked at the Kiwi market,
If you find a goodie let us know,
Roger Montgomery
:
I have identified less than 10 that are worth consideration.
John
:
Also RKN Rekon group i have a IV for 2010 of $2.50 plus they announced they are doing share buy backs of about 10% of share on issue they have no debt. surely this will increase their value and also they have not debt i believe they are an A1, maybe this is one you should add to your list roger
thanks john
John
:
Hi Roger,
my stock is HSN its engaged in the development, integration and support of billing systems software for the telecommunications and utilities (gas, electricity and water) industries. Other activities undertaken by the Company include information technology (IT) outsourcing services and the development of other specific software applications
I get an IV for 2010 for about $1.11 currently at its share price of .92 its not to cheap but it has announced a 50% NPAT increase for the first half of the year its future looks bright.
what are you thoughts.
Thanks
John P
:
Hi John and Room,
I have been following HSN and have held the stock for some time now.
Since they released the H1 results the share price has made a strong move and the volumes traded have increased significatly.I have a 2011 IV @ $1.16, a small discount but I think the future looks very promising.
The company structure reminds me of MCE, private company listed with father son combination as Chairman & MD and very well run.
Being principally a sofware based company there future capital requirements are relatively low. Their competative advantage comes from signing up their utility and communication based customers to long term contracts of up to 10 years and i would expect changing to another provider would not be a simple procedure.
Tacking the American market has bought many Australian companies undone over many years but their recent purchase of proprietry software company, NirvanaSoft (New York) appears to be a good opportunity to establish a wider global base along with offices in New Zealand and England. I agree their prospects look bright and would be interested in any other feedback.
Thanks.
LukeS
:
When I say these online businesses are not creating sales I mean they are not generating new sales by introducing new products or services but taking business from existing retailers who are not well represented online.
One site sells bathware – sinks, taps etc. They are based in Canberra and are selling goods all over Australia online. They have even had some international enquiries. These are sales taken from Harvey Norman, Reece and other local retailers.
LukeS
:
There has been mention of online sales for JBH and other comments here relating to how it may affect retailing.
I own and run a couple of online retail businesses and help manage quite a few others. The last few years has seen growth in sales of 50-100% year on year for most of the businesses. Most of this growth is organic with little or nothing spent on advertising. I would love to say it is due to my brilliance but the truth is we are just on a speeding train not quite sure where we are heading.
These successful online businesses are not creating sales. Often they are just sitting in the middle of transactions and taking a bit on the way through. We are all building large repeat customer bases and mailing lists, giving us very inexpensive direct marketing opportunities. There is gold in these lists.
The accelerated growth must end sooner or later but it is early days yet.
Companies like Wotif must have huge targeted mailing lists. They can probably predict how many sales they will achieve by sending an email out this afternoon. This can be done at practically no cost. Companies like Harvey Norman have to spend lots of dollars and shout at you to tell you about their specials. Online marketers just push a button.
Many of the larger retailers in Australia are slow to tap in to opportunities. Some just don’t seem to get it at all.
The online store for JBH will end up being their most profitable shop with an amazing return on equity. Shame they have to have physical locations.
Andrew
:
Your last line made me think of Oroton whose best performing store is their online one.
Matt
:
The Google Finance website is pretty good.
Matt
:
doh, this reply was regarding
“One question…does anyone know of any sites where I can screen for potential value opportunites on foreign markets, particularly the US?”.
You can filter by roe, debt, etc
ken fraser
:
Chris, CGF has no direct debt from what I can see, whatever that means and my broker says they have no debt. I don`t know the difference from direct debt and other debt. I studied accountancy after I left school but I couldn`t understand it properly so I`m not much help but I do have a few of their shares. Roger has a valuation on them somewhere around $3.50 I think. He mentioned them onYour Money Your Call last night. I forget exactly what price, but it was somewhere around there.
Brad J
:
Firstly a huge thank you to Roger for his book, I have enjoyed it thoroughly and am recommending it to all my friends, it is very VALUABLE.
I would love to hear Rogers ideas on diversification as Warren Buffett believes that you should not hold more than 6 companies and he would probably have half of his money in what he liked best.
I have noticed some comments on ZGL, which seems like a good opportunity and is trading at a significant discount to IV. I personally would feel much better if they had more forward orders like FGE and MCE. Has anyone else got any ideas on this?
Thanks
Roger Montgomery
:
Hi Brad,
Don’t buy the 6-stock diversification idea. Its not what Buffett does in his own personal portfolio or at Berkshire. Don’t bet so much that you can lose the farm. You should operate as though you only have 20 punches on your ticket, but that’s not the same as only having 20.
Lloyd
:
Yeah … based on recent disclosures Warren Buffett holds directly and indirectly positions in more than 100 stocks, plus a huge, multi- billion dollar exposure to derivative instruments. So don’t believe everything you read, or everything that has come from WB’s lips in years gone by (more often than not quoted out of context).
Times move on and opinions change, even with giants like Mr. B!
Steve I
:
Although I believe Buffett had a huge percentage of his holdings in Geico at one stage if my memory serves.
Kim Jordan
:
Did you all see ‘our Leader’ on Switzer and then following that, on ‘Your Money Your Call’?
It was a ‘command performance’ on the latter I thought – very good Roger, and most interesting.
Now, having expressed a firm interest in oil, Roger didn’t (wasn’t asked) to name any picks in oil stocks. So my question for you ‘disciples’ is, what’s the best ‘Value.able’ approved oil stocks??
Ashley Little
:
Hi Kim,
Lloyd is our resident Oil & Gas expert.
I understand that Lloyd has actualy sat on the Board of Listed ASX Oil & Gas Companies.
I hope Lloyd will give his views here.
My view for what it is worth is pure Oil & Gas plays in Australia are either expensive or poor quality or both.
BHP is the largest Oil & Gas producer in Australia so this will give you exposure.
MCE is my way for gaining exposure to rising Oil Prices. But I am a total chicken when it comes to commodity stocks
Lloyd
:
Kim,
I agree with the key points Ashley makes. Its tough to find quality at the right price in the oil and gas sector in Australia. Remember you are seeking exposure to long life low cost oil reserves to play the rising oil price theme that most people see arising from the Peak Oil hypothesis. I am a firm believer in the latter, but the inference that this leads to ever rising oil prices is a non sequitur for a number of reasons. Also remember that in the last twelve years oil prices have already risen ten fold to their peak in 2008 and currently sit more than six times where they were just twelve years ago. This has some significant consequences in terms of what may be expected in terms of a realistic future oil price path and the attractiveness of higher cost supply options, plus the uptake energy efficient technologies, which in turn alter the medium term supply/demand balance and thus oil price path.
I have written several times on Roger’s blog on oil and gas business investment and its pitfalls, but in the context of your question it is probably best to refer to my most recent comments which were made on the thread titled “What does my 2031 crystal ball predict?”
http://rogermontgomery.com/what-does-my-2031-crystal-ball-predict-2/#comments
Two key extracts follow as you might have problems locating them in the extensive comment this thread generated:
1. The Best play on Higher Oil Prices
Australian Exploration and Production sector companies are largely gas rather than oil producers. None have material long term oil reserves with the exception of BHP Petroleum, but then this is not a pure Exploration and Production sector play with the Petroleum division accounting for roughly 25% of the total business. So the search must be based on the producer with the largest, low cost, long life gas reserves, directly linked to oil price via LNG pricing. This brings us to Woodside Petroleum (WPL) with Oil Search (OSH) a distant second.
The coal seam gas CSG producers are ruled out by virtue of high cost production and the completely dry (no petroleum liquids in CSG which is why it is more accurately called coal seam methane CSM) nature of coal seam gas.
That said BHP Petroleum would be my choice if it were a pure play rather than embedded in a resource conglomerate. Of course if you believe the total commodity long term price story then this is inconsequential and BHP gives you both petroleum and pretty much everything else in one business.
The alternative is to play the oil price story via the contractor base to the petroleum industry and Matrix Composites and Engineering (MCE) is standout on the Australian listed business front in this respect with Worley Parsons (WOR) a distant second.
For the short sellers under this scenario the transport sector is the obvious place to take short positions at select times in the likes of QAN, VBA, TOL etc. Conversely you never want to be long these stocks under the long term rising energy price scenario.
2. On a query regarding Stuart Petroleum (STU) as a way to play the Peak Oil theme:
Brad/Ashley,
Rather than write a lot on STU specifically, I will simply note that playing the long term rising oil price under the Peak Oil Scenario via investment in oil and gas producers is fraught with problems.
As oil prices rise, so cost rise more than proportionally. Government take increases in most regimes (e.g. the PRRT in Australia, Special Oil Gain Levy in China and exponentially escalating price linked oil tax in Russia) and most oil company managements blow their brains out on risky, high cost capital investment development projects, plus ever increasing high cost, high risk, low reward exploration and fruitless (for the shareholder) M&A activity. In this sort of environment you will see the phrases “game-changer”, “company maker” and “high impact” thrown around by management and investment analysts with gay abandon. Run a mile when this happens, because the only high impact are the negative ones on profitability, balance sheet and thus shareholder value.
If you want to play the rising oil price/Peak Oil game via equity investment in oil and gas businesses, then you need to look for companies with established, developed, low cost, long life oil reserves, accompanied by brilliant shareholder friendly management who have profound understanding of capital allocation and the foresight and patience to see throuh the oil price cycle, which will still exist even in a post-Peak Oil world.
Does STU fit the bill? That is for you to decide rather than me to tell you. But before you answer the question take a good hard look at the company in light of Chapters 7 and 9 of Value.able.
But remember, the mugs out there will drive up the share price indiscriminately of each and every oil and gas company during an oil price spike, but this is speculation, rather than long term investment and it will unwind just as rapidly (look at any oil company’s stock price in the period 2004-2009 to see the effect). If you play this speculative game, just remind yourself of the rules of the game on rising from bed each and every morning, otherwise you’ll be incinerated in the long run.
So are you feeling lucky?
Regards
Lloyd
Peter M (Mully)
:
Hi Lloyd,
Just wanted to say how much I enjoyed reading your post. It’s quality contributions like this that set this blog apart from the rest and makes one realise how fortunate we are to be the beneficiary of the smart individual and collective minds that contribute to it. Breathtaking stuff to say the least.
Mully
Lloyd
:
Mully,
Thanks for the kind words. Happy to help out where I can. Oil, gas and energy operations were my career, which is probably why I am a very cautious investor in the sector! But you also owe thanks to Ashley for prompting me from my lethargy and sloth to put a few of my thoughts on the blog. Plus Roger who brought the discussion board into being and who generously provided the overall framework and initiates stimulating articles for discussion – very generous with his time and intellect.
Regards
Lloyd
Ash Little
:
Hi Lloyd.
Thanks for repeating that,
Sage words indead
Scott T
:
Hi Kim and room,
One of the points Roger has made many times is that you don’t have to pick producers to benefit from the growing demand for a commodity. Yes Roger is long on oil, however he has pointed out many times that going long on a commodity stock adds 3 different types of risks. Market risk, Commodity price risk and board room risk.
For this reason Roger is far more interested in selling picks and shovels to the miners. To this end MCE will still be selling buoyancy devises regardless of the fluctuations in oil price. In 12 to 36 months time as more and more oil rigs take to the high seas MCE will profit from the organic growth in demand for their products, wear and tear on currently installed systems and new players entering the market to raise capital and spend it all with the likes of MCE, all without MCE being exposed to any commodity price risk.
All the best
Scott T
Wayne P
:
Hi All,
I have to agree that value investing ATM is proving difficult, especially if you are in a position where your portfolio is sufficiently diversified and you can’t capitalise further on MCE, FGE et al.
One question…does anyone know of any sites where I can screen for potential value opportunites on foreign markets, particularly the US?
Many thanks
Greg Mc
:
Can’t help you with OS markets Wayne. With luck though, the current reporting season will throw up a few local companies to look at.
Ashley Little
:
Hi Wayne,
Lloyd may be able to help.
If he does not reply to this post then post again and ask fior Lloyd help.
He loves helping out and knows heaps
Lloyd
:
Greg, Mc,
I usually go directly to international company websites (investor section of each) and download the last few annual reports, SEC filings, etc., for basic data and then do my own screening from this. However, I usually only invest abroad with a specific play, or macro-theme in mind, so rarely do I use data screening applications to drive my investment decision making or strategy formulation.
For summary views, some free services are available on sign up to the likes of MSN and Reuters and these include basic screening tools. Basic historical data can also be sources from Google Finance though I don’t think this has a stock screening facility.
