Thank you and Happy Christmas

43 Comments

1. 

   Dave
   February 17, 2011 at 10:03 am:

   I have just started useing this and i hope it will help.

2. 

   Rod
   January 10, 2011 at 7:37 pm:

   Is there a way of getting a realistic IV for Acrux?

   • 

     Andrew
     January 11, 2011 at 7:42 am:

     Not trying to be smart but what do you mean by realistic?

     Haven’t run the numbers over Acrux so i don’t know what i am getting but i am unsure and interested as to what you mean by realistic.

   • 

     Nic Arena
     January 11, 2011 at 4:47 pm:

     Hi Rod,

     The only way that I get a realistic IV for Acrux is to be conservative. I don’t know if this fits into your realistic realm though. Because of its past performance my “realistic” IV is to be conservatiive. There have been heaps of one year wonder companies that have faded after their great year. As such I have an IV of $1.64 (ROE 35%, RR 14%, payout 0% and EQPS of 50 cents). I do have it rising to 2.36 next year and 3.43 the year which are big rises because of this year excellent performance. This means the SP is at my evaluation in 2 years. The issue is obviously negative NPAT until this year. I do like the fact they have a very high gross margin of 88% but I need a year or 2 more to drop the RR down and increase the ROE to get that higher IV. I have probably missed the SP boat though. Happy to as I have down well with Forge, Decmil, Oroton, Thorn Group and Seymour Whyte. These companies I think where easier to value due to their past years and I felt comfortable putting my hard earned cash into them!!

3. 

   Gary Telford
   January 6, 2011 at 10:33 pm:

   Hello All,
   Only received the book 2 days ago and have been valuing some companies tonight.
   Has anyone looked at 2011 for Oroton (ORL)?
   I just came to the figure of $16.15 intrinsic value for 2011.
   Equity/share = $0.81
   Payout ratio = 53%
   RR 10%
   Multiplier on table 2 = 34( only geussed this, ROE doesn,t go to 75%)
   ROE = 75%
   Was wondering if this is close or have I made an error?
   Only started in the shares about 6 months ago, have been following Charlies morning thoughts after opening Bell Direct Trading Account, and reading as much as possible on Warren Buffet, and others.
   Rogers Value.able book is brilliant, just what I was looking for

   • 

     Matthew R
     January 7, 2011 at 10:58 am:

     Ashley Little commented on this jump in future IV a few weeks back as well

     It occurred because the analysts predictions of payout ratio dropped

     Recent payout ratios for ORL have been in the 75-85% range. To drop POR to 53% means much more retained earnings compounding at very high rates!

     The risk is they won’t be able to maintain such a rate of compounding. Gary, what do you think would allow them to continue compounding earnings at such high rates?

     • 

       Ash Little
       January 7, 2011 at 7:09 pm:

       Hi Gary,

       Matt is correct.

       Thanks Matt

       I pointed out that ORL had got to my valuation and I had another look at it.

       Previously ORL had no Broker coverage on the feeds you get on Etrade and Commsec and now they have one(meaning only one analyst coverage).

       I think my words were “you get a nose bleed from looking up if you use these forecasts but they are only one persons forecasts”

       I have down some digging and I am still using the historical payout ratios to value the company.

       I like using forecasts but they should be compared to historical figures as well to see if they are reasonable…….Best to be conservative.

       Lots of peoiple here would be over the moon if ORL can cut the divy and invest the money back in the business at such a juicey ROE but not many of us are banking on it and using it in our valuation.

       The moral of the story is don’t blindly use forecasts for your future IV

       Hope this helps

   • 

     Andrew
     January 7, 2011 at 11:23 am:

     $16.15 would be a little high. I think i know how you might have got that as using Comsec forecast fugures i was getting $21 something for one of the years. This is where you need to look at whether the forecasts match the reality.

     One thing amongst others to consider is Oroton have been paying out about 80% of their earnings as dividends, would this continue or will they drop it down to the level you have?

