TV this week?
Tonight at 6.30pm on Today Tonight I will share my insights on a well known stock.
Tune into Channel 7 from 6.30pm Sydney time. More insights will be posted tomorrow.
An all-time record for the shortest post ever Posted by Roger Montgomery, 27 January 2011.
MORE BY RogerINVEST WITH MONTGOMERY
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.
Matt R
:
Ashley
Thanks for the explanation on the CLO-FGE. I think I understand it a little better…
Geoff Cruickshank
:
Can anyone help me with an efficient way to monitor company announcements? At the moment I type in codes one at a time in the ASX site or Business spectator. An RSS feed would be nice…
Nic Arena
:
Use wotnews. This question was asked a few weeks again and someone said you could use wotnews to monitor companies that you want to. Hope this helps. Nic.
Tom Charles
:
Also Roger,
Could you please give us answers to homework soon?
Tom
Tom Charles
:
Roger + Room,
What do we do when a significant amount of a company’s profits are from an income tax benefit (i.e. they made a loss the prior year). This is in terms of calculating ROE.
Please HELP!
Tom
Christopher
:
Hi Tom,
You must exclude those kinds of abnormal profits when calculating ROE, otherwise your IV will significantly overvalue the company.
Ashley Little
:
Hi Tom,
You have to look at what the sustainable earnings are.
Not sure that really good businesses have this problem when you value them.
BTW what are you looking at?
Tom Charles
:
Thanks for the help guys,
Ash – I was looking at CBD; annual report 2010. Note 4 lists “Recognition of prior year tax losses not previously brought to account”.
I cant remember from the top of my head but I have come across this situation with a few companies.
Tom
Ashley Little
:
Hey Tom,
I am going to use some Montgomery comments here.
Imagine if ten years ago we got together with a few friends and decided to start a business.
We put in a total of 6.7 Million
Now imagine if 10 years later this business was earning 8 Million dollars.
Not bad you might say. But how would you feel if I told you, you me and our mates have had to throw in another 90 million to achieve this return.
Not such a good story.
This is CBD
The company you are looking at may be a great investment but It may not.
The best part about valu.able is you don’t have to take extreme risks to achieve great returns. Not much risk in buying ORL at $6 when it was worth $9.
You just need to be patient and 2011 may really test our patience
Hope this helps
Roger Montgomery
:
Nice, Ashley! On behalf of everyone who reads here, thank you very much for all of your help. Constant capital raisings and rising debt in a fast-changing industry. Shorter term profit growth is impressive but debt supported by goodwill?
Tom Charles
:
Thanks Roger and Ashley,
I agree – its a terrible company.
Mal
:
Hi Roger,
I know this probably won’t be published, but I have tried using your system for value-ing companies, but I can’t find a rational reason to use the earnings multiplier tables that you use. At the same time, you discount the value of the PE ratio because its an arbitrary ratio.
As a result I use a far simpler and more conservative valuation method (which unfortunately rules out a lot of the growth stocks you find). Can you explain the rational basis for using the multiplier tables you use and how this is any different from using either PE ratios or forward PE ratios to calculate a target price? Alternatively, can’t you work out a forward intrinsic value – eg. IV year XXXX + 2/3 (with an estimate of ROE + historical payout ratios)- which would give you a target and a timeframe to calculate a target price?
Ashley Little
:
Hi Mal,
All I can say is rereaed valu,able and spend time reading the blog.
You will be enlightened over time.
With regards to ROE investing some people get it straight away ,some people take awhile (I am in this boat), some never get it.
I hope you are in my boat because it is very rewarding
Hope this helps
Pat Fitzgerald
:
Hi Mal
For ‘Table 11.1’ you can do an internet search for ‘Perpetuity’ (Wikipedia etc) it may help.
Matt R
:
Hi Ashley
Just went back through the ASX notes for FGE. Clough now owns ~30%+ of FGE (maybe more?). It also appears some directors exercised at lot of options at the end of 2010, which presumably would reduce shareholders equity.
I’m not sure what negative effect CLO partial ownership of FGE will have? Would you mind sharing your thoughts? Maybe I’m not in the right ballpark on this…
Thanks
Matt
Ashley Little
:
Hi Matt,
You have opened a can of worms here LOL.
This is from memory so It may not be 100% accurate but close enough for this exercise.
About 11 or 12 months ago Clough and Forge got together to form a strategic alliance that would benifit both companies.
