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Did you watch Your Money Your Call on Sky Business last night (25 February)?

Did you watch Your Money Your Call on Sky Business last night (25 February)?

Last night on the Sky Business Channel with Nina May, I received a few requests for comments on companies that I hadn’t included in my valuation tables.  So here are the valuations for those companies – Worleyparsons (WOR), Brambles (BXB), AGL Energy (AGK), Arrow Energy (AOE), Origin Energy (ORG) and SAI Global (SAI):

Intrinsic Values*
Company Code Price Intrinsic Value Forecast Intrinsic Value

(Above Current Price? / above Current Value?)

Forecast ROE range

>20% preferred

Net Debt / Equity

<50% preferred

WOR $24.36 $17.56 YES/yes 18%/21% 30.2%
BXB $6.99 $3.76 NO/yes 30%/33% 149%
AGK $13.80 $7.20 NO/yes 27%/32% 14.4%
AOE $3.33 $0.04 NO/yes -0.6%/2.4% -9.4%
ORG $16.50 $6.63 NO/yes 6.1%/7.7% -8.1%
SAI $3.74 $1.88 NO/yes 16%/18.3% 68%

*Be sure to read the warnings about intrinsic values.  See below.

“Would you buy this stock?” is a question I have fielded innumerable times since selling my funds management businesses and leaving them as well as the investment company I listed on the ASX.  I am not in a position to answer it – having had 8 months of R&R since leaving, but I will let you know when I am.  The following information comes from an earlier post “What would you say about my portfolio?” where I have listed further intrinsic valuation estimates.

When I am asked on air, sometimes without notice -by the guys at the ABC or Ross Greenwood at 2GB or Peter, Richard or Nina on Sky Business – what I think about a company, I will detail the price, the intrinsic value, the ROE, the debt and whether I believe that the intrinsic value will be rising by a decent clip in coming years.  These are the things that I believe are the most important determinants of an investor’s return.  Happily investors haven’t had to wait very long to see whether prices head towards the values – both Myer and Telstra are recent examples.


We’d all prefer intrinsic values that were cast in stone. Unfortunately, they’re not. The valuation depends on the input so to be safer, I always run my model using two data sets. Importantly, I only run ONE valuation formula. My preferred method of investing would be to buy at a discount to the most conservative valuation but if I can’t get that and valuations are rising strongly in future years I might invest a smaller proportion of my portfolio in first class business at a substantial discount to the upper valuation.


I would be interested in hearing what you prefer to see. Would you prefer to see 1) the most conservative valuation only, 2) the valuation based on next year’s earnings forecast 3) based on the continuation of the historical performance of the company, or 4) both? Feel free to vote. What I like to use myself may not be what you want to see.


Firstly, these valuations can change at any time and I may or may not update them here on the blog.  A company, for example, could announce a downgrade and the valuation would drop – potentially precipitously and I will probably busy doing something with my own portfolio(s) so do not under any circumstances rely on or expect these valuations being kept up to date here at all.

Second, valuing a company is not the same as predicting the direction of its shares.  Just because a company’s shares are lower than my valuation, does not mean the shares will go up. Conversely, a price that is well above my valuation doesn’t mean the share price is going to fall.

Third, my forthcoming book contains the information you need to calculate intrinsic value the way I do, so rather than ask me how I arrived at a valuation above, please register and wait for the book.

Finally, don’t act on this information (which can and is likely to change without warning and without notifying you) – seek a professional advisor’s recommendation, preferably someone who knows you, your financial circumstances and needs.

(Most importantly, don’t act without first speaking to an advisor who is familiar with your circumstances and needs.  You must not rely on my musings – they could change in a moment and anyway, they relate only to me. My thoughts here are “insights” into the way I think about stocks and they don’t have you in mind.)

Posted by Roger Montgomery, 26 February 2010.


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.

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  1. Roger
    Just publish your conservative valuation and we can decide if we want to overpay that by whatever % we wish.
    Regards Ian Bowditch

    • Thanks Ian,

      I really appreciate your thoughts. I do prefer to lean to the conservative side anyway, so that really suits.