     • 

       Peter
       January 7, 2011 at 4:58 pm:

       One way to check the reality of forecasts is to multiply the return on equity by the retained portion of the payout ratio to determine the “implied growth rate”. As Roger states in his book, if the results of this calculation produce an unrealistic earnings growth rate, then you can be confident that the forecast estimate needs to be revisited.

       Peter

   • 

     Nic Arena
     January 7, 2011 at 12:13 pm:

     Hi Gary,

     My IV is not nearly that high. I get an IV of 9.57 (2010) then 11.18 for (2011). I’m sure others have it even lower than me as I really like ORL becuase of their past record so I’m not as conservative about this company as say Matrix etc. For this year estimates I have used 70cents for EQPS, ROE of 60%, Payout of 86 (I use a higher payout rate than most people for conservative reasons) and a RR of 10. Hope this helps.

   • 

     David Sinclair
     January 7, 2011 at 12:28 pm:

     Hi Gary,

     I suggest you use a payout ratio of 85%, as this is what the CEO of Oroton has said that they are aiming for. I know that anaylsts are forecasting a payout ratio of about 50% for the next few years but if you use this in your valuation you are betting against the person running the business, which I do not think is very wise!

     David S.

     • 

       Gary T
       January 9, 2011 at 4:13 pm:

       Thank you all for your replys,
       I haven,t done a lot of reseaech on ORL, but i would assume it would require a change of board to get them to reduce the dividend payout,the family must prefer a bird in the hand.
       I did see the Swizer interview with Sally McDonald and she does comment on Rogers talk on retaining earnings.
       i shall go back to doing some more valuations, all new teritory at the moment, thanks again for your inputs, will keep watching and learning.
       regards
       GT

     • 

       Andrew
       January 17, 2011 at 12:11 pm:

       I think if we are going to see a change in the dividend pay out ratio than it will be over the next coming years as they expand into Asia. They may wish to keep some more money retained in order to help pay for this but all the sounds so far is that the pay out ratio will tend to be about the same as usual at around the 80-85% mark

   • 

     Andrew
     January 10, 2011 at 8:12 am:

     Whilst we are on the topic of Oroton, what are eveyones thoughts on the history of the company.

     I have just ran my analysis and valuation spreadsheet over all the years back to 2003 which is all the reports which are on their website and according to my figures the company did not hit investment worthy for me until 2007. I can see what Roger means about Sally McDonald being a competitive advantage as this coincided with the start of her reign in 2006. It was quite an interesting exercise and such a huge change in fortunes IMHO.

     • 

       Ash Little
       January 10, 2011 at 8:43 pm:

       Yes Andrew,

       Very correct,

       But it is the windshield we are looking though not the rearview mirror

       When Sally leaves she will leave a good boat and as Roger says it is much more important to be in a good boat then worrying about who is rowing it.

       That said Sally is is very good rower

4. 

   Michael P
   January 5, 2011 at 9:59 pm:

   Sorry for typo in DPS line – should be :
   Equity per share $ 2.43 (end equity 56127262/#shares 23070755)
   EPS 0.51
   ROE EPS/Avg Equity per share = 21.98% used 22.5%
   DPS= 5075567/23070755 = 0.22
   Payout ratio 43%
   RR 12%
   Intrinsic Value $ 6.25

5. 

   Scotty G
   January 5, 2011 at 1:48 pm:

   G’day all out there!

   Has anyone had a look at Treasury Group (TRG).

   Based off the 2010 June EOY Report I get the following:

   EQPS – $1.90
   EPS – 0.5061
   ROE – Used 25%
   Payout – 51.37%
   RR – 10%
   Value – $7.24

   Has anyone else taken a look at this one.

   Cheers,

   Scotty G

   • 

     Ash Little
     January 5, 2011 at 7:10 pm:

     Hi Scotty,

     This business is very good quality

     I have It on my watch list.

     Due to it’s size of the business and the lack of liquidity in the stock I am using a RR of 15% which puts it at about it’s value.