One of the conditions of the alliance was that Forge would issue Clough with 13% of the Company @1.90 per share. Clough would make then offer to take their holding to between 31% and 50% of Forge @$2.10 Per share.
As a shareholder I was outraged that the board would sell 13% of our business for a figure so much lower than value. This was later conformed by the independant experts report on the $2.10 offer that said don’t accept as the value is like high $3 or low 4$. But Clough achieved the target mostly on the back of board support.
When you sell a portion of your business for at least half it’s IV then IV will decline. That is if a company is say worth $450 and has 100 shares then IV per share is $4.50. If another 13 shares are issued for $25 then we have a company worth $475 with 113 shares the IV per share drops to $4.20.
This is on the assumption that the additional capitial can be deployed at the current high ROE.
I very much like the way the management of Forge run the business. I think it is just superb.
I am certainly not a huge fan of the Forge Board ATM and hope they don’t do something this silly again.
The Strategic alliance with Clough may well produce more for the shareholders than they gave up but they did give up alot.
As this placement only happened just prior to the end of the financial year we need to see what effect it will have on earnings going forward. If you include the options being exercised then the company has to improve earnings by about 20% just to keep the status quo on ROE.
Hope this helps Matt and this is not the consensus view on the blog
Matt R
:
Thanks Ashley.
I’m not sure what the share placement to Clough will do, or how, but I’ll keep reading…thanks once again for your feedback-it’s awesome to get the benefit of knowledge from people such as Roger, yourself and the many other fantastic bloggers here…
Matt R
:
Thanks Mully. I appreciate the feedback.
ken fraser
:
Lloyd, Sorry, you`re right SWL for 2011 34% roe. Ken.
Paul
:
Hi Roger, Everybody
I’m a really recent Valuable graduate and have been valuing some Stocks I have (or had) in my sights :-) I am relatively happy with my valuations of Westpac and Woolworths based on some of the tables I have seen posted by Roger over the last few months.. enough to be happy that I’m in the ball park.. but I am concerned with my calculation on Wesfarmers. I was wondering if someone could check my valuation. All the figures I have obtained below from the COMSEC wrap sheet. I have used the 2010 figures to obtain a valuation.
Wesfarmers
2010 NPAT $1565 (M)
Equity per share at the beginning of period $20.96
Outstanding Shares at the same period 1157 (M)
Payout Ratio 92% (at end of 2010)
My After Tax required Return 10%
ROE calculated from above figures 6.45%
Table 1 multiplier is 0.645
Table 2 multiplier is 0.454
(These figures are calculated by accurate formulas in a spreadsheet, not just plugged in from the book, so they are not just nearest values)
Now when I multiply is all out… I get an intrinsic value for Wesfarmers of just $13,44
Can this be correct since the current price is $33.68??
Any Advice or comment would be welcome.
Thanks in advance.
Andrew
:
What you have above is a perfect example of what we talk about here with Price vs Value being two completley different things. I get close to you on 10% but i don’t think i would use 10% for wesfarmers and would go towards 11 or more likely 12% which lowers it even more.
It is easy for us to question our findings when the intrinsic value is so different to the price of the shares on the market.
This is where the psychological element of investing comes in. We have our method for valuing a business and you said you were happy with your valuations for Woolies and Westpac. You used the same method to calculate Wesfarmers and this is the result you got.
Basically what this is saying is that Wesfarmers is completley expensive and you would not bother buying it. I would completley agree with that. This is what value investing is all about.
just remember what Ben Graham and many others have said “price is what you pay but value is what you get”.
The price to be paid for Wesfarmers is $33.68 however you are getting $13.44 of value.
Its a hard thing to do as in a way it almost lacks logic but you need to completley remove any link between market price and value, they are two different things and should not be confused.
but good work on your valuation, i would have used a different RR but the method you used is good and as long as you are happy for a 10%RR then you did a great job.
Andrew
:
Also Paul, if you want an interesting activity to learn more about how acquisitions can affect ROE and there for the valuation.
Go back a few years till before the coles take over and have a look at the trend from the years before coles and the years after coles in regards to the ROE and intrinsic value.
It’s a great example to learn more about what impacts valuations and value investing itself.
