Part II: What else has the reporting season avalanche uncovered?
The second full week of reporting season has just been and gone and saw another 80-100 companies report their financial results. More than 200 have reported and yes I am working feverishly to keep up and cover them all. I am happy to report that I’m ready for another week.
So far the results have been mixed. Information Technology, Banking and Mining/Oil & Gas Services sectors have stood-out, receiving high Montgomery Quality Ratings. The remainder have been distributed somewhat randomly amongst the other sectors.
And having analysed all of them so far, I can reveal that only 11 (5.5%) of the 200 have achieved my coveted A1 status (an additional six on top of the five from my previous post). These businesses have all passed my rigorous stress tests and come up trumps.
You may be surprised that after another full week and 80-100 individual results, only six additional companies have made it. But my A1 rating system has been specifically formulated to yield only the best and it is performing its function very well.
Of the six companies, three held onto their A1 status. These are Carsales.com.au (CRZ), Forge Group (FGE) and Monadelphous (MND) which have been joined by 3 new entrants in DWS Advanced Business Solutions (DWS), Finbar Group Limited (FRI) and SMS Management and technology (SMX).
Unfortunately, on a net basis we lost one A1 this year with four other businesses experiencing ratings declines from A1. These businesses include CSL limited (CSL), Consolidated Media Holdings (CMJ), Integrated Research (IRI) and McMillan Shakespeare (MMS). While CSL and CMJ have both declined to A2 status – nothing to be sneezed at, IRI and MMS have had larger rating declines.
Most notably, MMS has declined materially in terms of quality as I predicted it might after its acquisition, and it is now a ‘B3’. The mostly debt-funded acquisition of Interleasing (Australia) is the cause of this fall which I will cover in a separate post.
There are also another 20 A2 businesses that have passed my stress tests and rate in the top 15 per cent of the market in terms of overall quality.
Don’t forget to combine these lists with the A1 and A2 businesses I highlighted last week to continue identifying the best of the rest and stay tuned, I will post my intrinsic valuations for all 11 A1 businesses soon.
Finally, an update on my Telstra valuation. Last week I said that my valuation following the annual result was $2.50. I have updated my numbers and now get $2.30.
I sincerely hope that my Telstra comments have served your research well and that you have not been caught by all of the “it’s high yield and therefore a cheap stock” talk.
While others may have been tempted to buy shares for ‘yield’, you can use Value.able to first discover the intrinsic value. To save you a little time, Telstra’s valuation has declined since it listed. Even in the past year intrinsic value has fallen from $3.00 to $2.30! And the share price has fallen from $3.55 to the current $2.77.
In reality this is a widely reported and closely tracked company and its weighting in the index ensures a level of support from the large, conventional, index-based and tracking-error-focused funds. Indeed this is one of the reasons it has taken so long for Benjamin Graham’s weighing machine to catch up to the valuation – ten years! An improvement in the clarity for Telstra (forgetting whether its profitable for the business) could be enough to result in substantial price rises. Of course as a disciplined value investor focused on only the highest quality business, I cannot let that speculation tempt me.
Posted by Roger Montgomery, 24 August 2010.