     My RR may be a bit high but 10% RR should be reserved to a new few select businesses

     I know some other regular bloggers like this stock and It would be interesting to get their input as well

     Hope this helps

     • 

       David V
       January 5, 2011 at 9:46 pm:

       Hi Scotty,

       Yes I have a simlar valuation for TRG. I used ROE 20% and RR 12% and $7.02 for 2011. I have this increasing to $7.42 for 2012. I like to use conservative estimates. My ROE is probably a little low considering the last 4 years of performance by the group. I own TRG.

       Regards,
       David V

   • 

     Michael P
     January 5, 2011 at 9:54 pm:

     Hi Scotty
     My calculations from the AR are-

     TRG
     Equity per share $2.42 (end equity 56127262/#shares 23070755)
     EPS 0.51
     ROE = EPS/Average Equity per share = 21.98% used 22.5%
     DPS= 5075567/11676131 = 0.22
     Payout ratio 43%
     RR 12%
     Intrinsic Value $ 6.25

   • 

     Scotty G
     January 6, 2011 at 4:08 pm:

     Thanks for the replies everyone.

     I used 10% as I considered funds management a lower risk business along with the likes of Platinum Asset Mgmt and Hunter Hall.

     The point about the liquidity is well taken and I’ll go back over it some more.

     Thanks again!

     • 

       Alan Moore
       January 7, 2011 at 12:07 pm:

       Hi,

       I have done an evaluation and I get 7.12.

       What does liquidity mean in regards to this stock?

       Thanks

     • 

       Ash Little
       January 7, 2011 at 6:48 pm:

       Hi Alan,

       The liquidity of the stock is the amount it is traded. Thinly traded stocks are refer to as illiquid……TGR had 600 units today so I would classify it as illiquid

       Illiquid stocks can represent the best place to find a mispriced businesses and I confuse to owning some… I am fairly keen on TSM but it may go days without a trade. Remember you are buying the business not renting the stock so I like letting the business do it’s thing.

       However, If you make a mistake it is also very difficult to correct this mistake by selling the stock in a thinly traded market.

       Hence you need to either have a larger MOS or a higher RR for these types of stocks in my view.

       MCE was not the most liquid stock on the Market 6 months ago and hence I chose a high RR…. It is now more widely traded with the possibility of entering the ASX300 index soon. I may shortly reduce my RR.

       As Roger has said before real value just slaps you in the face as 6 months ago MCE had a huge MOS using a high RR.

       Hope this helps and it is just my view……Others here don’t have the same view

     • 

       Alan M
       January 8, 2011 at 5:40 pm:

       Thanks Ash,

       Appreciate the reply. Does a company do this delibrately or is there some other reason for the low trade in stock?

       Also I did an evaluation for MCE using last years annual report and my IV was under the share price in marhc or april. So far the lessons we have learnt from Roger are how to use the annual reports to value stock but I have trouble upgrading or downgrading their IVs during the year. Recently Forge announced an upgrade to their profits and this is good seeing as I own the shares so I know the IV will move higher but I am unsure how to do it an get an IV that I am comfortable with until I get all the numbers (from the annual report). Any help in this regard would be appreciated.

     • 

       Matthew R
       January 9, 2011 at 12:48 am:

       liquidity is a function of how many and at what price buyers and sellers are willing to transact shares

       you could apply a blanket rule and say that companies with larger market caps tend to have greater liquidity – but this rule must move to larger and large companies as you have more and more to invest (or divest) if you want to keep it relevant to your individual circumstances.

       if you have $1,000 to invest then daily volume of $3,000 might be all the liquidity you need. On the other side, if you are buying a company to own it forever then you don’t need any daily liquidity at all!

       Note that some big companies have very little liquidity. Berkshire Hathaway has about 3% annual turnover of it’s shareholders. As a result of not fighting with each other in the broker’s boxing ring all of the berkshire shareholders are wealthier for it

     • 

       Ash Little
       January 9, 2011 at 4:36 pm:

       Hi Alan,

       A company has no real say in it’s liquidity. The company itself is not often buying it’s own shares.

       It is us as the market that do the buying and selling. Bigger companies that have been around for a long time tend to have more share trades than smaller newly listed businesses.