Paul
:
Andrew
Thank you so much for the comments and analysis of what I did. It now gives me more confidence that my calculations were correct. It was just the gap between the valuation and the price that threw me.. had me wondering if there was something I was missing :-)
I’m a fledgling investor, but have a good portfolio with bargains I managed to snare during the GFC. I was following Buffets advice about being bold when others were fearful. However, I now have a great method to actually value those companies to make sure I am getting value… otherwise as Roger says in the book, I am just speculating.
I will do as you suggest and check out Wesfarmers before and after the Coles acquisition. I know the consensus was that they paid way too much, but I wasn’t aware of the affects on value. I’m using a spreadsheet I developed from Grahams formula which was also advising against Wesfarmers, but I wanted to check my new found valuation technique against it :-)
Ashley Little
:
Hi Paul,
Yes it is a bit of a laugh really but you have not done anything wrong.
This is what happens when a stock is popular.
No matter how well they run coles they simply paid a silly price of it.
Eventually price follows value and it will take a very long time for WES IV to get to current price.
Greg W
:
Sorry guys I forgot to mention that Atlas (AGO) has no debt.
Greg W
:
Hi all fellow happy undergraduates,
Firstly happy new year to you all. I have been doing a lot of research of late on companies that generate ROE > 30% and have come up with some great companies, many of which are on Rogers list of A1 and A2 companies.
Atlas Iron (AGO) is a very interesting business that has exceptional growth prospects and while it has not made profits in prior years as it was not in production should report profits in excess of $160m this year and $270m the following year. Its forecast ROE is around 40% for 2011, 2012 and 2013.
My IV calculations are:
2011 – $4.22
2012 – $7.34
2013 – $11.21
While the company does not pay a dividend at present I suspect it will in the not to distant future as this company generates substantial positive cashflow and production is set to ramp up dramatically over the coming years.
These IVs are based on a 14% RR so I believe they are conservative.
Any thoughts?
Peter M (Mully)
:
Hi Greg,
Even though its outperformed in recent times, I’m not a big fan of the resource sector mainly because of the volatility which commodity prices introduce to the investment. That said, if I was to invest in a resource stock, AGO would probably be one of them provided I was comfortable with the consensus earning forecasts which look a little too optimistic for my conservative investing nature.
Mully
Matt R
:
should we be using earnings per share, or diluted earnings per share?
Ashley Little
:
Yes if it related to options or convertible preference shares then the answer in my view is Yes use diluted.
Matt R
:
Hi Roger/All
Great blog-I’ve learnt more from reading the comments/feedback here in the last 2 months than the last 10 years of owning shares. Also, found ValueAble a transforming read.
My first IV calculation for FGE:
average equity (09/10) = 71.1 m
no. shares 78.7
POR .16 (2010)
NPAT 34m
ROE 47%
RR14%
gives a 2010 IV of $7.33
is this the same ballpark as what others get?
Cheers
Ashley Little
:
Hi Matt R,
If Roger permits I will comment on this,
Welcome to the Valu.able community.
As you have allready worked out the inslights you receive here are better than anything you will receive throughtout the world. Some of the knowledge and discussions on this Blog is unbelievable.
You have done a great job on your first go. Lots of people hear are coming up with similiar figures, but you should have a look at the share placement to clough in April 2010 and decide what that will do to ROE and IV goinjg forward.
Plus I have POR rising but it looks like I am Robinson Crusoe on this one.
Keep posting Matt,
We would all love your views and inslights
Peter M (Mully)
:
Hi Ashley,
Thought you’d be pleased to know that you aren’t Robinson Crusoe on this one :)
In arriving at my 2011 IV of $7.32, I’ve reduced my ROE from 37% to 32.50%, assumed a POR of 17% and applied an RR of 14%.
I’d be interested to learn how these assumptions/variables compare to the ones you’ve applied to your valuation.
Thanks in advance.
Mully
Ashley Little
:
Hey Mully
please read below,
ROE may not be as high as 37%
Time will tell I just don’t know.
Best to be conservative
Peter M (Mully)
:
Well done Matt. My 2010 IV for FGE is $7.32
PS: Too many Peters no so I’ll be using my nickname “Mully” in future.
Lloyd
:
On 31 January SWL stated announced that “…the company remains of the view that NPAT for 2010-2011 will be broadly in line with the results achieved for the 2009-2010 financial year.”
Is this the SWL forecast your are referring to – flat YOY ? In which case ROE will fall to around 34%.
Regards
Lloyd
Ashley Little
:
Yes LLoyd,
Great Insights.