  2. G”day Roger

    Some may think it is fence sitting, but I prefer to take both historical performance and analyst forecasts into calculation to work out an intrinsic value that I’m run with. Such a process always keeps my valuations away from some of the optimistic health stocks and stocks who increase their ROE, such as jbh; but I can live with that, one has to be comfortable with one’s own strategy. I think also we’re seeing the results now of companies who have little history and the analyst forecasts and 2-3 year historical return have turned out to be far too optimistic eg sxe, nod, wds, vmg, imd, etc (not a code…:-)


    • Hi Jason,

      I really liked that your method kept you away from JBH. There are many ways to make money in the market and you do need a strategy that fits with your temperament. In time we discover that the finance industry is not very good at forecasting change…so an analyst has a very tough time predicting a fundamental shift in the fortunes of a company.

  3. Roger, to ask a stupid question re: Forecast Intrinsic Value and (Above Current Price / above Current Value).

    Forecast Intrinsic Value vs Above Current Price means that “is the value in the stock (what it’s worth) above the current market price”. Easy enough.

    Forecast Intrinsic Value vs Above Current Value means to me that “the value right now (price you should be paying for it to be good value, else you are paying a premium) will increase in the future based on an extrapolation / guess / model / whatever the reasoning is, and at some point in time (assumed to be 2011 / 2012, to be fair) will be greater than the price right now”.

    Therefore, in this second case, ‘the company will actually be worth more in the next few years than the market currently thinks it is / will be (maybe no one wants to pay over the odds right now for the promise !)” – unless of course the price keeps up and the discount / premium value ratio to current price narrows or the stock will face a substantial re-rating when people wake up and realise that it’s actually a really good stock that is trading below it’s real value.

    Also works in reverse, e.g. WOR recent downgrade seeing it get hammered, along with other stocks in the same field (nearology)

    Is this correct ?

    I also heard from the recent ASX Investor Hour in Melbourne on portfolio construction that the presenter also took into account PEG ratios, and that even if a stock was at a premium, he took this into account too. Any comments on this ? (because REA is at a significant PE ratio, which I know you’re not too fond of, but the PEG ratio is tiny….although it is coming off a hideously low FY09 base).

    • Hi Chris,

      Starting with your second question first. The P/E ratio cannot tell you anything about what something is worth. ALl the P/E ratio does is tell you what people are willing to pay. But as Buffett said; “Price is what you pay but value is what you get”. Price and value are two different things. If the P/E ratio is next to useless (I explain and demonstrate why in the book), then anything else based on it or derived from it is too. You can’t expect a healthy branch when the trunk is rotten.

      To the first question, the Forecast Intrinsic Value vs Above Current Value means the VALUE in the future is CURRENTLY expected to be higher than todays valuation. Please note the valuations I show on those tables are based solely on analyst forecasts. They can be notoriously optimistic, terrible at forecasting change and change their minds. The valuations being based on those forecasts are therefore subject to change at any time. Further, you must not base your investment decisions solely on the information contained here. I could change my view in an hour and then head on a holiday for several weeks or longer and am therefore not under any obligation to report back here in a timely manner. YOU MUST SEEK ADVICE FROM AN ADVISOR FAMILIAR WITH YORU NEEDS AND CIRCUMSTANCES BEFORE ACTING AND/OR TRANSACTING

  4. Hi Roger,
    Thankyou for the great blog – can’t wait for the book.
    I am with the majority and would love to see a range (and even better learn to work it out myself)
    Any help you could give on McMillan Shakespeare would be very much appreciated. I think it is valued at about $4.25-$4.50 (currently trading at $3.15) on the face of it this seems like a fantastic opportunity to buy some more, but I am having trouble working out the potentual downside if the rumored changes recomended by The Henry Tax Review are adopted.
    Thankyou again for the insights.