       Roger did a good blog here about forecasting value on 1 October 2010. The link is below. I hope it works.

       http://rogermontgomery.com/how-do-value-able-graduates-calculate-forecast-valuations-2/

   • 

     Matty
     January 8, 2011 at 8:56 am:

     Hi Scotty,

     I have a 2011 value of $6.81 @ 11% RR or $6.00 @ 12%. MOS is between 22% and up to nearly 39% so it seems to be undervalued for what it is doing now. But what is it going to do in the future, this is on 2011 ROE of 20% which is a slight decrease. I am not familiar with the company so I do not know about the competitive advantage. My how my way of thinking has channged in less than 6 months. Thankyou Roger.

6. 

   Andrew
   January 5, 2011 at 8:01 am:

   During the value.able off season as we replace our regularly updated blog whilst the blogger is away with other indulgences like parties, over-indulgence and depending on which country your from complaining or celebrating the demise of the once great australian cricket team, i think it is a good time to share some thoughts. These aren’t related to intrinsic value or valueing but very much about listed companies.

   I touched on it in one of my commetns on the homework blog where i said that companies tend to get the shareholders they are after.

   I think it was Warren buffet himself who said something very siomilar although i do not have the exact quote. He said something like that because of the way Berkshire is run they have been able to avoid shareholders that are focused on the short term and instead are full of people who are prepared to hold the company for the long term and make their decisions on the business and not the market.

   Ever since my journey into value.able land and learning how to look at these businesses i have seen seen this so much clearer.

   Companies on the stock exchange will tend to get the type of shareholder that they are after. A good example of this is Transurban or any start up mining explorer.

   Transurban, i don’t need to tell anyone here, is an atrocious business. They don’t make a profit, they are geared up to their eyeballs and they don’t appear to be getting any better. They are a capital intensive business and their cash flow is terrible.

   However their is still a large number of people willing to invest in it and continue plowing more and more capital into the company with every capital raising that they do, at least they also try to stop the CEO getting payrises but this is a token gesture as they can’t really stop him. To many on this board we would sit back and scratch our heads and wonder why people would want to buy any shares let alone buy more in a capital raising in such a company.

   However i think it is a great example of this phenomenon that businesses get the shareholders they want.

   I know of one transurban shareholder, despite my warnings about the quality of the company, he points out that the share price has gone up since he bought it which pretty much is him saying i’m right and your wrong. Tried to get him to read value.able but was unsuccessful. he instead tends to listen more to the Skynews channel and see what he has to say (funnily enough though has never seen Roger). I have managed to keep him away from some disasters. He says he’s strategy is to buy shares in companies that will be around in 10 years time and that have DRP’s so that he can grow his holding via that. When looking for companies his first thing is to look for if they have a DRP.

   I know it would not make sense to many people here, especially the whole thinkg about transurban being around in 10 years.

   Back to the story, i have never seen so many capital raising forms since he has started. Not only that, but he sees them as an opportunity to buy more shares and thinks that the money is being used to grow the business. He won’t do the hard research required to see that this is wrong and their has been no growth instead of the losses and capital base.

   I think their will be quite a lot of other people that are similar and it is no wonder that these companies continue to get shareholder support. It is a mixture of greed and ignorance. One thinks that perhaps education has failed that allows these companies to almost prey upon these people. perhaps you should need a license before starting to invest.

   On another hand, a company that sets itself very short term goals will probably often have a very rapid share price movement due to it attracting hedge funds, technical analysts and other short term buyers.

   The longer term companies will have a smoother price movement ansd will more than likely track the intrisic value a bit more than the short term ones where there will be big premiums and discounts.

   I think in each investing circle (value investing being ours) their will be favourites and i bet if someone looks at these companies they will see that over time longer term value buyers favourite companies tend to have a smoother price movement over a long time where short term tends to have more peaks and troughs over that same period. Bad companies just tend to go south.

   I guess this is just another thing that relates to the voting machine/weighing machine theory of Ben Graham.