Low payouts and flat earnings mean lower ROE.
That said if this thing get cheap pin your ears back………..Lots of work for them in the next few years. Trust me Qld Infrastructure is not in a happy place.
Lloyd
:
Ashley,
I agree with your last point. In fact I own and will continue to hold SWL on this basis. Of course, it helps that I bought them at a marked discount to current IV and price, which makes my hold decision much easier!. My only concern is that I didn’t fill my boots at the time I bought them, despite my convictions… It seems that I am always too cautious when I pick winners and overzealous when I have the poor judgment back losers …. then again this may be a hindsight bias!
Regards
Lloyd
Ashley Little
:
LOL Lloyd,
I have that same hindsight bias.
I put a modest sum into AIR a few months ago and can’t believe I did not have the foresight to see the flooding of 75% of QLD.
fred
:
Thanks all and I am not after advice Andrew but different thoughts and Ken, Christopher and the second in charge the great Ashley where kind enough to do that.
The Bullion has been sold and a cool 20% profit for me.
ken fraser
:
Fred and Brad, I have some of AIR but am waiting for the half year report. I don`t think they will do much until then. If SWL get their 2011 forcast their ROE will be over 40% for each of 2008, 2009,2010,2011 and the broker research I deal with forcasts increased profits for 2012 and 2013. I do not have any research forcasts for MLD either but they are travelling really well at the moment going by their latest update. Ken.
fred
:
Regarding Forge Group Limited Roger,
Some time ago you had a intrinsic value of $ 4. 65 on Forge Group. Trying very hard not to get to personal, does this mean that you have exited or planning a exit or has the intrinsic value risen in your opinion? I do not hold Forge Group myself.
Thank you Roger for all your help
I have enlarge some of your pages from your book and stuck them on my wall for a easy way to value a company.
Christopher
:
Hi Fred,
I think Roger has posted more recent IV’s for FGE.
By the way Roger, that Today Tonight spot also has to be an all-time record for your shortest interview!
Steve
:
I think you will find most people have a higher valuation now for Forge as there have been some profit upgrades and announcements. I think the last time I checked my valuation was around $6.50 but would probably be higher now. As I mentioned earlier, I think it could be one of the few top quality companies still trading at a big discount to its value
David Sinclair
:
I agree that Forge appear to be both a good company and cheap, but I can’t see a cometitive advantage anywhere. Their short/medium term prospects are probably good because there are plenty of jobs for mining services companies at the moment, but when the boom ends they may struggle because they have plenty of competitors. I own shares, but only because of the discount. I don’t think that they are a ‘buy and keep forever’, but a ‘keep an eye on them and sell when the discount disappears and/or the order book starts to thin out’.
David S.
fred
:
Hi room,
Today I am selling my GOLD bullion . Is this a good move or not????????
Astivita Renewables Limited ( AIR ) I do have some but is it at a good price to get some more???????
Waiting for your thoughts room
Andrew
:
Hi Fred, if you are coming here for advice then you have come to the wrong place. No-one here, including Roger, will be able to give you any advice as to what you should or shouldn’t be doing.
We are more than happy to discuss the in’s and outs as to whether it is a good company or not but we can’t tell you whether it is right for you to buy or not.
Adam
:
Hi Fred,
Although pretty to look at, gold itself has no intrinsic value, i.e, it produces no income. (Yes people will give you money for it, but value is not what you pay, it’s what you get.)
Much better to put it into profitable companies with a sustainable competetive advantage, than to look into the crystal ball and speculate on what the price of gold will do.
(Just my opinion, hope this helps.)
Ashley Little
:
Air are based is Rocklea Brisbane Fred and it looks like AIR and water don’t mix too well together
Lloyd
:
….looks like AIR and water don’t mix too well together……nice one….LOL!
Matthew R
:
lol, your sense of humour is excellent ashley
Ashley Little
:
BTW guys,
I don’t mind this little business,
Well run and they will recover
After all they are Qldlanders.
Breed em tough up here
LOL
Craig
:
Hi Roger,
Welcome back. Just checked out your new website. Very professional looking. Unfortunately, despite checking all my jeans pockets and under the car seats, I’m not going to make the minimumm investment :-). Will need to stick with Value-able for now. All the best with it.
Regards,
Craig.
Manny
:
what new website?
Ashley Little
:
LOL Craig,
I did not know what the min investment was untill just now(via google) but someone asked me yesterday and that is the exact figure I said.