For US listed stocks including ADR’s of non-US companies a lot of basic info is available for free from the NY Times website after you sign up for free (at least its free at present). Go to the Business section of the NY Times and explore the Financial Tools available there … you might be pleasantly surprised by the info and data you can glean. It also includes a screening tool, which I have not used. I also occasionally look at Hong Kong Exchange listed stocks for access to China plays via H shares of Chines mainland companies (no restrictions on foreign ownership here) and the Hong Kong Exchange website provides a rather clumsy portal to access company releases and filings … takes a bit of playing around to become familiar with it, but easy once mastered.
Personally, I think you need to be more careful than ever in investing abroad, due to the absence of the awareness factor that you have with local stocks, events, business dynamics, politics and economic dynamics. It is easy to be blind-sided by distance, poor news flow and lack or awareness of the businesses and reputations involved.
Therefore, international stock screening tools should be used very judiciously as a small adjunct to international investment decision making. And this is before we consider the integrity (or lack thereof) of many databases on which the tools are applied.
Regards
Lloyd
Lloyd
:
Ashley,
“He loves helping out and knows heaps” …. I think you may be overstating it on both counts!
That said I came across this gem, which I want to share with you, from Charlie Munger to a recent graduating class of USC law school:
“Another thing you have to do, of course, is to have a lot of assiduity. I like that word because it means: sit down on your ass until you do it.”
I believe that those contemplating international investment certainly need to practice great assiduity, in the true sense of the word (constant or close attention to what one is doing), for the reasons I noted in the previous post…. please don’t rely on international stock screening tools as your sole guide!
Regards
Lloyd
Ash Little
:
Hi Lloyd,
I really love reading your posts.
They are very thought provoking.
Mostly I like reading them because you often come up with something I have not thought about.
You have helped me and others heaps Lloyd and I would like to say thanks for that.
Lloyd
:
Ashley,
Thanks for the kind words. Equally, I find your insights very Valu.able and thought provoking. You’re no slouch when it comes to the value investing game! This is aside from the fact that you frequently prompt me to rise from my usual state of lethargy and sloth, to write in response to you dropping me into the discussion! This in itself causes me to think about the issues involved. Thanks for the great contributions to the discussion board.
Regards
Lloyd
Wayne P
:
Thanks for the advice Ashley!
Emily
:
Ashley and Roger, you have both made comments that it is going to be difficult to find companies trading at a substantial discount to IV this year – that this year will be hard for value investors. Can you please explain why?
Roger Montgomery
:
Yes. I did say that …but I am buying some stocks at the moment. Because its hard, doesn’t mean its impossible.
John M
:
I have got to ask, what are you buying at the moment. I bet everyone is itching to know. I will understand if you don’t tell us. If you can’t tell us yet, can you give us a hint.
Roger Montgomery
:
Hi John,
I will be putting up a post in the not too distant future.
John M
:
Thankyou and bless your cotton socks. :)
Austin
:
Hi Roger,
As much as we like to know what you bought, i guess many of the Value.Able graduates would like to know “Are you selling already?”
So are you selling some of those great stock mentioned in 2010 already, which some of those (MCE, ORL) are trading inside your valuation range? How about those (JBH, DCG) whose valuation has dropped?
Look forward to an insightful reply :)
Again thanks for everything!! I would try to contribute more in your blog in near future!
Regards,
Austin
kent Bermingham
:
I am on holidays and do not have access to my valuation tables
In light of CPU interim result what is their new IV for 2011 and 2012
Would appreciate your comment
kent Bermingham
:
Don’t worry about replying, sold CPU bought MIN as Roger has estimated a 30% return each year for several years – not bad even though they are tracking their IV
Roger Montgomery
:
Hi Kent,
Just keep in mind that forecasts are just that. They can change and therefore I always look for a big margin of safety right now.
kent Bermingham
:
I agree but i just hope your forecasts are well founded
ales
:
cant wait for your new list of companies to look out for! will be awaiting it with heaps of interest!! thanks again roger absolute champion!
Stuart
:
Hi Roger,
I’ve recently read your book. Thank you! My only regret is that I didn’t have it five years ago.
On the understanding that it doesn’t constitute investment advice, would you be willing to let us know some of the shares you’ve recently bought or are currently on your short list (still trading at healthy discounts to IV)?
Roger Montgomery
:
Hi Stuart, I am working on a list to be released in an upcoming post.
Steve
:
Yes I agree it would be great to get some ideas on stocks that are looking good in 2011 for further research or perhaps a ‘Do these 3 stocks represent the last of the good value’ style of post (similar to last year). Although I guess the reporting season may unlock a few more ideas for us
Andrew
:
Hi Emily, i would agree with them. The companies that i have identified and would like to buy are trading at around or above my estimated IV’s, some extremley above my iv. Unless these companies drop dramatically i cannot see a big enough margin of safety to see any value at the moment.
I am not one to go digging trying to find a company that is at a big margin of safety, i am only interested in the companies i like and this is the case with them.
As Roger said, it doesn’t mean there isn’t value there but finding it is the hard part. Its hard to see what might be a catalyst for the markets prices to drop the amount needed and the cobwebs from the GFC have been blown off.
Ashley Little
:
Hi Emily,
I like A1s at 40% to 50% discounts to IV so If you know of any in this category let me know
Peter M (Mully)
:
Hi Ashley,
Here are a few which may be in the ballpark for you to look at if you haven’t already done so.
PRV
PET
BGL
MOC
IDE
MRN
Mully
Peter M (Mully)
:
Hi Ashley,
As a footnote, I should mention that I do not own shares in any of these nor have I reviewed their quality ratings or valuations in recent times.
Mully
Ashley Little
:
Hi Mully,
Thank you,
I will have a look at these
Ashley Little
:
Hi Mully,
Thanks for your list.
Please don’t be offended but these are my notes on my initial review( Given your footnote I know you wont)
PRV – A listed investment company (LIC). The correct way to value these in my view is NTA. The NTA as at 31 January 2011 is 95.2 cents per share after tax.
So they are at a discount but some of these LICs trade at a discount forever. I want to do things myself and not buy a company that gives money to other entities to Invest.
PET- another LIC but this one is more appealing due to their philosophy. If I ever wanted to go into this area I would prefer MFF.
BGL- Yes I have looked at this one in the past. It is a very competitive environment.
MOC-Yes I have this on my watch list but I am just not a fan off our Real estate sector going forward and MOC are leveraged to this. If Jim Roger is right Interest rates are going up and the mortgage business may be difficult. That said reasonable discount to IV ATM.
IDE- Yes I have looked at this but I just don’t understand quite what they do and it is a very competitive environment.
MRN- This looks like a great business but expensive
Thanks Mully,
Anyone else got something that they are interested in?
Ryan
:
Hey Ashley,
what are you thoughts for ZGL ZICOM GROUP LIMITED ORDINARY i get an IV of just over a dollar and they announced a profit update for the first half of the financial year ??
Cheers
Ash Little
:
Hi Ryan,
I have had look at this in the past.
A few bloggers are mentioning this one ATM which raises an eyebrow.
Give me a week or two and I will let you know.
Peter M (Mully)
:
Hi Ashley,
Thanks for taking the time to look at my list and for your insights and feedback which is much appreciated. Of these, MOC is the only one I’m going to keep my eye on. Whilst recognising the headwinds and sentiment currently facing the real estate sector, I have contrarian view and actually see some upside especially in the context of the MOC service offering but that’s a discussion topic for another day. Thanks again for your feedback.
Mully
Ash Little
:
Yeppers Mully
MOC is the best of that bunch and well worth keeping an eye on,
Like your Contrarian view on MOC
Nice thoughts
Kim Jordan
:
“I like A1s at 40% to 50% discounts to IV”
I can imagine Ashley!
How many have you found like that, and what are they?
Ashley Little
:
Hi Kim
Over the last few years their has been quite a few,
MCE FGE ORL last year JBH FWD a few years back just to name a few,
Most of the Banks were at big discounts during the GFC
The Market does really silly things sometimes. so (as Ben Graham’s Mr Market allegory testifies) it’s the Markets wallet we want not it’s wisdom.
Doing what I do will involve long periods where lethagy is the only solution
sam
:
hi roger and room
i have been researching FPS and would ike to understand why it does not publish funds under management such as PTM and others. instead it issues quarterly cash flow statements to the market place?
Roger Montgomery
:
Hi Sam,
The Oct’10 chairman’s statement reads: ” Funds under Administration grew 16.3% to $1.14 billion…” The company is not a pure fund manager its an advisory business as well.
Greg Mc
:
G’day Sam,
I put my two bob’s worth down on FPS on the blog in October. I don’t think that much has changed in the meantime though I haven’t redone my IV since and perhaps I’d use a higher RR than I did at the time – I’ve become a bit more demanding in that respect over time. I still hold them however and am waiting for the half year report with interest. To expand on Roger’s comment, they report quarterly cash flow in an effort to give transparency, they are not obliged to do so.
Here’s what I wrote back in Oct in response to a post from Lloyd about where to seek the personal professional advice that Roger keeps advising us to get, and which companies that provide said advice might be worth investing in – Roger then brought up FPS as a possible one to look into. I responded:
“Ah, Fiducian, one of my little favourites (as a financial services company which I have held in my SMSF for some time, I’ve never been a client). I have respect for Indy Singh, I like their business model and the way they go about their business. They managed to maintain quite good ROE even through the events of 2008-9. From a shareholder perspective, they treat their owners with due respect and go to some lengths to provide transparency – even down to publishing quarterly cashflow statements when there is no obligation for them to do so. I imagine that given the ethical way that they run their business, people seeking financial advice from them would get if not high quality advice, at least honest and ethical advice.
For what it is worth, I value them at $1.56, and track record and the confidence I have that management aren’t going to do something stupid or screw me over makes me happy to hold on to them.”
It should be remembered that almost anyone can start up a funds management business and advisory service so they’re in a competitive industry. I think that their reputation and one I Singh are potential advantages for FPS, and Indy Singh owns nearly a third of the company so it is certainly in his interests to work hard for the business. While I like FPS, I don’t think this is a company that is going to shoot the lights out like some of the blog favourites, though I did buy them almost at the very low point of the GFC so the return has been worthwhile. Their payout ratio has been 70% for some years now and I expect ROE in the mid-high 20s so their implied growth rate is not in the stratosphere. I have more faith in the guys who run this business though than most companies and I can sleep well at night owning FPS.
Wayne G
:
Hi Daniel,
Regarding CCV
ROE of 17ish
2011 est Equity per share .461
Avg equity of 168,806,056
and RR of 10%
gives me IV of 0.82 this year and 0.87 next
Wayne
Grant
:
With the CBA results out today I headed back to my valuation check how the IV changed.
I ran into a problem of which profit figure to use. They report a cash profit and statutory profit! Confusing!
Ashley Little
:
Hi Grant,
This reporting was started by from memory ANZ during the middle of the GFC.
They were trying to make the figures sold better than they really are.
Over time they should equal out but I have always used the stat profits
As long as you are consistent it won’t matter
Steve I
:
Whilst a declining cycle of bad and doubtful debts is improving profits now, I worry what the numbers will be like in a high interest rate environment.
Ash Little
:
Hi Steve,
I agree.
I few months back Roger did a good blog on the Banks,
My view at the time was the time to buy the Banks is when the economy is in tatters.(My view is still the same)
This will happen I just don’t know when.
Raymond
:
Hi Roger, Everyone,
Congratulations on your book and many thanks for your insights, blog and comments Roger. You have opened a window to investing that I did not know existed and I have become a disciple and true believer!
This month I have been trawling the market for possible purchases and been intrigued by the spin off of Dulux (DLX) from Orica (ORI) in July 2010. The fundamentals look good although it does have some debt, it has (in my view) a competitive advantage in its brand name and products. It also appears to be cheap and I wondered if you could have a look at it sometime in the future. If anyone else has a view about this company I would welcome their thoughts also.
Raymond
Roger Montgomery
:
Hi Raymond,
The issue is declining valuations.
Matthew R
:
Hi Raymond,
There was some discussion of Dulux here:
http://rogermontgomery.com/what-a1-stocks-am-i-looking-at-right-now/#comment-5762
It looks like you are on to it though – there are some issues regarding debt and cashflow. I agree they do have a well known name, but I’m not sure that good paint is hard to make, although I have no experience or training in the area.
However, and I believe this is a reasonable litmus test: I wouldn’t have any idea what paint was used in my house. And none of my friends have ever asked…. and nor do I ask them what is on their walls… and nor have I ever heard of a house advertised as being “painted with Dulux”
I think I’m like most people, and to me paint is white, not easy to develop a competitive advantage in that area. But there are other competitive advantages that Dulux might have, it is just that the numbers and my research don’t tell me that (yet).
As roger has also more succinctly stated, there are also some other investment check boxes that get a red flag
I’m happy to watch from the sidelines on this one for now
Andrew
:
Good post Matthew, i agree with a lot of your points.