   Just some random thoughts and ramblings from one investor

   • 

     Matthew R
     January 5, 2011 at 10:43 pm:

     I agree Andrew – I also know investors just like the one you describe, and I’m sure many others do as well

     There really isn’t much progress to be made in this world by taking the easy and well-trodden path

     By definition value investing is a contrarian investment strategy, a search for the unpopular, unloved and long neglected issues! And if none of those abound, then god forbid, we invest in CASH. Who would have thought?

     • 

       Ash Little
       January 12, 2011 at 12:45 am:

       Hi All

       I picked up a book a few months ago, cant remember what it was called but it was interviews of top fund managers during 2006.

       The exact figures may be a bit off but you will get the gist.

       Interview with Roger Montgomery,

       Our return was 26% and we had 30% in cash and we had zero invested in resource stock.

       Nothing wrong with cash……….In fact I view cash as an aggressive asset not a defensive one

     • 

       Ash Little
       January 12, 2011 at 12:49 am:

       The bit about cash is from me not a quote from Roger,

       Just wanted to clear that up

7. 

   Paul
   January 4, 2011 at 4:16 pm:

   Hi everyone.

   I am trying to calculate the future Intrinsic value for arp but seem to be way off.

   I have a current value of $7.75 based on
   Return on equity of 32.08
   Recomended return:11.5
   Equity per share of 1.54
   Payout ratio: 37.04

   I have used comsec future eps and dps figures of
   2011 eps:49.1/dps:21
   2012 eps:55/dps:23

   From the 2011 and 2012 eps and dps figures above I have calculated the following.

   2011
   Return on equity of 27.01
   Recomended return:11.5
   Equity per share of 1.82
   Payout ratio: 42.77
   Intrinsic value: $6.30

   2012
   Return on equity of 25.72
   Recomended return:11.5
   Equity per share of 2.14
   Payout ratio: 41.82
   Intrinsic Value: $7.33

   According to the table in the table in the following link http://rogermontgomery.com/who-made-the-value-able-grade/
   arp has a current value of $8.07 which is close to my value but a 2011 value of $8.39.

   Can someone guide me on where I have gone wrong in the 2011 and 2012 value for arp

   Cheers
   Paul.

   • 

     Matthew R
     January 4, 2011 at 11:24 pm:

     Hi Paul,

     You are not that far off Roger’s estimate! That difference doesn’t mean much when you are trying to buy it at $5.00.

     For what it is worth my 2010 IV is $7.35, 2011 is $8.11 and 2012 is $8.47

   • 

     David Sinclair
     January 5, 2011 at 8:46 am:

     Hi Paul,

     If you look at ARP’s results for the last 10 years and the forecasts for the next 2 years you will see that the ROE varies, but within a fairly narrow range (roughly +/- 5%). The payout ratio is also generally consistent except in the years when they pay a special dividend. If you use the figures for each individual year then the values you calculate will fluctuate along with the ROE and payout ratio for that year. I prefer to use a constant ROE and payout ratio that I believe are reasonable estimates of the average for the next 5 to 10 years and then increase the equity per share to get future values. If you use this method your values will not vary as much over time and you will be less likely to pay too much for the business in a good year (or sell too cheaply in a bad year). For ARP, the consistency of its past performance makes me fairly confident that the average ROE for the next 10 years will be similar to the average for the past 10 years, so that is the figure that I would use for each of 2010, 2011, and 2012. For the payout ratio I would probably use the median, but using the highest of the years that didn’t include a special dividend would be a more conservative option. I am sure that there will be many other opinions out there about the best payout ratio to use.

     I hope this is helpful to you, and don’t forget that the aim of the exercise is to figure out what you think ARP is worth, not to match Roger’s numbers exactly. If you are more or less confident about the future of the business you may use a higher or lower ROE than Roger. Your required return may also be different to Roger’s for any number of reasons. These differences in input will give you a different output but that doesn’t mean that you have the wrong answer, just a different answer. The question you should ask is not “where have I gone wrong in calculating the value”, but “why have other people chosen different inputs and do their reasons make sense to me”. If you understand the process, use it correctly, and have a good reason for the inputs you have chosen, then the answer you get is the right one.

     David S.

