It’s Business Time
You can call this Part 5 or the ‘Finale’ in our series on McMillan Shakespeare.
You might recall that after McMillan Shakespeare’s shares were lifted from suspension (following Kevin Rudd’s pre-election announcement of a change to the recording of car usage for FBT purposes), the shares traded around $7.00 – down 50 per cent from pre-suspension levels.
Montgomery’s Head of Research, Tim Kelley, articulated in a three part series our view regarding the probability of the proposed legislation getting up and damaging the company.
If you missed the three part series you can read each part here: Part 1, Part 2 and Part 3, but in essence the chances of the legislation getting up were slim.
Following the company’s AGM this year, in October, we wrote: “Management stated today that while earnings in the first half of 2014 will be depressed, conditions are expected to return to normal in the second half. This confidence is reflected in the declaration of a dividend for the 2013 financial year, which management previously withheld due to the material uncertainty created by the announcement.”
As many of our followers would know, we have been significant supporters of McMillan returning to normal quickly, since buying the shares at approximately $7.25 on the day they relisted.
And so we turn to today’s announcement…
McMillan announced today:
“The Board of McMillan Shakespeare is pleased to announce that following the material disruption to our business caused by the Federal Government’s 16 July FBT announcements and its subsequent repeal by the new Federal Government, trading is now approaching a “business as usual” footing…”
It strikes us as somewhat curious that the share price should jump 9.3 per cent to $13.20 today on the back of this announcement, because despite significant advances in understanding and technology, the market is still making the repeatable error of being willing to pay a higher price for a cheery consensus.
We were obviously delighted to have the major investment recognised by Peter, who wrote this afternoon:
“For Roger and Team.
MMS up 9 per cent today after announcement it is business (and growth) as normal. Thanks for your previous comments on MMS discussing the fundamentals of the company had not changed. I purchased after their trading halt.
The release of info to market today was already known to us, but interesting how the sheep are now excited. Thanks for the insights. I know why most of my super is with you. Interestingly analyst recommendations over last 90 days (as per CommSec) have moved from strong buy to hold or moderate sell. What would they know! Thanks, Peter”
Thanks for the encouraging words Peter. We’ll get a few right but keep in mind we are bound to get plenty wrong and I expect we will make every mistake by the time we are done.
Oh- and if you are trying to link today’s column to the image… Flight of the Conchords recorded a very funny song called It’s Business Time. Flight of the Conchords is an NZ comedy duo comprising Bret McKenzie and Jemaine Clement, pictured.
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.
Andrew Longden
:
Hi Roger,
Just recently GM/Holden announced it will be putting a halt to its car manufacturing in Australia.
Does this have any impact on McMillan Shakespeare and its operations?
I wouldn’t have thought so myself, however they have been smashed on the market today and most days, since announcing business as usual.
There seems to be a lot of misplaced emotion associated with the stock.
Roger Montgomery
:
One wonders whether people unable to lease an AUstralian made Holden will lease something else? Of course Holden financing will be affected but one suspects it will eventually be replaced.
john oshea
:
I’d say the issue is far from over. It is a useless tax that will be reviewed again in the future. The industries with highest take-up of the offer are police and teachers, followed closely by public servants. None of these professions need a fuel efficient, new car for work because they don’t do enough work travel enough to justify the capex expense. We are encouraging a bad investment on a gigantic scale with this tax. It should really be termed the “20% off new cars if you leave it in the garage tax”. It is $1.8 billion in taxes that could be used on road / rail projects with far better returns on investment. Investments that actually reduce travel time and improve fuel consumption / reduce crash related costs. It could even be as simple as transferring the $1.8 billion of incentives for freight companies to purchase more efficient delivery trucks.
I’m not saying the tax will be repealed this term of government but I think the government is just a very large and slow moving business where the efficient market theories will rule true in time and the tax benefit will be scrapped. Obvious carnage of such a policy change is the like of MMS and I don’t think it can justify a glorified PE of 20 x current earnings when it has a business based on a un-economic tax law that subsidises the parking of new cars in garages.