BTW this is not an unusually high figure by industry standards
Greg Mc
:
I reckon it’ll get a few takers for sure, but not me….I fall just short of the minimum to be considered by just a few hundred thousand plus a bit. I observe that the different target market of this venture neatly avoids issues Roger had about going into competition with his mates at Magellan and Angus at Fat Prophets.
Matthew R
:
I think the financial industry should handicap the amount
Say if you are under 30, then it might be $50,000 minimum
Over 30, $200,000
Over 40, $600,000
Over 50, $1,500,000
Over 60, $4,000,000
Over 70, $10,000,000, except that when these applications come in the applicants receive by return mail tickets for an around the world cruise for two, a beach side holiday house with a playstation for the grandchildren, a phone with large buttons, a cheque with their application money less the preceding expenses and a crisply folded letter containing only the phrase “Upon thorough assessment of your financial circumstances we felt this was the best investment we could make for you”
Matthew R
:
I was reading the economist from Jan 22-28 and was interested to read the report on the world’s richest
According to estimates, there are only 10 million people on the planet with more than 1 million dollars in investable assets (ie excluding the value of a home, an art collection etc)
Interestingly the article goes on to say that if your total assets (ie including your house etc) exceeds $1M then you are in the top 0.5% of the wealth in the world (24.2m people in this bracket), and that collectively those in this bracket control more than a third of the world’s assets! There are 81,000 people with greater than $50m, 30,000 with more than $100m and 2,800 have more than $500m
And the average wealth of a person in this world? $30,700 to $43,800
We are really rich living in Australia (or other western countries)
Ashley Little
:
LOL Great stuff Matt,
What I can’t work out is how a surgion has the time or inclination to read “The Economist”
I sense that byou are almost as passionate out this stuff as me.
Keep up the good work.
Roger Montgomery
:
I can confirm he is Ashley!
fred
:
Tuesday Interest rate call 01/02/2011. My call is no move and also no move for the first half of the year.
Lloyd
:
Fred,
Does it really matter?
The short term is exactly that. It is what is going to happen in the next five to ten years that is the determinant of value. So what the RBA navel gazing determines in the next day, or month, is immaterial to the long run value equation.
The key issue for the next decade is secular interest rate tightening versus secular currency debasement. The reality is that both are equally value destructive. Think about it! And as Keynes said in the long run we are all dead!
So don’t sweat the first Tuesday of each month! It is all b.s. unless your into day trading and speculating, which is not what this blog is about.
Regards
Lloyd
Ashley Little
:
Hey Fred,
You could indeed be right
But you are speculating LOL.
ken fraser
:
It`s good to see a bit of humour from the bloggers. Ken.
Lloyd
:
Ken,
Yes I agree. You’ve got to worry when you take yourself too seriously. Hubris is the central element of Greek tragedy, which is as pertinent today as it was 2,000 years ago.
Regards
Lloyd
fred
:
Hi Ano,
Like you I am still learning but Navitas seems very dear but I am sure Roger will have more info about that then me. You don’t want to know my buy price………Its no where near it….hope I am some help.
Ano
:
Hi Roger,
Just have a quick question about NVT.
They have what looks like a strong first half result. My only concern is the 100 mill that was pumped into the company by a share purchase plan.
This company has a track record of 50% ROE at times. This will take a hit or jump depending on their aquisition.
What are your thoughts on the intrinsic value of NVT at the moment.
Roger Montgomery
:
I will have a look and get back to you Ano.
Ashley Little
:
Hi Ano,
Have not looked at NVT for awhile as it has been so expensive but had a look today….That future acquistion looks pretty bad for shareholders to me.
Their current roe is like circa 60% and they are buying this business at 12% roe.
IV must decline. Current shareholders will be poorer for the venture
When the Board start talking about earnings acceetive acquisitions…..Bah Bah………Don’t trust them…..This looks like it will drive the ROE much much lower and IV will follow.
Combined intangibles sent a shiver down my spine.
Hope this helps
Brad
:
MLD looks good value
I have IV >$3 for 2011 based on NPAT of $28Mn / 50% POR for 2011, don’t have any research for consensus no’s though.
Paul Muscroft
:
Hi Roger – would you ever consider setting up an internet forum so VALUE-ABLE students could help each other out etc. The blog comments are great but it’s difficult to follow the thread of a single topic/thought/question being discussed (not surprising as that is not what the blog comments are specifically for anyway).
