Search Results for:

The enthusiasm surrounding the Myer float is good reason for a value investor to stay clear. So is the expected price.

by Roger Montgomery Posted in On the Internet.

• READ ONLINE
• save this article
• POSTED IN On the Internet.

I’m not talking about the front cover.

The current owners, including TPG and the Myer family, plan on raising $1.9b to $2.8b to exit the business. (Yes, the Myer family indicate on Page 33 that they may sell 100% of their shares).

$315 million will be used to pay down debt and $100 million odd are frictional costs associated with the float. The rest will go to Private Equity and the Myer Family.

Upon listing, the business will trade with a market capitalisation of somewhere between $2,282m and $2,768m.

What, however, is the business worth?

With all the relevant data to value the business now available and using the pro-forma accounts supplied in the prospectus, I value the company at between $2.67 and $2.78, substantially below the $3.90 to $4.90 being requested. It appears to me that the float favours existing shareholders rather than new investors.

Investing safely in the share market requires a wonderful business and a rational price. Myer is arguably now a much better business than it was, but the price being requested is even hotter than the cover.

By Roger Montgomery, 28 September 2009

by rogermontgomeryinsights Posted in Consumer discretionary.

• 2 Comments
• save this article
• 2
• POSTED IN Consumer discretionary.

by Roger Montgomery Posted in In the Press.

• READ
• save this article
• POSTED IN In the Press.

My portfolio is full of businesses that dominate their market. Is yours?

Businesses with sustainable competitive advantages not only dominate their market, they are also able to produce significantly better returns using the same amount of capital and effort. Such businesses make great assets if you are trying the build an investment portfolio full of only the best stocks.

Businesses with a competitive advantage can charge higher prices for their products and services because people are willing to cross the road for them, even though the guy on the other side charges less (think iPhone).

Why? The service may be so intimately involved with the daily business of another company or the daily lives of consumers that they cannot possibly leave (Reckon or the banks), or it may be that they are the lowest cost provider and competitors simply cannot match their prices (think JB Hi-Fi). What is the competitive advantage of each of the stocks in your portfolio?

Competitive advantages are a critical recipe for continued high levels of profitability for a business. The next time you are shopping for vitamins, consider why Blackmores products are priced at a premium to their competitors. Maybe its because BKL has a competitive advantage?

By Roger Montgomery, 24 September 2009

by rogermontgomeryinsights Posted in Insightful Insights.

• 5 Comments
• save this article
• 5
• POSTED IN Insightful Insights.

by Roger Montgomery Posted in On the Internet.

• READ ONLINE
• save this article
• POSTED IN On the Internet.

If you ever hear I’ve bought an airline, call an ambulance. Here’s why.

by Roger Montgomery Posted in On the Internet.

• READ ONLINE
• 1 Comments
• save this article
• 1
• POSTED IN On the Internet.

Former Qantas chief executive, Geoff Dixon, was paid almost as much for his final nine months as for the previous year, despite a dramatic nose-dive in the company’s profitability.  Roger Montgomery reveals what the company did and did not pay for.  Read article.

by Roger Montgomery Posted in In the Press.

• READ
• save this article
• POSTED IN In the Press.

Like me, your Myer One card entitles you to pre register for a prospectus for the forthcoming float of Myer. Should you take the next step and buy the shares?

The answer to that question depends on three things. First, does the business have bright prospects? Second, what is the business worth? Third, at what price is it being offered?

Clearly, Bernie Brookes is the talk of the town, and his work in turning Myer around is fast becoming legend.  But is the talk about Bernie’s ability to improve returns on sales from 2 cents in the dollar to 7 cents, or is the talk because a private equity firm bought a business with $400 million of equity and $1 billion of debt then, in the first year, paid themselves back their equity – essentially getting the business for free and then a few years later still, floated the business for what many analysts believe will be $2.5 billion?

Myer may be a better business than it was and it may be that earnings next year will be higher again, but this is not a JB Hi-Fi, able to roll out another 100 highly profitable stores with short payback periods. This is a department store.

It is, I confess, now a highly profitable business and highly profitable businesses are the sorts of businesses to own. But what should you pay for it?

To value a company, we need to know a few things. How much is reasonable to expect the company to earn on its equity going forward? What will be the equity going forward? And what will be the policy for the distribution and retention of earnings? In other words, what portion of its earnings will the company pay in dividends?

The company earned $109 million on beginning equity of about $300 million. That is a return on equity of 36.3%. If we assume the company and its management earn another 30% next year, pay half out as a dividend, and if we assume that we require a twelve percent return, the business is worth about $2.4 billion.

But there’s a catch, the company will not earn 30% on its equity, particularly if its equity keeps growing as half the profits are retained. In reality, if the company kept retaining profits, the equity would rise and the return on equity would fall. As the business matures, it will have to pay an increasing proportion of its earnings as a dividend.

Now that probably means that the business’ value will not grow significantly after about three to five years.

Investors who are considering buying shares in the float need to consider what the true value of the business is and what it will do in the future. And also keep an eye on how much goodwill is added to the balance sheet and how much tangible equity is taken out prior to the float.

By Roger Montgomery, 17 September 2009

by rogermontgomeryinsights Posted in Consumer discretionary.

• save this article
• POSTED IN Consumer discretionary.

Westpac and The Reject Shop have been good investments, but now it’s time to cash in.

by Roger Montgomery Posted in On the Internet.

• READ ONLINE
• save this article
• POSTED IN On the Internet.

by Roger Montgomery Posted in In the Press.

• READ
• save this article
• POSTED IN In the Press.