    • Hi Hardin,

      Thanks for the encouraging words. You will be able to do the valuations all on your own, once you have the book. Yes MMS looks cheap but as I have said in my post on MMS (You can find it by typing MMS into the Search box under my photo on the right hand side of the website) its the outcome of the Henry review that holds the keys to success or otherwise. The worst case scenario could wipe out half their business.

      • May I add that it’s more a case of how quickly MMS can change and prove the ROE on its new business model before the FBT part of the Henry review is realised in its literal form?

        MMS has become a speculative BUY ever since the Henry tax review *began*. Recall the parable of the turkey (as related by Nassim Taleb) who thought that life was good until it literally stopped on the day before Thanksgiving. Intrinsic value says MMS is a good buy until the day the government decides otherwise.

        However, I will add that should people abandon the stock in droves when the Henry review is wholly released, I will be buying more MMS. Crystallising the full impact of a possible downside now leaves me the rest of the future upside.

  5. G’day Roger,
    I’d prefer to see the different values that are produced by all three inputs – most conservative, next year’s forecast, and continuation of past performance….if that’s not too much to ask. That would give an interesting range of values to ponder.

    All the best,

    • Brett Williams-Kerr

      Hi Roger,
      I have no preferences and will appreciate all intrinsic value information you wish to share. I admire Warren Buffet and his share investing philosophy and it is great to find a like-minded person, such as yourself, who uses Warren’s philosophy in an Australian context. I am keen to learn more from you and cannot wait until your book comes out.
      P.S. will your book be in hard cover or paperback?

      Yours Kindly

      Brett Williams-Kerr

  6. Hi Roger,

    I am a very risk adverse investor myself so intrinsic values based on the most conservative financial inputs would probably suit me better.

    Like others reading your blog, I am looking very forward to reading your book and learning a lot from such an intelligent and cautious investor like yourself.

    I read from this article that “JB Hi-Fi was in a sweet spot during this last set of results under Uechtritz – it was estimated that $500 million of the Rudd stimulus package went into the tills at JB Hi-Fi. That effect will soon fade.”


    Are these estimates accurate? Because the effects are obviously quite substantial. Also wondering what your most recent JBH value predictions are.

    As always thanks for the lovely reads and insights Roger.

    • Hi Roger D,

      I know James (the author of that article well)- I was playing with the kids in the pool when he called to let me know he was going to write a piece with a different view of JBH to me. He is a man with a great deal of integrity and its worth reading his information. Different views of course are what make a market. Every time you buy a share, the person selling disagrees with you, so you have to be used to differing opinions. Type JB Hi-Fi into the search facility on the right hand side of the home page of my blog site and you will find a recent posting about JBH. Another view. Its really useful because it explains the impact of the decision to increase the payout ratio on the intrinsic value of the company.

  7. Hi Roger

    I would like your intrinsic values to be based on the financial data released by the company. That way once we can calculate the intrinsic value for ourselves we know we are reading off the same figures and can check our results. Looking forward to your book.


  8. Hi Roger,
    enjoy your thinking as usual.

    I would prefer your companies intrinsic values to have a range. We could then use reporting season to move the intrinsic value based on new data.
    This is more difficult with cyclical s of course.
    If say the XJO 200 is fair value around 4000 ATM
    Do you know what the fair value of the XJO 200 Nov 2007 was?
    This would give me some idea of how overvalued a market had become.

    Look forward to your book and hope it covers most of the XJO 200 as most of my holdings are invested there.

    Thanks again for your website,


  9. I saw you for the second time on Sky Business and found your comments a different style and very interesting. Based on your comments I bought more WOW rather than WES and ,lucky me, they went up 5% today.
    I believe all information is good information. I like having an intrinsic valuation and a projected earnings and will both in future together with other information.
    I have registered for your book.
    All the best.
    Phil Egan

    • Hi Phil,

      Thanks for registering for the book. I am editing the final typeset version right now and I am pretty excited about it. Be careful attributing too much importance to one day’s price move. You should be focused on the next few years instead.

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