Paint i feel that regardless of the power of a brand name is still a commodity style product. If i bump into a family friend who is a professional painter i might ask him what paint he chooses and why. Might be interesting to see if there is actually an edge you can get in the paint manufacturing world.
Raymond
:
Hi Roger, Matthew R,
Thanks for the link and for both your inputs. I must confess I am curious about DLX red flags and declining valuations not withstanding and like yourself, will sit on the sidelines and watch how it goes.
Daniel
:
Hi Guys been reading Rogers book did a val on cash converters CCV and got a crazy amount of $2.88 can someone check this for me
Thanks Daniel
Roger Montgomery
:
Hi Daniel,
Welcome and well done jumping straight in to valuing companies and contributing to this blog. You may find a better response if you also provide your inputs. That way others here can compare and contrast for you.
Nic Arena
:
Hi Daniel,
It is definitely high compared with my IV. I have $1.17 rising to $1.33 next year.
Later.
Mal
:
I agree with Ashley regarding the fact that there are no really cheap companies around. I am also a value investor, but I don’t utilise terminal value when calculating my intrinsic valuations (as I find that as soon as these growth companies mature and their ROE decreases, there can be steep declines in accompanying price- eg. look what will happen to BKNs price after the latest report). I am finding that whereas 12 months (even 6 months) ago, I could find a number of excellent (safe) underpriced companies- eg. SWL, CTD, MLD, MCE, CDD, MND, LYL, FGE, ORL the companies that represent value (at current prices) tend to be far riskier.
That said, my current list (and I do not exclude miners) of companies trading at a substantial discount to intrinsic value are (and I wouldn’t touch quite a few of these due to the risks associated). The only ones I would class as A1 are FMG, HSN, QBE, TGR:
MNF
GDO (gold miner)
KAM
CGX (gold miner)
RMS (gold miner)
FMG (iron ore miner)
AGO (iron ore miner)
EQN (copper miner)
MLX (tin miner)
DGX
SHU
ICP
IDE
DDR
SBD
CTD
HSN
EMB
FXL
TGR
QBE
HNG
PPG
Ashley Little
:
Hi Mal,
Nice list
Thanks for that,
Please keep posting. I like reading them.
Not saying I agree with them but you are not right nor wrong because we disagree
Andrew
:
Hi Mal,
Any insights you wish to share about the companies you class as A1. I understand QBE but would like to hear your thoughts on some of the others.
Mal
:
You will notice that all the companies on my list (excluding miners) essentially have:
– growing sales/revenues
– low-ish debt
– good free cash flow
The ones that I have suggested as A1 (and this is not a systematised rating system like Roger’s) – I would say have some sort of competitive advantage. TGR- large salmon farms are capital intensive, HSN technology- smart meters. You have to treat mining companies differently- they are very difficult to value (require a much more in-depth look through reports and have some sort of understanding of the drivers of the commodity in question), but Fortescue is obviously a very large successful producing iron ore miner, that is ramping up production massively (and is on track for at least 40MTPA production this year). The other companies on this list are significantly undervalued but don’t have any obvious entrenched competitive advantage (some of them are ridiculously undervalued), they would also be very difficult to invest in if you need liquidity (quite a lot of them are very illiquid). I am not sure about the business model of IDE in depth but the numbers look promising.
Since I last posted FXL just released an excellent report and would probably also fit this A1 criteria. With a NPAT of 50million FY 11- 259mill shares, equity of 205mill gives ROE of 0.24, and a current IV (with no growth factored in) 1.93 with a discount rate of 0.10. I suspect if you use the valuation tables it will be significantly higher :).
Andrew
:
Have to say TGR to is a bit left field so couldn’t help but have a look at it. And sorry i know you didn’t ask for my advice or what i think but thought i would post my thoughts.
I can’t work out whether i think their is a competitive advantage in Salmon farming and distributing. Love eating it but looking at it from a business point of view is something different.
I know john west have done it too an extent but i cannot think of whether when someone is working through woolworths for instance they will look specifically for a Tassall branded salmon product. Personally i just get the woolworths generic ones which are pretty cheap.
One red flag about the business i can see is that it has negative company cashflow. This means that the operations are not generating enough cash to look after the investing activities which is basically paying for the property, plant and equipment which would lend to what you said about it being capital intensive. Not sure i would go as far to say that the capital intensivness is a source of competitive advantage. If Tassall were adequatley making enough money to pay for the PPE than i might revisit it a bit more.
Also with a ROE of just over 15% it does not qualify for me.
You are correct in it trading below its intrinsic value i have on a RR of 14 an intrinsic value of $1.92 and current price is $1.765 which is about an 8% MOS.
Once again, i could be completley wrong with my thoughts and it wouldn’t be the first time so don’t listen to me.
Roger Montgomery
:
Hi Andrew,
Salmon farms = no.
Andrew
:
That was the answer i came up with as well.
Ashley Little
:
Hi Mal
FXL has roughly just off the top of my head debt of about $550M and equity of roughly $220M.
Cashflow is terribile if adjust some of the figures to reach reality
This may do very well but it is not for me
george
:
I am also finding it difficult to find value in the market at the moment. I am having a fairly hard look at the moment, Thanks for the post I will have a closer look at some of them.
regards
George
DC
:
Hi Mal
Please expand on your thoughts on KAM. Fund manager, no debt, forecast ROE 70-100%, 100% payout, no restricted capital, large management stake. CA people and processes locked in with aligned shareholding? Readily scalable business. Could this be a baby PTM?
Post result price rise seems to have resulted in a premium to IV. Using broker forecast have 2013 IV @ 60ish cents ROE 60% EqPS 11c 10%RR 100% payout ratio.
How can these types of businnesses generate “Returns on incremental equity”. If good they seem to be cash machines for the key staff and shareholders. They probably use their divies to invest in other companies with increasing returns on incremental equity.
Any fund managers out there ?
Roger Montgomery
:
HI DC,
Thats the issue from a passive investors perspective, very high rates of return on equity but near 100% payout ratios. Still excellent but second rather than first prize, unless you own one.
Scotty G
:
I valued a couple of these the other day before I came across the list.
HNG – EQPS – 1.36
ROE – 20%
DIV – 70%
RR – 13%
IV – $2.34 for 2011 vs current price $1.435
Doesn’t rise at a rapid clip in the future but decent margin of safety
DGX – I’ve mislaid my figures but was actually able to find some forward EPS estimates! For DGX but not FRI. Come on brokers! Got a present IV of just over $0.50 with an RR of 14%. Current price $0.28 and had IV rising at a decent clip in the future to over $1.00 in 2013. Not an A1 company but not too bad either. Perth property is a bit depressed at the minute but tightening into the future so this probably counts as a contrarian play!
Some value out there but you have to look a bit and take a bigger margin of safety. It all comes down to your personal profile as no two investors are the same and no two will value a company the same. Use higher RR is all I can proffer as a buffer when wading in to some of the smaller companies.
Rambling a bit but I’m at work! See you on the bourse
Roger Montgomery
:
Good rambling though Scotty. Thanks. Big margins of safety, is something I have been advocating for a long time here.
Scotty G
:
G’day,
Has anyone out there been able to find any forward EPS estimates for Finbar (FRI)?
I’ve come up dry on my search across the interweb!
Peter M (Mully)
:
Hi Scotty,
I haven’t been able to find any consensus forecast data either so I’ve done a little crystal ball gazing of my own taking into account the recent capital raising and come up with a 2011 IV of $1.43 based on the following variables.
EQPS – $0.85c
ROE – 20%
POR – 45%
RR – 14%
Mully
Lloyd
:
Roger,
Can you comment on your approach to grading and valuing companies like Computershare (CPU) which report statutory accounts and then focus all presentation material and management statements on another set of numbers, “management adjusted earnings”, which inevitably show the company’s performance in a more favorable light than the statutory accounts.
For example the just reported CPU statutory accounts interim shows a YOY reduction in earnings of 31%, whereas the “Management Adjusted Earnings” are only down 15%.
I use statutory accounts as the basis for IV and determine an 2011 IV of around AU$ 6.10/share based on my forecast statutory EPS which assumes a significant improvement in second half performance. Using “management adjusted earnings” with an associated higher ROE would generate a higher value.
As an observation the ROE of CPU seems to be declining to more normal levels (15% – 20%) after the peaks of 30 – 40% achieved in the years leading up to the GFC. As a result, the IV value path of the business is declining rapidly over the next few years (at least on my modeling).
How do you see this sort of CPU management approach, and does it influence your grading of the company, given the transparency issues that arise? I recall that you had CPU rated an A2 in one of your blogs last year. Does this rating remain.
Any insight on the subject and the business would be greatly appreciated.
Regards
Lloyd
Roger Montgomery
:
Lloyd,
In such situations actions speak louder than words. The rating however is my measure of ‘cat.’ risk.
Greg W
:
Hi Roger
I would like to get your thoughts on CSR. While I know it does not stack up on Intirnsic value I am a long time holding at around $2.40.
The company has advised they will return $0.4357 per share to investors as a capital return with the record date being 16 February.
Can you advise if a companys share price generally goes down by a similar amount to the return of capital amount once the share goes ex return of capital as it does when shares go ex dividend.
If price is not affected then it may be an apportunity for me to buy further shares before the ex or record date to further reduce my average cost base.
Your earliest thoughts would be greatly appreciated.
Roger Montgomery
:
Greg,
When a stock goes ex dividend, theory says the shares should fall by the amount of the dividend (and more if franking is included) the drop however is not linked to any drop in cash because – as we all know – divs can be paid from borrowings rather than cash. The change, I believe, is related to the impact on the value. How ever the divs are paid, it will be a negative impact on equity and a corresponding increase in return on equity – all things being equal. A capital return – an entry that hits share capital rather than retained earnings – has the same impact on the valuation. In short, theory suggests an equivalent share price drop but of course, sentiment will determine share prices in the short term and the extent of the reaction.
fred
:
Due to the fact that I do not hold Matrix or Forge I also price them at $ 3.00…….I hope you agree with me Ash……..Now where is that rope……….lol
Ashley Little
:
Hi Room,
Just like to say how silly the analyst downgrade from that broker firm was regarding MCE about 4 or 5 months ago.
On the back of today’s Investor presentation how embarrassing is it to have a target price starting with a $3.
No advice BWT do your own research .IV could very well be somewhere in the 3’s……….but i am not getting that figure.
Pat Fitzgerald
:
Hi Ashley
There has been big differences in Broker forecasts for MCE, I assume updates will be out soon and the forecasts will be closer now. At least one broker did have above $9 as their forecast so their clients will be happy.
Greg W
:
I couldn’t agree more Ashley.
MCE is a great company and has a great competitive advantage in its industry.
By the way your frequent comments are very interesting and informative so thank you for your input.
Roger Montgomery
:
Here here.
Ashley Little
:
Thanks Greg,
Nice to hear that,
I sometimes think I am over playing my hand
Scott T
:
Hi Ashley,
Great recollection, I have just gone back through the broker calls on Eureka, it was JP Morgan, and on the same day they went underweight MCE and Overweight Qantas.
Well well well.
All the best
Scott T
Roger Montgomery
:
Having a very quiet and reserved chuckle and giggle. tee hee hee.
Ashley Little
:
LOL,
Great move. sell MCE to buy Qantas.
yep sure to make you money by selling an A1 with big competitive advantage and buy an airline.(Not to mention the A1 was trading at a hugh discount at the time)
.
still laughing at that one
Greg Mc
:
One might be suspicious that that number will be quickly and quietly changed, Ash. It might also illustrate the problematic nature of using analyst figures to try to estimate future IV, particularly in companies with only a few brokers covering them. Better perhaps to go with the company’s statements and not try to predict too far in advance.
Roger Montgomery
:
Also remember my strong bias towards large discounts to present intrinsic values. Thinning on the ground now too.
Ashley Little
:
I very much like your views Greg
And your sense of humour..Keep Posting
David
:
Not sure if it has already been commencted but GREAT updates today by both Forge (FGE) and Matrix (MCE), both of whom I own (thanks to reading Valuable and reading the posts and listening to the many outstanding views on this blog).
Based upon these updates I have forcasted IV’s for both these two above the $9 mark and that’s using some conservative figures.
Pat Fitzgerald
:
Hi David
Excellent results from both FGE & MCE. No news on the dividends, so I am not sure what the payout ratio will be but for now I have an IV for Forge of above $7 and MCE above $9. I have estimated/guessed that the payout ratios for both of these may get to 40% in FY 2012 onwards.
