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AGL, like Origin Energy and Arrow, has been expensive for a long time. According to Roger Montgomery this seems to be a general trend in the energy sector. In his appearance on Nina May’s Your Money Your Call Roger also reveals his 2010, 2011 and 2012 valuations for Bluescope and JB Hi-Fi, and discusses the impact of management’s decision to raise JBH’s dividend payout ratio from 50% to 60%. Watch the interview.

by Roger Montgomery Posted in Media Room, TV Appearances.

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Richard Uechtritz built revenue from $158 million to $2.8 billion in a decade. Will JB Hi-Fi be the same without him? Read online.

by Roger Montgomery Posted in Media Room, On the Internet.

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I have just completed a phone interview with Ross Greenwood on his Money News program at radio station 2GB.  He was interviewing me and Patrick Elliott, the Chairman of JB Hi-Fi following todays result.  As you have all probably noticed, the half year result was excellent but JBH has traditionally exceed the market’s expectations for earnings and sales growth.  Today’s interim FY10 profit was up 29% on sales growth of 19%, and while it was at the upper end of expectations – it didn’t exceed those expectations.  Believe it or not, the result will be downward revisions to analysts future estimates.

The share price decline today – it was down 6.5% at one stage – to be down 5.1% at $19.07 per share, was partly the result of the ‘voting’ machine saying; “the growth is not going to be as high as we envisaged” but probably to a greater extent, it was due to the fact that Richard Uechtritz announced his retirement in “July/August”.

Having grown revenues in ten years from $145 million to $2.8 billion, the resignation of Richard is a blow to the company.  But as my restaurant owner friend says; “revenue is vanity, profit is sanity” and the new CEO will be no slouch.  Terry Smart joined JBH when Richard did, as part of the private equity funded management buy in.  They’ve all made millions and plenty of Terry’s money remains invested.

The changeover reminds me of the retirement of one of Australia’s retailing legends, Barry Saunders, from the Reject Shop.  He handed the reins over to Jerry Masters and Jerry continued to grow and expand The Reject Shop.  Jerry was an outsider and arguably not the first choice.  Terry is a JB Hi-Fi insider and remember my comments that the business boat you get into is far more important than who is rowing it.  I think you will find that with 210 identified stores and 140 likely to be rolled out by the end of 2010, there is still plenty of room for growth.  More over, Richard’s resignation is similar to The Reject Shop in one important way; neither Barry nor Richard departed to compete. Richard, like Barry will remain a consultant and Richard on the board.

But unfortunately, it is not growth that determines intrinsic value.  Its the return on equity, the payout ratio and the equity itself that determines whether the value continues to rise.  The big news on this front is that the dividend payout ratio continues to rise.  Now at 60%, the increased dividend is a classic response by the board to a business that is generating cash faster than it can use it.  But thats a shame because the company is generating 45% returns on its equity.  I would much prefer they kept the money – prepay some leases and get a discount (get the contingent liabilities down) – than hand it to me as a dividend.  The best I can do with it is perhaps 8% in a 5 year term deposit.  Not bad, but not 45%.

The result of not employing as much retained earnings at 45% is that the intrinsic value declines.  Its still going up but not as much.  The conservative intrinsic value before this result was about $20.30.  Now it is $19.30.  The intrinsic value next year falls from $24.14 to $22.50 and the year after from $29-ish to $26-ish.  So where previously we were looking at a rise to the $30 area for intrinsic value by 2012, it now seems the value will be at best $26.50.

The sole reason for the change to intrinsic value is the increase in the payout ratio. More dividends means less profits being retained in the business, earning more than 45%.  Now don’t get me wrong, this is still an amazing business – one of the best and intrinsic value is still forecast to rise by a compounded 16.3% per annum over the next 2 years or so.  To get really excited however, you now want a bigger discount to the current intrinsic value.

Posted by Roger Montgomery, 8 February 2010

by Roger Montgomery Posted in Consumer discretionary.

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Some time ago Peter Switzer invited me on to his program to discuss five stocks for the long term that met my criteria for quality at least, and value if possible.

We didn’t end up with enough time to cover them so I was asked back on October 28. By that time the market had rallied hard so the three I could find were MMS ($3.99 back then) now $4.44, JBH (then $21.50) now at $22.96 and WOW (then $28.82) now $28.42.

The other two I mentioned, to satisfy the more speculative viewers, were ERA (then $24.70) now $24.46 and SXE ($1.62) now $1.63.

The 2009 valuations for MMS, JBH, and WOW are $4.69, $25.76 and $27 respectively. For ERA and SXE the 2009 valuations are $33 and $1.97 respectively.

At all times I have deliberately based these valuations on consensus analyst’s estimates so that there is no favouritism. But keep in mind analysts estimates are prone to change and therefore so are the valuations.  Further, it is worth remembering that when I run my aggregate valuations over the market, it tells me that the market as a whole is about 15 percent above its valuation.  In other words the market in aggregate is no bargain and may be a little expensive.

Also keep in mind that if you go and transact in any security in any way based on these opinions, you do so at your own risk. I really do mean it when I recommend that you seek advice from a professional adviser, broker or planner that knows your financial circumstances.

By Roger Montgomery, 19 November 2009

by rogermontgomeryinsights Posted in Companies, Insightful Insights.

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The retailer’s same-store and overall sales were strong, it is dominating its sector and its prospects are bright.

by Roger Montgomery Posted in On the Internet.

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