Roger Montgomery
:
We think you are probably right but it may at least three years before we need to concern ourselves…
Andrew Legget
:
Sounds like things are going well Roger.
Not surprised by the market behaviour, something that is becoming and entrenched view of mine is that it is perception that drives market prices and not reality. The issue is that perception is increasingly being developed based on other peoples perception to the point it becomes one big group think point of view. People also seem to really value having their own views confirmed so everyone tends to think like everyone else where as Tim showed how coming up with your own point of view based on all relevant information and ignoring the noise can be a very profitable approach. I know some mentioned it was akin to speculation but i think this incorrect and maybe caused by some people believing that something has to be 100% or not. Using multiple probabilities to calculate the risk or the chance of an event happening is a very sound and good approach in my view.
I have recently begun reading up about Nate Silvers work in prediction and forecasting in various areas and it makes sense and matches what Montgomery did with MMS. This should be a constant reminder to ignore the noise as when the noise comes you might have missed the boat.
Perception differing from reality is not a bad thing, it is the same thing that drives discounts to value as well as premiums to value. However, a value investor should always remember to differentiate between perception and reality and to focus on that reality. Sometimes the future might be unclear but as has been shown here, some problems can have multiple solutions rather than a good or bad situation. This grey area could also be the place where good risk management can see you generate substantial excess returns.
Roger Montgomery
:
You are spot on Andrew. Thanks for sharing.
craig.cory.54
:
Andrew, I agree but as is mentioned somewhere it can be a long time waiting for value. My thinking is firming that small guys can’t swing a market only the heavy lifters can. The running order sequence for this is Events happen, Sentiment changes, Markets respond, Value is considered, and then Prices follow. Probably the best we can do is learn the game well, then mostly just follow the leader, unless you decided he’s headed straight off a cliff!
Roger Montgomery
:
I would argue you need a clear view ahead of you and if you are following the leader you cannot see what lies ahead.
jeffrey excell
:
I for one, would welcome some discussion on portfolio construction and position sizing. Your MMS example is an interesting illustration. Even though the price is
down strongly , if you already own it, how much more MMS is too much relative to the portfolio……………..that said, I understand that a portfolio concentrated around strong themes is better than a mega diversified portfolio………in essence the market average.
jeff
Michael
:
Roger, did you buy any of Forge when it came out of the trading halt? As Craig mentioned, it was one of the better stocks not that long ago. Keep up the good work.
Roger Montgomery
:
Our only buying recently has been the upcoming floats. We like Veda, Lifehealthcare and Covermore
craig.cory.54
:
Good that it did go well Rog. Mind you it may not have so highlights the need for various stream of a businesses cash. And look what happened today to Forge. That was one you liked if i remember right. So as you say. There will be some things that dont go so well and diehard diciples who allow for someone else to call their shots stands to come up disappointed. cheers C.
Roger Montgomery
:
We should offer a discussion about portfolio construction and position sizing – risk management. It might be the missing piece everyone needs. You will notice that the 42%-odd returns in The Montgomery Fund since inception and the equally impressive results in The Montgomery [Private] Fund include teh returns from those that don’t go so well. Its all about managing risks and portfolio construction is an important part of the equation.
craig.cory.54
:
All your insights are appreciated, and I’ve learnt much for it all so thanks. And your fund’s track record has shaped up well so far for sure. The thing I always get concerned with though and I read it frequently in feedback comments here, is an under recognition that you guys are pros, so complicated approaches can come over as being easy for those without experience, training and insights to replicate your results. We all know they aren’t. And the result of playing with the big boys without the matching skill set may go well when its sunny, but won’t end well when it storms. Cheers matey, C.
Roger Montgomery
:
That is indeed true Craig. You have made your point well. There is no escaping understanding the business.
Greg McLennan
:
Good job. Peter’s right of course. It doesn’t say much for the majority of those in the financial world who couldn’t see what was going to happen.