David
:
Hi Pat,
For FGE I worked on the assumption the announcement of NPBT of $30mill for H1 would at least continue through to H2 (you may call this blind optimism). Allowing for a basic company tax rate of 30% and considering the current shares on issue of approx 83million, my estimated EPS for 2011 was nearly 51c. With a beggining equity per share of $1.19 that is an approx ROE of approx 42.5%. Allowing for an increase in Div payout ratio to 25% (was 19% in 2010) then I get an IV above $9 using a 12% RR.
I may be being slightly optimistic on the ROE being this high by the end of 2011 (which will depend on H2 performance) and also remaining this high in future years.
Would be interested to hear other peoples variations to the above.
Cheers
David
Roger Montgomery
:
Hi David,
At some point the payout ratio will rise. That should impact your valuations. You should also look at previous half year and full year results and determine if there is any observable seasonality. Or just call the company and ask.
ken fraser
:
Steven, Great minds think alike. Re TRG, I paid $4.99 and got IV $7.09 for 2010. On one brokers forcast I got $5.50 for 2011 and on another broker forcast $8.22. We will just have to wait and see. If we lose money on this one it shouldn`t be much anyway. I also bought CGF. I don`t know what Roger thinks of these type of companies, probably not big enough discount for him maybe and history not consistent enough and not big enough increasing profitability. Maybe Roger could mention something about these two stocks. Ken.
Roger Montgomery
:
Hi Ken,
Will add both financial services stocks onto the list to write about soon.
Chris
:
was looking at cgf (challenger limited), using the commsec financials sheet it seems to have a good ROE but quite a lot of debt..
SCOTT
:
Hi Roger, Im also disappointed that market moves has been axed. I have been watching Market Day, but it is a completely different program
Roger Montgomery
:
Hi Scott and all,
This year I will be working with all the same excellent people as last year.
Craig B
:
Roger,
Just on Sky Business, you can sit and watch YMYC for the full hour and see 95% of the stocks covered be speculative mining ones.
Why don’t they have 3 slightly different versions of the show on Tues, Wed, and Thurs?
Perhaps Mining firms one night, small caps the next, then the rest of the market on the third night. Or something like that.
If it wasn’t for fast forward on Foxtel IQ it would be 3 hours out of every week for little info pertinent to value investors.
Any thoughts?
Roger Montgomery
:
Hi Craig,
Send your thoughts to the program/network producer Kylie Merritt.
Steve PL
:
Hi Craig,
I agree with you as most nights you hear the same callers chasing different highly speculative stocks looking for their ten bagger. However I actually find it reassuring and a validation that I have chosen to invest the Val’u’able way. Still a work in progress mind you. Hopefully one day they too will purchase Rogers book and read this blog.This is one band wagon worth getting on.
Matt R
:
Hi
anyone know MCE’s NPAT/FY11 equity forecast yet? I can’t find it on any of the sites…
regards
Jonesy
:
Hi Matt
From the Comsec website today:
2011: EPS 45.6 DPS 13.5
2012: EPS 62.9 DPS 21.3
2013: EPS 68.1 DPS 20.4
Using RR of 12%, the forecast payout ratio of 30% and basing ROE on ending equity rather than average equity I get the following intrinsic values for coming years
2011: $7.96
2012: $10.77
2013: $13.03
Ashley Little
:
Hi MattR,
Try reading this
http://rogermontgomery.com/wp-content/uploads/2010/08/Where-to-find-the-Source-Data-for-Value.able-valuations.pdf
Hope this helps
Matt R
:
I should add i used # shares as 109M, giving Eq/share of ~2.96
Matt R
:
Guys
Current JBH IV calc for your comment:
average EQ- 293m (2010) +352m (HY11)/2=323m
NPAT forecast- 134-139, use 136.5
POR 0.6
ROE 42%, use 40%
RR 12%
gives a current/2011 IV of $16.27
this seems significantly different to Roger’s IV of low $20s in late 2010 (did I hear this incorrectly?)
would love to hear other’s thoughts or IV calcs.
Roger Montgomery
:
Hi Matt R,
A “late 2010” valuation is not a feb 2011 valuation!
Grant
:
It appears that 12%% may be too high RR for a stock such as JB. Excellent track record over the last decade, excellent business metrics, entrenched competitive advantage – all this points me to a RR of 10%, 11% to be conservative.
Ray H
:
Let us not forget that the required rate of return should be heavily influenced by the risk free rate of return. As interest rates rise, so too should your required rate of return.
Is it worth risking your capital for a 10% return, for example, if you can get a 7% or 8% return from a (government guaranteed) term deposit?
The only companies that I am still using 10% RR for are large corporations that are likely to maintain pricing power in an inflationary environment (eg CSL). Everything else I require 12% or better.
Roger – might be worth putting this concept on your ideas list for a blog post?
Roger Montgomery
:
Hi Ray, I cover it in Value.able too. Interest rates act like gravity on the value of all assets. Its an invisible force that gets stronger as rates rise.
Steve I
:
Roger, I’m posting this a tad late.
What are your thoughts about rising oil prices and the impact on margins acting in a similar way to interest rates?
Roger Montgomery
:
Hi Steve, I think it means steer clear of QAN, TOL, VBA et. al. Seek and take personal professional advice. See my first post for the year http://rogermontgomery.com/what-does-my-2031-crystal-ball-predict-2/
Tiago
:
Thanks for the answer Roger, good to know. Could you give us your view on QBE latest acquisition? I think they will never overpay for anything, would like to know your view on future IV followed by the acquisition and maybe higher competitive advantage after having a higher market share and maybe higher ROE. Thanks a lot
Roger Montgomery
:
Ok Tiago. On the list for a post.
Tiago
:
Thanks Roger, could you share your opinion on QBE latest acquisition? I believe they wouldnt over pay on any acquisition but wanted to thoughts on future ROE, QBE’s increased market share and competitive advantage maybe generating a higher roe in the future, your view would be good too Ashley!
Thanks heaps
Ashley Little
:
Hi Tiago,
I have not looked at this QBE are not on my radar,
Sorry
Leigh P
:
All fellow value investors, I came across ZGL around 3 months ago and was impressed by their annual report. Comments contained within the report seemed liked they came straight out of Roger’s book. i.e:
-shares trading at discount to intrinsic value.
-share buy back to increase the value of the business etc.
Their post GFC recovery looked as though it was tracking nicely, yet ROE was to low to warrant investment at the time.
Yesterday, they released their 1H11 profit guidance, which indicated NPAT up 115% – 130%.
Extrapolating the results for full year guidance looks as though EPS 6.75 – 7 cps, indicating ROE in the 20% for 2011.
Prior to this upgrade I had it trading at a slight discount to intrinsic value, however, the released guidance has confirmed the success of the companies goal for growth, and consequently indicates intrinsic value and ROE ‘rising at a good clip’.
Being a small cap and relatively illiquid seem to be outweighed by the future prospects of the company as they plan to further grow this multinational. Also seems much more of a diverse engineering company than MCE.
Would like to hear some thoughts from fellow bloggers.
Craig B
:
Hi Leigh,
I wrote about ZGL on the Jan 13 post (Crystal Ball). Have a look.
Seems like a great opportunity to me, but I’d love the maestro to offer his thoughts.
Roger Montgomery
:
Its on the list.
Paul
:
Had a look at this one and came up with a conservative IV of .69 @ %13 taking into account the recent profit upgrade.
What IV have other posters here come up with?
This one looks interesting. A well established business who have had maintained a good ROE over the years. Low debt etc….
As has been mentioned before when an opportunity arises it pokes you in the eye. Could this be one?
Ashley Little
:
Hi Craig
Raised an eyebrow from me
Do you or anyone else here know anything about the company’s competitive advantage. I can’t find one but would love to be enlightened.
That will be the key to seeing it being a much bigger company in 5 or 10 years time.
All views would be good as it is obviously cheap on a pure valuation metric
Ashley Little
:
Sorry I me Craig an Leigh
Sorry Leigh
Wayne P
:
The ROE doesn’t yet look high enough to consider investing in.OLlie EPS reduced beyween 2009 to 2010, one to watch I think?
Manny Sorbello
:
My observations on ZGL for everyone. It reports in Singapore Dollars but figures below have been converted to AUD. Using FY 2010 data, ROE of 15%, Bookvalue, $0.26, RR 10% = IV of 0.51 cents. Note – Net Cash position of circa $5million and it has a low dividend payout ratio.
Feb 7 Profit guidance for 1st Half 2011 stated that 2nd half should be higher than PCP. I estimate FY EPS of 6CPS, ROE of around 20%, so IV will rise higher than current $0.51. Net Profit Margin seems to be on the up and up, which may indicate good pricing power or cost control.
Mr Sim Executive Chairman,Managing Director since 1995 owns more than 1/3rd of the company and has been adding to his position.
Using a higher RR there is still has a good margin of safety to future IV. Hope this info helps. – BelloWood
Ryan
:
Hi Manny,
Great post i agree 100% with you.
Ashley or Roger any thoughts in ZGL ??
Cheers Ryan
Roger Montgomery
:
B2 and IV rising at 13.8% p.a. for next three years. Prefer organic to acquisition-led growth which has resulted in halving of ROE over last 4 years. Hopefully the latest half is the beginning of improved performance.
Ryan
:
thanks for the response roger much appreciated
Regards Ryan
Andrew
:
Not sure how many people saw this but myer announced a forecast drop in earnings which I am sure will make the mums and dads who jumped on the float even happier.J
They also announced that they bought 65% of fashion label sass & bide for 42.5 mill which I think also includes some type of option agreement for the rest of the 35%. Haven’t seen the specifics yet.
What’s everyones opion of this? As they are a private company I have not seen any financials but my gut is telling me that is too much for this company. I think I read that they had revenue of 30 odd mill, so who knows what their bottom line is after costs.
This will mean that david jones will no longer be stocking this brand although I am not quite sure yet what to think og the impact. DJ’s said they only add 0.5% to their sales. Part of me thinks that it will actually hurt sass and bide not being stocked in dj’s as if you want to be seen as a high fashion company you want your clothes in dj’s and not myer which has the reputation of being cheaper.
I think it is a dangerous move for a dept store to be sercuring brands exclusivley by taking them over and if my feeling that they paid too much is true than profitability will of course be hit and those share holders will be probably seeing more downgrades.
As I haven’t seen much detail yet the above is purely speculation and please take your own advice. Any ithers have a view on this?
Roger Montgomery
:
Below is a piece on Myer I wrote at the time of the float.
By Roger Montgomery
Investors keen on a quick profit from the Myer float may get their wishes fulfilled but the opportunity is not certain and the odds remind me of the man who jumps from a great height, hoping that the landing won’t hurt.
There is no doubt the Myer float is popular – 146,000 people have apparently registered for a Myer prospectus – but you can’t buy what is popular and expect to do well.
Popularity or otherwise aside, the way to put the odds in your favour is to buy shares below their intrinsic value. Before floating and selling my last funds management business, I bought The Reject Shop at $2.40 (now $13) and more recently bought JB HiFi at $8.50 (now $19), Fleetwood at $3.50 (now $8.00), I sold my Platinum Asset Management shares at more than $8.00 on the morning they listed (now $5), and warned investors who attended my ASX investor seminars to get out of ABC Learning at $8.00 (last traded at 54 cents before delisting) and to get out of Wesfarmers at $38 as they acquired Coles (recently traded less than $20).
In all these examples, I simply assessed the price by comparing it to the intrinsic value of the company. And the calculation for the intrinsic value of a company is simple. It’s just a multiple of equity based on the profitability of that equity. For example, if a company has $1 of equity per share and it will forever generate a 20% return and pay all the earnings out as a dividend, then an investor seeking a 10 percent return can pay no more than $2 for every dollar of equity. There’s a little modification for a company that retains profits but essentially that’s all there is too it. And provided you are not in too much of a hurry, it works really well.
Three years ago, Myer was purchased from the Coles/Myer Group by a private equity team called TPG/Newbridge. The Myer Family were also involved and together the consortium acquired Myer for $1.4 billion. The group used $400 million of their own money and borrowed the rest. Before the first anniversary, a very long-term lease on Melbourne’s Bourke Street store was sold for about $600 million and a clearance sale, reduced inventory and netted $160 million. All this additional cash allowed the new owners to reduce debt, pay a dividend of almost $200 million and a capital return of $360 million. In other words, before the first year was out the owners had received all of their $400 million outlay back, and arranged a free ride on a business with $3 billion of revenue.
But you are not being invited to pay $1.4 billion, which was 8.5 times the earnings before interest and tax (EBIT). You are being asked to stump up to $2.9 billion or more than 11 times forecast EBIT. You are also being asked to replace the vendors as owners and while they know a lot about extracting maximum performance out of department stores, you don’t.
