It’s quality that counts
When markets rise and your Value.able portfolio rises even more, its difficult not to want to enjoy some fruits. But Roger believes value investors must keep constant vigil and if it’s high-quality smaller companies that suit, there are a few with exposure to oil and gas that your advisor should look at. Read Roger’s article.
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.
Victor
:
Hi all,
In reading the heading on this post I couldn’t help but posting my thoughts on the best quality stock that I believe is out there. I know many of you may believe its a little over priced etc but its hard to argue that there is a better company out there than Apple (NASDAQ:AAPL). In applying the Value.able technique I have yet to come across a more consistent, predictable and transparent balance sheet than theirs.
A few numbers taken from the 2010 annual report…
(end of fiscal year and in millions)
Equity:
2006 – 9,984
2007 – 14,531
2008 – 22,297
2009 – 31,640
2010 – 47,741
Net profit:
2006 – 1,989
2007 – 3,495
2008 – 6,119
2009 – 8,235
2010 – 14,013
Return on AVERAGE equity remains at ~30-33%
I’ll let you do your own intrinsic calculations but I promise you’ll come across something rather promising when you compare your values to the actual share prices throughout the comparative timeline.
Many may argue that this isn’t too great a return, but when equity is rising at the rate is, maintaining these rates of return are significant.
Since 2006 the SP has risen from ~$50 to $340 which is what it stands at now. Microsoft on the other hand has remained at roughly the $25 it stands at today. Fundamentally they are a slightly different company but it should be said that these two businesses evidently support the dividend theory that’s so elegantly explained in Roger’s book! Microsoft pay a consistent dividend whereas Apple don’t and do not plan on doing so. As a result, the comparison indicates the value of the company reinvesting its retained earnings and growing the business.
It should be said that I have conducted a little research on consumers’ views on apple products, as a part time employee in a department store selling apple products among others, it is clear the loyalty that these customers have to the product is unparalleled. We have been inundated with enquiries and abused at times at the lack of iPad 2’s we and other retailers, have to sell. It’s ridiculously beyond belief how many calls we take on the possibility of a new order of them coming in! Their competitive advantage lies not in their price (their products are actually more expensive than others) but in the innovative design, quality of manufacturing and unique experience that only an apple product can give. I even read an article that stated that Apple as a brand was the most recognised in the world, moreso than Mcdonald’s and Google!
Excuse the lack of referencing, but i read elsewhere that they have been one of very few, if any, successful american businesses to make it big in Asia, notably China! As the 300million or so middle class of China continues to become wealthier it is without doubt that they too will be purchasing their own iPads and iPhones!
I believe the key competitive advantage lies in the itunes and app stores. They are the best of their kind and despite similar hardware products (i.e tablet pc’s and smart phones) existing, I believe it is the range of apps that is key to really drawing people to buying the iPhone over the HTC for example (the touch technology on the ipad and iphone the other key reason). The App stores and itunes also act as a significant path to consistent cashflow into the business which may act as some sort of insurance if sales go down for whatever reason.
There are so many things to discuss but more importantly I would love to read any opinions on future exchange rates or other fundamental issues that people think may derail this strong growth in what I believe is the world’s best company!
Btw, my intrisic value for end of 2011 fiscal year is $606 (DYOR) – would be interested to see anyone else’s.
David Martin
:
A stock i purchased some time ago is Hansen Technologies – it was one of the first i applied the valuable technique to – it therefore has some sentimental value to me.
For conveneince i used a RR of 10% and from this came up with a value over around $1.05 and as it was trading at around .65 i bought some.
So far it has been good and through its ownership i have received a few fully frnked dividends so it has paid me quite well.
I note someone in the blog recently was concened about the business impact with the high AUD.
I remember in Feb reading an announcement when they declared their dividend and updated the market on its 1/2 yr results. I quote from that announcement:
In announcing the half year result Hansen’s Chief Executive, Andrew Hansen, observed, “As a result of our international expansion, 40% of revenue is now derived in foreign currencies. The appreciation of the Australian dollar has had an impact on our businesses performance. Revenues in the first half were a net
$1 million lower than for the previous corresponding period. However, as a significant part of our cost structure for labour and occupancy is now incurred in those same currencies, we have offsetting cost reductions which, together with ongoing investment in development efficiencies, has allowed us to achieve an improved operating result in spite of the net fall in revenues.
For what it’s worth i still hold but will be curious to see what results will be like when they next report.
I reckon the buisienss is bullet proof – no debt and a reasnable ROE although i am not convinced of its competative advantage.
I would be interested in any views.
David
Matthew R
:
Hi David,
This is one that I have recently become interested in as well. I’m not qualified to comment on their competitive advantage without further research, but below are some of my initial thoughts.
Revenues haven’t changed for 10 years. Profits have really only turned positive in the last 4 years. Current ROE has been helped a lot by the 2002 result.
Good working capital
No Debt
Very healthy cash flow
Very large proportion of the shares are held by the Founder and current Chairman – Kenneth Hansen
High level of intangibles as a portion of equity. Not surprised by this given the type of business.
Recent raising of an eyebrow with the sale by the CEO of all of his personal holdings. Recent attempt made to increasing the liquidity of the stock by the family selling down some of their holdings (through a tranche) but now the CEO (family member) selling all of his personal holdings seems a little strange.
The last two reporting periods there have been surprise upgrades to earnings forecasts.
The future could be good with the strong competition between telcos trying to attract customers. The companies that provide the databasing, marketing etc tools could do very well if they have a good reputation and are nimble in this space. In terms of the energy sector it looks like they are in a rapid growth sector there as well – but whether they are the best of breed provider I can’t confirm yet – they compete with IBM and many others.
I see a reasonable MOS on my 2011 calculations. The CommSec forecasts (which I am not using) are provided by a stockbroker whose Chairman has recently been appointed to the board. He has no personal shareholdings in HSN. Interesting then to see they list HSN as a ‘Strong Buy’.
The main questions that you should ask yourself are “Are we at a point of inflection for this company? Or will the future mirror the past? The last four years have shown promising changes but does the view out the front wind screen look bright?”
There are some thoughts to consider David. I don’t have an opinion yet on HSN. It seems to have some potential but I need to read more about the industries it operates in and contact Hansen directly.
If you have any insights you can provide in to some of the questions I have asked above please share! :)
Cheers,
Matt
David Martin
:
Matthew, i have been away for a week and only tonight saw your comment – i do hope you see mine as it is along way past now.
I am inclined to wait until their full 2011 yr numbers.
I appreciate the need for smart meters and the need to use and ration resources such as energy more efficiently. This type of technology is going to be important in the future.
I was not aware that a chariman of a stockbroking firm was recently appointed to the board – i have now seen the report. Interesting he holds no shares!
I agree there is a MOS and given my entry point at around 0.65 i can perhaps affor to be paitient.
I will be happy to share any further insights with you when i form them.
THanks for your interest Matthew,
David