The good, the bad and the ugly (18/02/2014)

5 Comments

1. 

   Andrew Legget
   February 20, 2014 at 12:34 pm:

   Good to hear you and your team has had some good success so far. I always appreciate the updates and insights into the internal dialogue at Montgomery during this time of year as i imagine other readers are, so thank you once again for the effort.

   I have been focusing on JBH. Valuing them through a range of different methods as a bit of practice (to those who haven’t done much, the best way to learn about valuation is doing so i think). Whilst i have come up with what i think is a pretty fair valuation of $18.08 i am now working through a few areas that i believe need to be addressed such as their future capital structure (no debt/use more debt as a way of sustaining returns on equity etc) and whether my growth rates in revenue are the ebst estimates i can come up with (as well as whether the associated inputs for costs could be refined).

   JBH is going to be an interesting one to watch over time, they are a cash generating machine that is now mature. I think people looking at this company should be looking through the potential scenarios as to how they will use that cash. I expect increases in the dividend pay out ratio but their will still be a bit left over.

2. 

   lloyd taylor
   February 18, 2014 at 6:50 pm:

   Roger – thought provoking summation.

   However, I struggle with your assessment that Cochlear’s (COH) R&D expenditure of the last five years has yet to bear fruit. Can you elaborate on this and the basis for your optimism that it will do so?

   I ask this question against the backdrop of the last three years of Cochlear management’s continuously overpromising and subsequent under delivery. During this time the company has been more than a little accident-prone, to the extent that I wonder whether what we are seeing is symptomatic of something more than accidents. Management seems to have lost its mojo, to say the least.

   Against this backdrop I cannot but wonder about the quality and output of the R&D effort. The uptake of the latest Cochlear product release seems pretty underwhelming based on the company’s reports and recent financial results.

   So where in this mix is the ground for optimism for a turn-around in the company’s fortunes in the face of increased competition, newly emerging players, and an increasingly tight focus by governments of all persuasions on cost control in healthcare generally and medical appliances in particular.

   Despite the under delivery of business performance over the last three years, the share price remains doggedly well above intrinsic value, which based on Skaffold is around $18.87, so one has to be very optimistic about the output of the R&D spend of the last five years to justify any interest in the business at the current share price.

   What am I missing in this assessment?

   • 

     Roger Montgomery
     February 19, 2014 at 4:35 pm:

     Have a look at the features that have been approved by the USFDA and the many that Cochlear have developed but which have yet to be approved for promotion…

3. 

   rob barnett
   February 18, 2014 at 2:15 pm:

   Roger,
   I am a huge fan of your investment insights & analysis. I’d like to better understand your analysis of GEM (in particular) & CCP more recently. How much attention do you pay to the Free Cash flows generated by these companies? I understand that GEM may be in a ramp up but the business doesn’t appear to generate a lot of cash for the amount of capital invested. Similarly at CCP – something appears to have happened over the last 18 months whereby more capital is going in but less cash is coming out. Can you please help me understand what is going on?
   Thanks, Rob

   • 

     Roger Montgomery
     February 18, 2014 at 5:50 pm:

     They’re investing everything they are generating back into the business. In the past they didn’t and that’s why the debt came down so fast.