In estimating an intrinsic value for Myer, I have ignored the fact that the balance sheet includes $350 million of acquired goodwill as well as $128 million of capitalized software expenses. I will also ignore the addition of sales made by concession operators “to provide a more appropriate reference when assessing profitability measures relative to sales”, the removal of the incentive payments to retain key staff – not regarded as ongoing costs to the business, costs associated with the gifting of shares to employees and most interestingly, the reversal of a write-off (meaning it has been left in) of $21 million in capitalized interest costs; all regarded as non recurring.
While ignoring these in my estimate of intrinsic value seems irresponsible, it merely means that whatever number is produced by the calculation, it is going to be higher than it really should be. That’s fine; I just have to ensure a larger margin of safety.
Taking a net profit after tax figure for 2010 of $160 million and assuming a 75 per cent full-franked dividend payout, I arrive at a return on equity of about 28 per cent on the stated equity of $738 million – equity that could have been higher after the float if $94 million in cash wasn’t also being taken out of retained profits. Using a 13 percent required return I get a valuation of $2.90.
Alternatively, I am buying $738 million of equity that is generating 28%. If I pay the $2.9 billion that is being asked for that equity or 3.9 times, I have to divide the return on equity by 3.9 times which produces a simple return on ‘my’ equity of 7.2 per cent. For ‘my’ money it’s just not high enough for the risk of being in the department store business.
And in the future things don’t become dramatically more attractive either. Based on the numbers in the prospectus I estimate that the value only rises by 6 per cent per year over the next five years and delivers a value in 2015 of $3.90 – the price being asked today.
I am going to pass on My piece of Myer.
And from a previous Blog Post…
Have I changed my view of Myer’s float?
October 26, 2009
In short, the answer is no. Three years ago Myer was purchased from the Coles Myer Group by a private equity team called TPG/Newbridge. The Myer Family was also involved and together the consortium acquired Myer for $1.4 billion. The group used $400 million of their own money and borrowed the rest.
Before the first anniversary, a very long-term lease on Melbourne’s Bourke Street store was sold for about $600 million, and a clearance sale reduced inventory and netted $160 million. All this additional cash allowed the new owners to reduce debt, pay a dividend of almost $200 million and produced a capital return of $360 million. In other words, before the first year was out the owners had received all of their $400 million outlay back, and arranged a free ride on a business with $3 billion of revenue.
But as a participant in the upcoming float of Myer you are not being invited to pay $1.4 billion, which was 8.5 times the Earnings Before Interest and Tax (EBIT). You are being asked to stump up to $2.9 billion, or more than 11 times forecast EBIT. You are also being asked to replace the vendors as owners and while they know a lot about extracting maximum performance out of department stores, you don’t.
In estimating an intrinsic value for Myer, I have ignored the fact that the balance sheet includes $350 million of acquired goodwill as well as $128 million of capitalised software expenses. I will also ignore the addition of sales made by concession operators “to provide a more appropriate reference when assessing profitability measures relative to sales”, the removal of the incentive payments to retain key staff (not regarded as ongoing costs to the business), costs associated with the gifting of shares to employees and most interestingly, the reversal of a write-off (meaning it has been left in) of $21 million in capitalised interest costs; all regarded as non-recurring.
While ignoring these in my estimate of intrinsic value seems irresponsible, it merely means that whatever number is produced by the calculation, it is going to be higher than it really should be. That’s fine; I just have to ensure a larger margin of safety.
Taking a Net Profit After Tax figure for 2010 of $160 million and assuming a 75 per cent fully-franked dividend payout, I arrive at a return on equity of about 28 per cent on the stated equity of $738 million – equity that could have been higher after the float if $94 million in cash wasn’t also being taken out of retained profits. Using a 13 percent required return I get a valuation of $2.90.
Alternatively, I am buying $738 million of equity that is generating 28%. If I pay the $2.9 billion that is being asked for that equity, or 3.9 times, I have to divide the return on equity by 3.9 times, which produces a simple return on ‘my’ equity of 7.2 per cent. For ‘my’ money it’s just not high enough for the risk of being in the department store business.
And looking into the future, things don’t become dramatically more attractive either. Based on the numbers in the prospectus I estimate the value only rises by 6 per cent per year over the next five years and delivers a value in 2015 of $3.90 – the price being asked today.
In valuing Myer I am not predicting its price. Remember what Benjamin Graham said; In the short run the market is a voting machine. Shares that are popular can go up a lot even if the value is much lower. In 1999 and 2000 Telstra’s value was less than $3.00 and yet the shares traded around $9.00 for a long time. But Ben Graham also said in the long run the market is a weighing machine. In the long run, Myer’s share price will reflect its value.
So no, I have not changed my view of Myer’s float.
By Roger Montgomery, 26 October 2009
Andrew
:
On thing i would also add, i don’t like Myer, i think it is lost and can’t decide whether it wants to be high end or middle range and this is confusing customers. I also expect some a certain new player to make a big splash in the market and it will affect Myer more than David jones.
I do, however, like David Jones and think they are run extremley well and management have great clarity as to what they want to be.
I remember being down on the Myer float myself and thought it was expensive. I don’t believe they have the brands needed to challenge DJ’s and i guess in a way buying some of DJ’s popular brands and giving themselves exclusivity helps fix this problem. I wouldn’t want a business i own to do this however.
Andrew
:
Also, for further clarity of what i meant about myer being confusing. I think Myer is the cashed up bogan of the dept store scene. Tries to look more fashionable than it actually is.
Not surprised with the downgrade as i think they are becoming a bit irrelevant at the moment and will need big changes in their strategy. This will cause less sales.
Also, my fiance, whose finger is more on the pulse than me in this area is of the opinion that online shopping is making a big dent in this market despite my initial thoughts on the subject.
Roger Montgomery
:
Hi Andrew,
Very interesting insights. Value and ROE just mediocre. You might enjoy the following shot of Aussie workplace safety: http://www.bogan.com.au/photos/index.php?album=2&image=167
Ashley Little
:
Lol
Very Funny
Still laughing at that.
Lloyd
:
Very funny, but I should say don’t laugh… many a well meaning volunteer in the flood clean-up was not so well equipped!
And they were encouraged by politicians to do so!
If the said politicians had been business managers or directors they would have been potentially at risk of criminal prosecution, under Occupational Health and Safety Legislation… go figure!
Two standards depending on which side of the public/private divide you operate.
Tiago
:
Roger, do you ever make profits by short selling C4, C5 companies trading at an expensive price comparing to IV? if no, why not?
Sorry if the answer is in your book, I have only read until page 153 where you teach us about cash flows.
Take care
Tiago
Roger Montgomery
:
Hi Tiago,
I think you can but there are a very specific set of circumstances that you need to reduce the chances of losing money. In Australia we have relatively few large cap A1s and A2s and so fund managers are forced to invest in companies based often, only on size rather than quality. The result is that you can get it right ultimately but lose a lot of money (a la LTCM) while waiting. Its better to have a catalyst. One of the best is a large, debt funded acquisition that has a negative impact on ROE and IV. I hope that helps.
Scott T
:
MMmm that sounds like Wesfarmers buying Coles doesn’t it!
Simon Anthony
:
When markets turn
Jan 22nd 2009
From The Economist print edition
A parable of how modern finance can go wrong
GEORGE SOROS, one of the original hedge-fund managers, believes that every boom in the making is tested. Often the potential bubble succumbs and is forgotten. If it survives, the market’s misplaced faith is redoubled. That, Mr Soros says, is when things become dangerous.
The test for the credit boom was Long-Term Capital Management (LTCM), a super-brainy hedge fund created by John Meriwether and his team from Salomon Brothers, along with Robert Merton and Myron Scholes, the pair of Nobel laureates who had worked with Fischer Black on options pricing. The markets should have learnt from LTCM’s collapse, but they were too busy making money.
Click here to find out more!
LTCM’s strategy was to scour world markets for pairs of assets with prices that appeared to be out of line with each other. For instance, at Salomon Mr Meriwether’s team had spotted that the 29-year Treasury bond was surprisingly cheap compared with the 30-year Treasury bond. If you think about it, the 30-year is just months from becoming a 29-year Treasury. It was dearer because a lot of people wanted it in their portfolios, but did not think to buy the 29-year. So Mr Meriwether sold 30-year Treasuries and bought 29-year Treasuries and waited for the gap to close.
For a while LTCM was outstandingly successful. Over time, it found 38,000 of those mispriced pairs. In 1996 alone LTCM’s investors made a profit of $1.6 billion. By 1998 it had so much money that it returned more than a third of its $7 billion in capital to its investors. But in August 1998 Russia defaulted on its debt, sending financial markets into a frenzy. LTCM began to lose money. According to Charles Ellis, the author of the Goldman book, in the second week of September its losses were as follows:
Thursday 10th: $145m
Friday 11th: $120m
Monday 14th: $5m
Tuesday 15th: $87m
Wednesday 16th: $122m
LTCM’s collapse was the credit crunch in miniature:
• The fund depended on debt. Its real return in that bumper year of 1996 was a modest 2.45%. It made so much money because only $4 out of every $100 was equity. Earning $2.45 of profit on $4 of equity is pretty good. Unfortunately, as LTCM discovered, equally small losses could wipe out the fund.
• It was secretive. LTCM traded each half of its pairs with separate brokers because it did not want anyone copying its strategy. That was an advantage when it was riding high. But when the tide turned, its brokers wanted more security, as they could not judge the risk of its pairings and its hedges.
• In a crisis everything correlates. LTCM’s asset pairs should have been independent of each other. But when Russia defaulted, the whole market bolted for safety. LTCM had been buying the less liquid of each pair of assets and selling the more liquid. Suddenly all its positions were in trouble at once.
• LTCM failed to grasp how much it was affecting the market. Allegedly Goldman Sachs and others eventually began to copy LTCM. When it got into trouble and had to start unwinding its bets, others sold first. Its own positions were so big that its selling put further pressure on prices. Whereas the prices of asset pairs should have converged, they were forced further apart, making LTCM’s losses even bigger.
After Wall Street bailed LTCM out, Mr Meriwether quoted his colleague, Victor Haghani, on how other firms had traded against it: “The hurricane is not more or less likely to hit because more hurricane insurance has been written. In the financial markets this is not true. The more people write financial insurance, the more likely it is that a disaster will happen, because the people who know you have sold the insurance can make it happen.”
It was an example of something that Mr Soros calls “reflexivity”. Once people come to believe that house prices never fall, they will buy too much property—and house prices will fall. When they believe that shares always do well in the long run, they will buy too many shares—and the market will do badly for years. When funds believe that diversification always pays, they all invest in the same exotic instruments. Diverse markets suddenly have something in common: the funds that have bought into them.
People often talk about financial markets as if they were casinos, but reflexivity makes them much more dangerous than any gambling den. The numbers on a roulette wheel never change, but markets offer no guarantee that yesterday’s odds will be the same tomorrow.
Ben
:
Short selling carries a higher risk profile- at the end of the day you are borrowing the stock off a broker… selling it at the price at time of borrowing and then repaying it back at a later date. The major problem is that there is unlimited upside which means you could potentially lose out alot more than you put in.
Example: buying a stock for 25 dollars, means you could potentially lose 25 dollars.
Shorting a stock for 25 means you would lose Y-25 where Y is any number above 25! So it could mean you could lose 8000 (by which case the price of the share was 8025)
Ashley Little
:
Nice Post Simon
Ashley Little
:
Hi Room,
I have always loved my JBH shares but today I am now officially in total awe of how well they run this business.
The cash this business is generating is simply amazing and this in an environment when same store sales are down 1.5%.
During the last 6 months JBH spent about 30Mill on PP&E . Now not all this will be on the 13 New stores they opened due to replacements and upgrades in older stores but to be conservative let’s assume that it is
That makes fitting out a new store at roughly $220,000. The average stock per store is roughly $250,000 and the average profits per store per year are roughly $800,000.
Now for anyone who likes looking at payback period this is the payback period from heaven.
But wait it gets better, the average stock turn is 50 days and the average creditor days are 55 days so on a cash flow basis they are not out of pocket stocking the new store at all. In fact it’s like consignment stock. That is they are paying the supplier 5 days after selling the stock.
What that means for the JBH shareholders is that payout ratio will continue to rise.
They are just spitting off so much cash and they really don’t need much cash to grow at all. Expect further rises in payout ratios despite what the boffins think. This is not a bad thing,
My only concern is mention again of a capital management review due to the strong cash flow.
So often in the past capital management reviews are code for Investment Banks telling boards to do silly things. Let’s hope this is not the case
BTW I own JBH and I am not adding as it is not at a big enough MOS
.