   • 

     Ash Little
     January 9, 2011 at 7:51 pm:

     Hi Paul,

     You are using the ending 2011of $1.82 when working out what the return was in that year but you started with equity of $1.54 to achieve this return.

     I would use $1.54 on forecasts for 2011 to calculate my 2010 IV and so on

     This makes sense to me. If you have $1.54 in a bank account on 30 June 2010 that would earn say 30% and you could reinvest about 40% then you would calculate your return on $1.54 not the $1.82 that you would end up with.

     This is just my view and others here disagree with me.

     But if you do this and use RR 12% then you should get close to Rogers figures

     • 

       Ash Little
       January 9, 2011 at 8:27 pm:

       Sorry I Mean Reinvest 60%

8. 

   Andrew
   December 29, 2010 at 9:05 am:

   Can someone give me a hand please.

   I am looking for the formula to work out a businesses Cost of doing business and had a mind blank and can’t seem to find it anywhere.

   I need it for my analysis and valuation spreadsheet.

   For those that are interested, I am using it to point out whether a company’s Cost of Doing business is below a companys gross profit margin as an indicator of a stores true profitability. I also have net margin in there as well.

   • 

     Andrew
     December 29, 2010 at 12:41 pm:

     From what i can tell, using Woolworths as an example it is the sum of additional revenue, branch expenses and administration expenses which all fall in between the Gross Profit and EBIT. Does this sound right?

     In WOW 2010 case
     Additional Revenue 179.3
     Branch Expenses -8165.4
     Admin expenses -2325.4
     equals 10311.5

     Sales 51694.3

     CODB% 10311.5/51694.3= 19.95% which matches the CODB in the annual report

     Is it just these three however or is it everything inbetween Gross profit and EBIT that needs to be sued for the CODB

     What are peoples thoughts as i think each company might be slightly different.

   • 

     Andrew
     December 29, 2010 at 1:27 pm:

     Sorry to keep answering my own question. I have done some further research and have found the definition that CODB is all the non-interest expenses found below the gross profit figure.

     However that leads me to a little confusion when it comes to ORL.

     They don’t have anything under the profit before income tax other than tax. Instead they group everything together above that figure.

     So for the CODB of Oroton would i be adding the other income, warehouse and distribution, marketing, selling and administration costs and leaving the cost of sales and finance costs?

     What are the selling expenses? I understabnd the rest.

9. 

   markH
   December 24, 2010 at 5:15 pm:

   To Roger: Thanks for conducting the orchestra so brilliantly.

   To The Orchestra: You’ve all been totally inspiring, beyond what I could have imagined.

   Here’s to 2011 being music to our ears!

   Merry Christmas All

   MarkH

10. 

    Duncan
    December 24, 2010 at 12:24 pm:

    Hi Folks and happy Xmas to all

    JB HiFi. regarding rogers concerns about new stores. we had a new opening on the sunshine coast here. the location is good being near bunnings and 20+ retailers including the likes of chemists, cycle shop,super cheap auto, clive peters, cash converters, baby shops and much more. The JBhifi on the south side of the coast is constantly packed and people queue on a sunday more all year round. i’ve been in the new store regularly since opening and never has it had look JBhifi busy even today( xmas eve) i shopped around for a new t.v wanting to buy it from JB but they were $100 more and couldn’t more for the exact same t.v. i was looking to get back into jb hifi but fear their sale figures may not be reached and so a sentimental price drop may Occure. then i may jump in!!

    Just an observation on the Sunshine coast/ constant rainy coast

    Happy 2011
    Dunc

    • 

      Duncan
      December 27, 2010 at 3:03 pm:

      Mistake- it should read $100 more and they couldn’t match the price for the exact same t.v.

      too much to drink i feel!!

      Dunc

11. 

    Wing
    December 23, 2010 at 10:02 pm:

    Hey Roger

    It’s a surprise to bump into you today. I was a bit stunned and lost words, hope you dont mind. Lucky me to see you and you’ve made my day! :)

    Wish you Merry Xma’s to you and your family.
    Chat again in 2011

    Cheers,
    Wing