Roger Montgomery
:
I don’t think JB Hi-Fi are as easily influenced as less experienced boards. Of course whatever tack the company takes, the probability is highest that intrinsic value will be impacted adversely because, quite frankly it is unable to employ the very large amounts of cash being thrown off at the rates of return it enjoyed in the past. Back in August last year, with the share price at about $20.00, and following the full year results, I wrote the following note. I don’t believe the long term picture has changed materially.
JB Hi-Fi has built its brand over a number of years by offering consumers the latest goods at the cheapest prices. Following the release of full-year results, investors were beginning to question whether the stock has finally begun to run out of puff.
A quick glance at the numbers doesn’t throw up any warning signs. Net profit was up 26% to $118.7 million and sales topped $2.7 billion – an increase of 17% on 2009 when stimulus money was still working its way through the economy.
More importantly for me, however, are the operating leverage as well as the gross margins and EBIT margins.
Previous results that showed declining gross margins saw the company explain it away by mentioning the tough competitive landscape. JB Hi-Fi (JBH) is perhaps the toughest and most aggressive discounter in the space and therefore has to accept an amount of margin squeeze. Lower margins are simply a reflection of the company entrenching its competitive advantage by charging lower prices than any of its competitors can afford to.
This everyday low price proposition offer can be a sustainable source of competitive advantage but if you are going to compete on this basis, you better make sure you are running the lowest costs. On this score, JB makes the grade.
Its EBIT (earnings before interest and tax) margin has increased consistently – meaning its overheads are falling (thanks in no small part to a flexible labour force) – and despite declining prices at the retail coalface, the company is reducing costs even faster.
EBIT margins rose again in 2010 from 6.1% to 6.4% and the cost of doing business fell from 14.7% to 14.5%.
While everyone worries about declining consumer confidence – something that has seen both Kathmandu (KMD) and Premier Investments (PMV) miss guidance and Harvey Norman (HVN) produce a fall in sales – JB Hi-Fi is uniquely positioned to buy mindshare as well as market share.
For income-hungry retirees, the dividend was up 50% – reinforcing my opinion that you are better off owning a great business with a lower yield than a poor business with a high one.
The company previously indicated that its dividend payout ratio would increase from 50% to 60% so the final dividend is no surprise. Total dividends for the year are now 66¢ and this is a function of the extremely strong cash flows being thrown off this business.
So just how much cash flow is being thrown off?
As you may know, I am attracted to the unconventional. Calculating cash flow is no different. The dual cash flow method or balance sheet cash methods reveal that JB generated cash flow of $94 million in 2010, from which it paid dividends of $67 million, reduced borrowings by $20 million and still had plenty left over.
The question now for both the portfolio and for you the investor is whether the JB Hi-Fi of the future can produce the sort of returns it has in the past.
Putting aside the change of management issue – it is true that JB will eventually saturate Australia’s relatively small market. When this happens management will do one of three things:
1) Continue on a steady-as-she-goes path, continue generating amazing returns on equity but pay all of the earnings out as a dividend because it cannot employ any more retained profits at such attractive returns and it doesn’t need the money (note the biggest asset is inventory of $334 million, of which $290 million – 87% – is funded by suppliers).
2) Keep retaining earnings, watch returns on equity decline and make a really smart acquisition at a really great price.
3) Keep retaining earnings, watch returns on equity decline and make a really dumb acquisition at a really dumb price.
JB Hi-Fi has not quite reached that fork in the road yet and another 18 stores that will take three years to mature – on top of the 23 it opened last year – will be opened this year.
Returns on incremental equity are a good metric to turn to. The company reports returns on total capital, which includes debt but because debt is declining the company can report rising returns on total capital.
I prefer to use return on equity, however, and on that measure the numbers are plateauing and possibly beginning a decline.
Don’t get me wrong, the numbers are impressive. I estimate returns of 45%, 44.7% and 43.9% for the next three years ( UPDATE: I can now see ROE’s of 39%).
Over the past eight years, profits have grown by $116.9 million and owners have committed an additional $276 million, suggesting a return on additional equity of 42%. Try finding that in a bank account.
The inescapable fact is that they aren’t rising any more. That alone means that intrinsic value can only rise at rates approximating the growth in equity and with all that cash being thrown off, the dividend payout ratio could increase again (although the $250 million present value in lease liabilities may mitigate this to some extent). Equity could grow even more slowly. Intrinsic values under this scenario could even begin to decline.
Mature retail businesses don’t produce massive increases in intrinsic value. For example, over the past 13 years Harvey Norman’s intrinsic value has increased by a rather bumpy 15.6% per annum.
By way of contrast, JB Hi-Fi’s intrinsic value has increased by 85% a year over the past eight years. Why the interest in this metric? Ben Graham said that in the short run prices reflect popularity, but in the long run, prices follow intrinsic value. And intrinsic value follows economic performance.
In Australia, with a population of only 22 million, retail businesses mature much more quickly than in countries with much larger populations. And unlike the Americans, who have been very successful exporting businesses, history would tell us that the prospects of Australian businesses for overseas expansion aren’t nearly as bright.
Maturity can hit with a thud. In the last three years, owners have committed an additional $129 million to the business, which has generated an additional return of $53.8 million. This represents a return on equity of 41% revealing a declining trend in returns.
But before you go jumping at shadows, keep in mind the consumer is still quite subdued. All bets are off, and things will look decidedly better if people around Australia started shopping they way they used to.
I would rather be invested in JB Hi-Fi than in most other retailers right now but the time for the stunning 85% per annum increases in returns on equity are fast fading. I reckon intrinsic value will rise by no more than 15% in the next three years, and by less if the company increases its payout ratio again.
JB Hi-Fi shares remain at a discount to intrinsic value so the portfolio won’t need to sell anytime soon, but buying a whole lot more is not an option right now either.
Ashley Little
:
Hi Roger,
Great stuff,
You should have saved this for a full post.
Not everyone will read this
Roger Montgomery
:
We can always republish it Ash. Thanks for the encouraging feedback again.
Frank Bildos
:
Hi Roger,
I am having trouble finding the figure for cashflow for JB HiFi. Looking at the annual report under ‘Net cash inflow (outflow) from operating activities is 152.1 million. You state that they had cashflow of 94 million. Even if I subtract Net cash from investing activies I get a figure of 96.3 million. Can you tell me how you came to the 94 million figure. Thanks.
Roger Montgomery
:
Hi Frank, It would aid your analysis to read Chapter 9 of Value.able.
Manny
:
Amazing post on Jb and so accurate were your previous posts on it. No surprise with the myer downgrade today Roger?
Roger Montgomery
:
No surprise at all when an inferior business downgrades Manny.
Paul
:
That is a fantastic post Roger.
The next task is to uncover a future JBH.
Roger Montgomery
:
Thank you Paul. I hope you are enjoying the insights provided here by all contributors.
Duncan
:
Hi
if you have a wow sight and sound close by check it out. it has many products at a price jb hifi wont or can’t match. i’ve been to jb hifi wanting to buy a computer and t.v from them as i owned shares. The exact and i mean exact same product was cheaper in wow.
it’s probably a positive reflection on JB as a business at this time. Wow maybe one to watch if it lists in the future?
Dunc
Tom Charles
:
Dunc,
I agree – after having a look WOW Sight and Sound appears to have some potential.
Unfortunately none in Sydney that I can check out!
Tom Charles
:
To Ash,
I just made a post on the blog about your FGE valuation for 2011 but now I can’t find it so im just putting it back up!
A few days ago you used EQPS of $1.19 as an input for FGE. Was this your 2011 valuation? Because I have my EQPS as $1.19 + $0.403 – $0.07 = $1.52 and maybe plus a little bit extra for the shares they have issued since the 2010 Annual Report.
With EQPS of $1.54, ROE of 30.16%, RR of 12% and POR of 17.36% i get a 2011 IV of $7.36
What do you think?
Ashley Little
:
Hi Tom,
Not bad
Are you using ending equity to calculate ROE ?
Roger advocates average equity.
I use beginning equity,
Plus I would use RR 14% if China or India sneeze FGE may get a little more than a mild cold.
Hope this helps
Roger Montgomery
:
It would be useful if a cold was caught and it was neither contagious nor terminal. A patient recovering from a cold would be ideal.
Ashley Little
:
LOL,
Yes recessions are our friend.
I don’t mean to sound a total heartless B but my fingers are crossed for a recession
Tom Charles
:
Ashley,
I used an average of the 2010 equity and forecast 2011 equity.
I wasn’t expecting an RR of 14% that seems big! Can never go wrong with being conservative though.
Thanks
Ashley Little
:
Hi Tom,
I am looking (along with other things) at predictability of earnings.
FGE is growing nicely but in this sector earnings can be very lumpy.
I can precinct WOWs earning with a fair amount of certainty JBH slightly less and FGE & MCE even less
Doesn’t mean I don’t like them. The last two are my biggest holdings
Tom Charles
:
Ashley,
I was also wondering if you use software to extract the data from etrade to excel documents.
Cheers,
Tom
Tom Charles
:
Thats meant to say: What is the software you use to extract the data to an excel sheet, if you’d be so kind to share it?
Ashley Little
:
Hi Tom,
Pdf pro allows you to print anything to PDF format.
Their are loads of programs that can extract PDF to excel(just do a google search) I am currently using cogniview.
Excel can extract info direct from the internet via ,data tab, from web tab,
I can’t get this to work on password protected sites like etrade and comsec so if someone knows how to do this please let us all know.
Hope this helps
john
:
Hi Ashley,
My third attempt on a stock i have MCE at 9.26… am i in the ball park?
Thanks
Ashley Little
:
Hi John,
Close to mine,
IV changes and the ivestor update yesterday may change this figure
Andrew
:
Hi Roger,
Great post, thanks for sharing your info. I tend to agree and when i looked over JBH i was factoring in an increase in the pay out ratio.
It is a great company that manages to combine lowest-cost leadership, the convenience of big business with a store close to most and in a sense the edginess of a independent record store that attracts young people and makes it their first choice for buying the type of goods they sell. Plus they do it successfully as the results have shown.
Heres hoping that the board doesn’t get itchy feet and make as you say a dumb purchase at a dumb price.
Janet
:
Hi Roger
I take that there have been some significant changes in your estimates for JBH’s IV for the next couple of years. I believe on Switzer 11/6/2010 you compared JBH and HVN and mentioned that your IV for JBH for 2010 was $21.72, 2011 $26 and 2012 $29-$30 – which you said was a 50% increase in 2yrs – that at the time seemed pretty impressive. Obviously time has passed – events have occurred, new reports released to affect IV – but I am surprised at such a big change. Any new estimates for IV for next couple of years?
Roger Montgomery
:
Hi Janet,
Yes. My estimates of intrinsic value going out three years have fallen by 30%
John M
:
Hi Roger and Ashley,
Great posts, thanks for the update. I would love to find a bank account with interest rates circa 40%.
Richie
:
Hi Roger
Great read. One thing I have noticed just by visiting JBH stores over the years is that 2-5 years ago, the TV section was abuzz with activity with people getting into the flat screen products. Nowadays, they seem quiet in comparison. Now that people have made their purchases they are no longer in the market for a new TV. It might only pick up again when they shut down the analogue broadcasts. But I agree that the market has reached maturity and you are quite right to ask whether the high ROEs of past years are sustainable. It is still a great business though.
Roger Montgomery
:
Hi Richie,
You are referring to a concept I call ‘the economics of enough’.
Ben
:
Hi Roger and all. Just wanted to say how awesome it is to be able to understand a business’ economics and competitive advantage in the way Roger has laid out above. The one input that is required from the value investor (which is RR) is the input that requires the most work. I realise now that digging up numbers from annual reports and chasing forecast ratios is the easy part of the process. Understanding the economics of the business and trying to crystal ball where it will be in 10-20 years is the real challenge and looking for the “highly probables” is hard enough let alone finding the “inevitables”. So just wanted to thank Roger and his disciples for this blog that has made a world of difference to the investment education of many including myself. I hope one day to be able to contribute with the same quality of thinking that has no doubt made most, if not all on this blog wealthier individuals.
Roger Montgomery
:
Thats fantastic Ben. Delighted to be or service and thanks for taking the time to write.
Dave v
:
Based on JBH half year results I’ve calculated the following for 2011.
Half year NPAT of 87.9 and full year guidance 134 (range 134 – 139) which means 2nd half NPAT at 46.
Dividend payout of 52.4M (48 cps) in first half of year and estimated 28M (~25cps) in 2nd half based on 60% payout ratio policy.
Equity as at half year is 352.8 which could fall slightly in 2nd half given higher dividend payment now 52.4M vs 2nd half NPAT of 46-51M. For calculation I’ve used final equity of 350M.
Ending shares estiamted at 110M
This provides an ROE of 41.7%. I’ve used 40% and an RR of 10% to give an IV of $23.06
Dave v
:
Based on JBH half year results I’ve calculated the following for 2011.
Half year NPAT of 87.9 and full year guidance 134 (range 134 – 139) which means 2nd half NPAT @ 46.
Dividend payout of 52.4M (48 cps) in first half of year and estimated 28M (~25cps) in 2nd half based on 60% payout ratio policy.
Equity as at half year is 352.8 which could fall slightly in 2nd half given higher dividend payment now 52.4M vs 2nd half NPAT of 46-51M. For calculation I’ve used final equity of 350M.
Ending shares estiamted at 110M
This provides an ROE of 41.7%. I’ve used 40% and an RR of 10% to give an IV of $23.06
Roger Montgomery
:
I would be more conservative than that. Current stores are majority tier 1 (124 v 19 Tier two stores). But next 67 stores will be almost half and half and Tier 2 stores will earn lower returns on capital. JB is at a discount to IV but IV may not be as high as that.
Ray
:
In the figures they do not appear to have made a provision for the dividend to be paid in March. Therefore I wonder if we should be showing the equity as 352754000 or this amount minus the dividend which I believe has to come from this money.
If I am correct the equity figure for our calculation needs to be about 300 Mil or say half way between this figure and the previous equity which would be about 297 Mil.
This would not change the overall result markedly but would still show the ROE to be 45.1% and using a 10% return give an IV of 23.73 or using an 11% return an IV of 20.48.
Any Thoughts?
Tom Charles
:
For what its worth I have a current JB 2011 IV of about $21.58.
This is given ROE of 41.53%, RR 11%, EQPS of 3.2739, and POR of 60.63%. (All forecasts).
Lance
:
Hi Roger and fellow bloggers
Well, this is a coming out for me and having trawled through this blog, literally on a daily basis, for the past 12 plus months I felt compelled to thank firstly you Roger for an awesome website but just as importantly to those who so freely give up their knowledge and ideas. I am some way off attaining the prestige of being a graduate; but I have learnt so much in such a short time. Thank you again all and I shall endeavour to contribute my opinion when I believe it adds value.
p.s. Ashley; your last post ‘rocks’; you make this post what it is!!!
ken fraser
:
VOC looks like they are reallly getting their act together. 2011 is looking good and they look cheap at the moment for 2011. Ken.
ken fraser
:
I have ROE for SWL for 2011 of 38% on NP of $11.8m. and equity per share 43.7 cents. Ending equity for 2011 of $34m. and average equity $31m. I was wondering what others have if anyone is interested. Thanks, Ken.
Nic Arena
:
Good to see JB HIFI buck the trend from other retailers and post a record half year profit (although full profit expectations are slightly lower than analyst thought – but generally aren’t they always). Could Mr Market about to jump on board the JBH train over the next month or 2?
P.s Ash great list of companies. Even if you didn’t know anything else that simple task has generated companies that almost any investor would do well with.
Ashley Little
:
Yes Nic,
I knew it would get lots of A1’s and A2’s but the end result even suprised me
MattB
:
Agree Ash. I was pleasantly suprised to see their online sales increase so dramatically. This is a very well managed retailer. I also like how quiet they stayed during the ‘no GST under $1000’ advertising campaign. Let Gerry Harvey take all the heat and just turn off the media and carry on good business.
Simon Anthony
:
I’ve put together a portfolio that WON’T beat the index in 2011.
10% in each stock from ASX 200 QAN, TLS, ELD, TCL, WES, WPL, RIO, GNS, FGL & AMP. How many of these stocks do you own ?
Ashley Little
:
LOL Simon,
Very funny,
mike griffen
:
Hi all
I purchased one of our better A1stocks MND Monadelphous group, & currently showing a gain of 57% plus dividends, my head is saying sell my heart is saying hold. based on last years results its looking over priced, any thoughts???
Peter Kruckow
:
Hi Mike
A quick read of Chapter 13 in our ‘bible’,Value*Able, should give you good guidance
Cheers
Pete
Andrew
:
How do you think it will perform in the future? Will the IV rise to above the current price? Is the outlook of the business as good as it is currently, will it improve or will it get worse.
john
:
Hi Ashley,
Will definately go through your list, which would be your top 5 that i can keep an eye on?
Thanks again Ashley
Ashley Little
:
Hi John,
I like big discounts,
Just not a buyer ATM.
Ashley Little
:
That said John a very high proportion of these businesses are very good quality if they ever get cheap enough
Duncan
:
Hi Folks
just a note to anyone who may be exposed to any mining in QLD. LNG in Gladstone is struggling to get approval for a key part of it’s operation which could set things back a while. also many mines have been told they can not pump out the water into the rivers bbecause it is toxic. again production will be held up.
this intormation has come from a personnel recruiting organisation. i do not know the true affect of these problems or how they affect individual companies.
Dunc
kent Bermingham
:
Ashley, what made your top 2 buys TODAY and why?
Ashley Little
:
Hi Kent,
Not a Buyer ATM,
I am really a deep value investor,
Most things I look at are not cheap and most are fully priced
ken fraser
:
Grant, I had CSV in the float a few years ago but have sold since. I have an IV of $2.44 for 2011 on NP forcast of $46m using RR 10% but they seem to have a lot of debt now so personally I would not be interested in buying any at the moment. CTD I had in the recent float but have sold since as I have an IV of $1.54 for 2011. I understand they are expecting to do well in the near term so I will be watching them. Ken.
James
:
Most of the debt comes from leasing. these are on long term contracts so i am not worried about that portion of the debt.
From (a newsletter):
Excluding lease receivables and borrowings associated with the leasing business, net group debt of $52m at 30 June represents a debt to equity ratio of 24%. FY10 interest cover was a comfortable 9.2 times.
ken fraser
:
MattB, I bought some of DGX last week. They retired 105M of debt last year and are buying back shares so they seem to be travelling well but they may have to establish more consistency before they are rerated by the market. Ken.
Steven Mullin
:
Ken,
We seen to be on the same page, re TRG, additionally I bought SWL @ 1.60 and am very keen on t DGX and AGO. Could you email me at (contact Roger for my email) to compare notes further. I fully understand if you decline my offer.
Kind Regards
Steven Mullin
Brian
:
Hi Roger
Thanks for keeping us all educated and challenged. I would just like to be provocative here. The median for the All Ords for 2011 is 7740. That is the long term median. That suggests around 5000 we have a lot of catch up to do and this will happen as earnings rapidly increase at some stage. I am not trying to predict when. It is just statistics – we are still historically very cheap.
My concern is towards pick and shovel companies. Like many valuable investors I have done so well but we have to be careful not to get overexposed to them. I remember when the tech boom was here in the 1980’s and the .com fiasco in the US at the turn of the century. Pick and shovel days are having their day but will crash and burn when commodity prices drop or China goes into a temporary recession. I am lowering my exposure to them at present as I have too many MND FGE MIN DCG. Pick and have done so well my portfolio looks unbalanced. I am not getting out of them just rebalancing to lock in great profits.I halved my Fleetwood holding recently too. It is just not worth $14.
My thinking is that with no debt we can ride the market out to 7400 with negligible risk by buying stocks below IV with 10 years good figures behind them e.g. ARP under $8, BHP under $42 WOW under $26, MTS under $4, CSL under $30, and so on.
The market could dip again but I don’t care it just means more opportunity. If it gets to 7400 in the next 2-3 years I will off like a bride’s nightie!
Roger Montgomery
:
Hi Brian,
You won’t hear too much arguing against portfolio management from me. Maintaining some balance makes a lot of sense and reducing exposure to those stocks most above intrinsic value is a sensible thing to do. Seek and take personal professional advice of course.
Matt
:
Thanks Ashley,
I did a similar exercise on commsec over xmas and unearthed a few extras to keep track of (my vague memory recalls at least IDL and TNE).
I’m waiting to see what the company reports turn up and hoping for some healthy market volatility.
I find the query type function of these web-sites very handy, it’s also amazing how a simple filter (of ROE, Debt/Eq) immediately filters out so many companies ;)
Ashley Little
:
Hi Room,
In a serach for value I extracted using ertade filters for companies with Debt to equity of less than 25% The shareholders equity, shares on issue, and forecast EPS.
I then cut this into excel and calculated forecast ROE using the beginning equity deleting all mining companies and companies with ROE of less than 20%.
This gave me a list of 47 stocks.
Not suprising this produced heaps of companies on the A1 or A2 list and not many new ones to look at.
Those that have not been discussed by Roger and the diciples are either expensive or on the list due to an etrade statistical error so no joy in this exercise.
If you are interested the list is below in order of forecast ROE (Highest to Lowest)
Acrux Limited
Platinum Asset Management Limited
Wotif.com Holdings Limited
Navitas Limited
Carsales.com Limited
Monadelphous Group Limited
Nick Scali Limited
Matrix Composites & Engineering Limited
Data3 Limited
Count Financial Limited
REA Group Ltd
JB Hi-Fi Limited
Iress Market Technology Limited
Reckon Limited
Konekt Limited
Specialty Fashion Group Limited
Runge Limited
SMS Management & Technology Limited
Forge Group Limited
M2 Telecommunications Group Limited
DWS Advanced Business Solutions Limited
ARB Corporation Limited
IMF (Australia) Ltd
Eservglobal Limited
Technology One Limited
Lycopodium Limited
ISS Group Limited
Fleetwood Corporation Limited
Webjet Limited
Mineral Resources Limited
Thorn Group Limited
Decmil Group Limited
CPT Global Limited
David Jones Limited
Sirtex Medical Limited
GUD Holdings Limited
Hansen Technologies Limited
CSL Limited
Integrated Research Limited
Oakton Limited
Treasury Group Limited
Mortgage Choice Limited
Breville Group Limited
Consolidated Media Holdings Limited
Domino’s Pizza Enterprises Limited
Noni B Limited
Kathmandu Holdings Limited
Wayne G
:
Hi Ashley
I enjoy your posts very much. Your experience is obvious. I noticed you use Etrade filters. I use another company and have not been overly impressed with their software. How do you find Etrade?
Thanks in advance
Wayne
Ashley Little
:
Hi Wayne,
The edrade filters are flawed but a good place to start.
I also use some additional software that can print to pdf then extract to excel. This makes it a bit easier.
I don’t know (other third party tools) so I can’t compare them
Tony Connellan
:
Hello Roger, and other students
Ashley, you used debt/equity < 25% and from the list I assume the definition is" interest bearing debt/equity".This is what I assumed was universal.However I ran debt/equity on 2 different filters and got 2 very different results.Comsec used the definition above, the other company used "total liabilities/equity".I then rang my accountant and asked him what he understood it to mean and and he uses "total liabilities/equity".I am aware of 3 different meanings for ROE.How many of the other terms that we commonly use have different meanings to different people.
Ashley Little
:
Hi Tony,
Yes unfortunately many formulas have different definitions. This is unfortunate but I was just trying to get a universe of stocks to do more research.
Next time you are in Dalby please look me up if you want. Roger has my email and I will give you my contact number.
Love to chat about Wines and IV
Pat Fitzgerald
:
Hi Ashley
Some companies do not have ‘forecast EPS’ on Etrade so I did not include it when I did a search. Also I included ‘cash’ because from memory I think that Etrade does not subtract that from the ‘debt’. I found approx 100 companies about 6 months ago and lots of them have performed well since Roger’s book was released. Note: some companies do not show up in the search results, I think because they have ‘missing/blank’ data in some fields on Etrade. It is a very good starting point.
Ashley Little
:
Hi Pat,
Correct,
No coverage no forecast EPS,
I run the filter of current ROE and debt to equity a few times a year.
The reason why I ran this one was that I can find anything cheap and was looking and another angle.
Hope this heaps
Brian
:
Ashley. I agree with you. ROE is so important.
I just filter all the stocks for ROE >20 Debt 20 and Debt <20% and that gives me two groups.
I rule out single jockey companies and single product companies ( COH does not do it for me)
Then I do a log chart of earnings per share for 10 years.
The companies with EPS chart lines that are steep and trending upwards and not too saw shaped win the day.
If you want to check this out try graphing on a log graph the EPS over 10 years for ARP, BHP FWD WOW MND CSL MTS SOL CBA – it is really interesting and does not take long.
As soon as the EPS drops I am out!
Brian
:
Sorry that shoudl read ROE>20 Debt<40% and Debt <20%………
John M
:
Thanks for that Ashley,
I hadn’t done that exercise for a little while so thankyou. I have been a bit tied up with work and doing lots of reading. I have had the TV unplugged for a few weeks in an effort to recoup some time in my schedule.
I had previously came up with similar results, so it looks like we are waiting for the reporting season to uncover some pearls.
Andrew
:
Nice exercise Ashley, looks like a good idea for a starting point to uncovering great companies and conducting our own research after that.
Some of the ocmpanies i am interested in are in that and i liked the emphasis on the debt to equity then worrying about the ROE after as it obviously helped get the number of companies down and quility companies up. I also would have done the exact same thing and deleted all mining companies, just too much of a hassle those companies IMHO.
Some of my fav’s as per my criteria for a company on that list are:
Wotif, Carsales, REA, JB Hi-fi, ARB and David Jones. Some many other great companies up there as well, Platinum would also be one i am interested in.
Thanks for sharing this Ashley.
Ashley Little
:
No Problems,
I know a few very smart people who like some select mining companies ATM
No debt high ROE IV rising at a good clip.
They are just not for me
Roger Montgomery
:
Keep an eye on the federal government’s response to the Pedestrian Council of Australia’s push to see new design rules for vehicle applied in Oz. These would result in the phasing out of steel and alloy bull bars on some (Non 4wd) vehicles. A final decision is some time away because current proposed rules are based on type of car rather than geography but don’t forget revenue from OZ is ten times that of the US and even more compared to Thailand, so changes need to be watched.
Andrew
:
I did not know that Roger so thankyou for bringing it up. As someone who is currently out of the market for the near future i have fallen behind on some things. No doubt this is something we will need to keep an eye out for in regards to ARB although i haven’t got around to doing an in depth analysis of this company yet and it is the last of the ones i mentioned above.
Stevek
:
Hi Ash,
I don’t think that this is exhaustive, one of my favourite stocks, Solco (SOO) fits your criteria but doesn’t appear on the list?
Steve
Ashley Little
:
Hi Steve
No analayst forecast on Etrade so thats why they missed the filter
Graeme
:
Nice work Ash, you are a champion :)
G
Grant Duggan
:
Hi Ken your post did come through on blog dated 17th jan.Just curious if roger or any grads can help out with any input on CSV(CSG).I have them around the $2″ mark have read annual report a couple of times however i do struggle a little with the understanding debt.
The company sells and services canon products in all capitals in australia an konica minolta in new zealand,they appear to be strong in QLD and have contracts with the government in NT.However on the downside they have a court case coming for what reason i am not sure with a worst case loss of 10% of NPAT that is $3 to $4 million.Would appreciate any feedback or views if anyone can help out.Thanks to all for their valuable inputs it is priceless, and very enjoyable reading.
Jason Kelly
:
I work for one of these companies and i can certainly say, I also would not invest in them as well knowing how they operate.
Ashley Little
:
I hope you don’t work for the treasury group Jason because it is on my watch list
Tom Charles
:
Ashley,
Can i ask what your 2011 IV for TRG is? and what RR you are using?
Cheers,
Tom
William Gill
:
HI Tom/ Roger
TRG looks a good company I have been watching them for awhile, but there is no MOS at the moment. Due to the thin trading of shares I think you need minimum 20%, maybe 30% and a high RR Also last year operational cash flow was less than NPAT. The company carries no debt.
Maybe we have a long wait.
Ashley Little
:
Nice post william
Ashley Little
:
$5 Tom,
ken fraser
:
Has anyone got an opinion on TRG,CGF,DGX. All seem to be under IV depending on your RR% figures. None have a competetive advantage but very few companies have. Ken.
Kent Bermingham
:
TRG and CGF trading at or close to current IV on RR 14%
DGX big margin of safety, poor track record, some debt, low cap!
MattB
:
Ken,
I raised the question with DGX late last year. I think it has a huge margin of safety. While it may be a low cap I think rising ROE and IV make it appealing to me. It wouldn’t get an A1 MQR but where the margin of safety is so great I’ll forgive it that. Its also a property company so the moat might be more like a trickle.
Another contributor raised some excellent points about them receiving a one off payment and how that was treated in the books. I’d appreciate any others opinion on that and DGX in general.
I think it will be very interesting to see how they report this year. Jason, if you do think your boss is doing a dud job you should buy him a copy of value.able!
Steven Mullin
:
Ken,
I have bought TRG based on a RR of 10% and ROE or 20% calculating an IV of 7.20 a 30% safety margin to the current price of 4.91. I like the specialist services they provide boutique fund managers and their CEO Mike Fitzpatrick who made a success of Hastings Funds Management a few years back.
Tom Charles
:
Steve,
I just got a 2011 IV of $5.56 for TRG.
I would be weary about using a 10% RR; despite having no debt they are only a small company and I don’t think they have a strong enough competitive advantage to justify a RR of less than about 13%. Roger may be able to provide some more assitance on this for us though.
My values are: RR 13%, Forecast ROE 25.57%, Forecast EQPS $2.1315, and POR 54.36%.
An RR of 12% which may just be allowed gives a 2011 IV of $6.27.
Let me know if you have any thoughts.
Cheers,
Tom
Roger Montgomery
:
Hi all,
I am using a slightly higher discount rate, producing a very small margin of safety and intrinsic value is rising at about 16 per cent per annum. Liquidity is also a very big issue here.
Tom Charles
:
Roger,
Do you mean liquidity as in the volume of stock that is being traded, or the liquidity as measured by the balance sheet? Because I did a few liquidity ratio’s from the balance sheet and I didn’t think it looked too bad?
Cheers,
Tom
Roger Montgomery
:
Hi Tom,
Trading volume.
Justin
:
Hi everyone,
great conversation! I just wanted to share my thoughts on liquidity (a matter mentioned by roger). A good example of one of the risks of an illiquid stock is what happened yesterday to ISS (I think an A1). Here is the course of trade:
Time Price Volume Value Condition
03:52:38 PM 0.175 17 2.98
11:55:29 AM 0.160 44,120 7,059.20
11:55:29 AM 0.165 5,880 970.20 XT
11:44:38 AM 0.160 10,500 1,680.00
10:59:31 AM 0.160 42,001 6,720.16
10:59:31 AM 0.160 2,999 479.84
10:57:17 AM 0.170 5,000 850.00 XT
10:55:22 AM 0.170 15,000 2,550.00
10:55:22 AM 0.170 60,000 10,200.00
10:55:22 AM 0.170 25,000 4,250.00
10:55:20 AM 0.175 30,000 5,250.00 XT
10:52:03 AM 0.175 30,000 5,250.00 XT
10:48:34 AM 0.175 20,000 3,500.00 XT
10:48:00 AM 0.175 30,000 5,250.00
10:04:40 AM 0.180 17 3.06
High Low
0.260 0.099
Last traded time
I was happily surprised to see the price dip to 16 cents early in the day, but when i checked again after close it was back to 17.5 – roughly 10%. Why? Because someone bought $3 worth at 2 minutes to the bell. That looks like market manipulation to me (especially since a similar trade opened the day) – price support or window dressing (broker’s have a lot of terms for this sort of trading). Anyway, it pays to be wary that this is easy enough to do with illiquid stocks and can leave you exposed if you don’t check and place an order “at market”.
look forward to the year with you all.
justin
ken fraser
:
Kent, I got MLD information from the prospectus on comm sec after Roger spoke about them. Ken.
Kent Bermingham
:
Ken thankyou, I must be more attentive as i missed this ride
Andrew
:
Lesson 1 from the table above, if you want to start a great business than don’t have the business name starting with “tran” there is 3 of them on there. Surely that can’t be coincidental haha.
Ashley Little
:
Hey Andrew,
Don’t leave out Asicano,
After all they are in Transport
Greg Mc
:
Ah, very good Ashley….
costas
:
After i purchased your book Roger i have changed my stock picking criteria.Have done a lot of changes to my portfolio.Sold out of qantas,virgin blue,santos,asciano,toll holdings and newcrest mining.
Most of them in a loss and held them for a few years(except ncm because of lihir takeover).
Bought mce after reading your book and topped up on jbh and wow and have nearly covered my losses from the others that i held for a few years.
Thanks again for your good advice and recommend all reading your book.Wish you published the book when i was 25 and not now.Would of saved me a few thousand dollars.You live and learn!!!
Ann
:
Yes its a shame about Elders
Kent Bermingham
:
Paul,
Congratulations on TGA and MLD, using valueable techniques what was your basis for investing in MLD? I just looked it up on E trade and there is no Balance Sheet info yet?
Greg Mc
:
G’day Kent,
The prospectus is/was your friend in this instance for financial information as well as earnings projections. Obviously MLD have upgraded half yearly profit expectations but you need to come up with your own estimate of full year profits based on that announcement. They have said that full year profit should be comfortably above previous advice, but they haven’t been too specific, or perhaps they themselves can’t make an accurate guess yet.
Zoran
:
HI KENT
MLD — go to their(MLD’s) website and look at past(last 3 year performance).
After that you can not help it…. ITS A BUY
Cheers
Zoran
Ashley Little
:
Hi Kent,
It only listed in November 2010.
You can get the prospectus under the company announcements if you want to look at the financials
The Float price was at $1 when a rational price was $2.
Not many here got in on the float but you could buy them when they listed @ $1.40. ish
The company recently announced that all things being equal it will comfortably beat prospectus forecasts so a rational price is now higher than @ $2.
In fact i am a bit embarrised to tell my most opimistic valuation.
Steve
:
Based on the updated forecast I got a slightly more conservative valuation of $2.69 and a more optimistic valuation of $3.02. I might have considered it around the low $2.00 mark but not where it is now. I’d want a bigger discount to make up for some of the contract risks which Roger previously discussed
Ashley Little
:
Yes Steve,
$3 for something they sold for $1 a few months ago,
Very embarrassing for some
Paul Middleton
:
Hi Kent
Re MLD, I decided to look over the company’s two previous Annual Reports which the company lodged on-line (announcements) at the time of listing. This gave me a good understanding of the progress the company had been making, and gave me a basis for determining changes in intrinsic values. So while missing out on the float, I still felt that the share price on listing represented a substantial discount to IV, particularly when they had most of their FY11 revenue in hand, and were cashed up to go out and buy more machinery. Hope this helps.
Roger Montgomery
:
The same conclusion might be reached with MACA at $1.47 when it listed
Steve
:
Hi Roger,
Speaking of turning the stock market on/off – any idea what has happened to the Market Moves program on Sky Business? I know we aren’t supposed to worry about daily price movements but I always found the program to be very informative in relation to company news and related analysis. For someone like myself interested in shares and investing, it really was a good program. I always enjoyed getting the daily wrap up.
Any idea what happened Roger? Please pass on my disappointment to your contacts at Sky Business. Thanks in advance
Roger Montgomery
:
My sources tell me that most of the show’s content has been incorporated into Market Day. I’m back in the studio next Thursday and will pass on your comments. Switzer and Your Money Your Call continue to be broadcast.
Scott T
:
Morning Roger,
Please do pass on many peoples disappointment about the axing of Market Moves, particularly mine. Yes most of the content has been incorporated into Market day, but instead of a concise stock focused 30mins we now have a meandering 60 minutes of waffle including crosses to hear about Honda’s quarterly volume update and 4 different people saying same thing about todays chart!
Rant Ends
Scott T
Duncan
:
Hi All
regarding information sources I read an article that paints a very grim picture of the australian economy and the share market. I have read alot of different article predicting the disintergration of the US dollar, a new economic currency and the collapse of capitalism. Currency i can believe. The collapse of capitalism? what is the alternative?
thanks Dunc
Roger Montgomery
:
Hi Duncan,
There are lots of also rans. Stick with the original. To maintain independence I don’t allow the promotion of any third party products. I don’t believe in the fall of capitalism but I do believe that a new reserve currency will emerge much faster than the decades being predicted. The impact of a recent change to the rules in China about exporting companies there not having to repatriate foreign earnings and allowing those earnings to be invested offshore are profound. Expect more takeovers from Chinese companies in the next few years.
fred
:
Thanks for this post Roger, I did over look something in one of my purchases .
Thanks again again and again Roger!
Paul Middleton
:
Roger
The investing methology that you endorse (finding intrinsic value based on return on equity) started to resonate with me not so much when your I saw your famed A1 companies power ahead in 2010, but rather when my investments in the likes of ELD and ISF started to nosedive. A brief analysis of debt and intangibles provided enough evidence for a fast retreat from the register of those companies. We surely do learn more from our mistakes tham from our successes, and this lesson in focusing on ROE has stood me well, taking on fine companies such as TGA and MLD.
Thoroughly appreciate your guidance.
Lloyd
:
Roger,
A somewhat academic question, but have you done any history match to determine what percentage of your C5 category companies could be expected to “blow-up” in any five year period? My gut feel is that its somewhat higher than 15%, but I have no historical analysis to substantiate it.
As for a liquidity event, as opposed to a “blow-up”, its is probably closer to 100% – just look to the emergency capital raisings of the last few years amongst the sorry acts you have listed in the table! Very sobering indeed.
Regards
Lloyd .
Regards
Lloyd