Roger Montgomery
:
Hi Paul,
I have thought about it but they invariably turn into a venue for vituperous comments. I have seen many examples of otherwise excellent forums – even those run by professional organisations – turn into dens of animosity and envy. The impact on the provider of the blog is initially to light to be felt but quickly becomes damagingly heavy. At this stage I will leave it for others to find or establish there own. This will be the place to come if you wish to secure or discuss independent and rigorous information about the true intrinsic value of a company and its quality.
Lloyd
:
Wise move. Otherwise it potentially becomes Roger’s gladiatorial forum dominated by those with the largest egos and biggest you know whats weighing on small brains!
Greg Mc
:
‘Biggest you know whats’? Not sure what you’re referring to here, Lloyd.
No wait….Biggest competitive advantages. Of course.
Ashley Little
:
lol good one Greg Mc
Matthew R
:
LOL…. so sharp Greg
john
:
Hi All,
New to this… was usinng ARP as my first stock to calculate and found the payout ratio was 150%…what figure would i use for the growth multiplcation?
Thanks
Matthew R
:
ARP paid a special dividend in 2010 and you need to exclude that from the payout ratio calculation
Go to page 3 of the Annual Report to see the individual figures for the Interim and Final dividends
I hope that helps! Post back here with your IV
And by the way, great company to start on – ARP is a solid gold A1
john
:
Thanks Mathew,
I came up with a figure of $7.02. am i on the right track?
Thanks again.
Andrew
:
Hi John,
I got $7.71 so I think you are pretty much on top of it as the extra could be down to a few different reasons. Not sure how others have it. Hope this helps.
Ashley Little
:
Hi John,
Great first effort,
Mine is a bit higher but not much.
The important thing is to be approximately right which you are.
Now what we want to do is buy it at $4 or $5 to give us a nice MOS
Matthew R
:
Hey John,
Yes, you are on the right track – well done!
It is also useful to post your inputs, but from the IV you have generated I’m going to guess you chose an RR of 11-13%. Personally I use an RR for ARP of 12%.
So, no margin of safety right now, but be patient.
For interest, try calculating a future IV. There is a blog post on the topic here: http://rogermontgomery.com/how-do-value-able-graduates-calculate-forecast-valuations-2/
If you post back I’ll help you through that as well. Just remember to include the values you are using in your post.
I love this stuff,
Cheers,
Matt
Greg Mc
:
G’day John,
ARP paid a 40c special dividend in late 2009 which is artificially inflating your payout ratio figure. I’d exclude this from calculations of future value as this is unlikely to be a recurring feature.
nevada cody
:
i like to watch Peter Switzer one of my favorite programs he is fun to watch and he is a free market capitalist like my self and i liked the way he openly criticized the mining tax
cheers cody
Roger Montgomery
:
Thanks Nevada,
I also enjoy Peter’s company enormously and I can tell you his genuine enthusiasm for and desire to educate and improve the fortunes of investors and small businesses owners is on par with few others in Australia.
Jason
:
Hi All,
I’m looking at the Oroton Group’s annual report for 2010 and I was wondering if someone could help me out and let me know what the difference is between the Costs of Sales expense and the Selling expense? (And why is the selling expense greater than the CoS?) (Page 49)
For a comparison I had a look at Noni B’s 2010 AR and they combine Marketing and Selling as one expense which is close to the Cost of Sales but less ($30m vs $47m)
Thanks
Ashley Little
:
Hi Jason,
This mean that (roughly) the are selling someting for $146 that cost the $46…………………Wow how good is that.
Noni are selling something for $62 that costs $24…..Not bad but not as good as ORL
The selling costs would relate to store wages and rent
……Just my view but It is a very good thing that cogs are so low for ORL………..It suggest a competitive advantage. Not many businesses can sell comething for $3 that cost them $1.
Hope this helps
Lloyd
:
Jason,
“And why is the selling expense greater than the CoS?” Ashley’s analysis is correct to a point.
However, an important and often overlooked part of the selling expense is marketing and advertising cost. This is a large part of the means by which a bit of cheap stuff is turned into an expensive branded item. It is at the core of the ROE of the business….branding and brand recognition is what ORL is about. Without it, it would be just another retailer of commodity fashion accessories.
The other unspoken of key element in the case of ORL is design. This is where there is another major key person risk aside from the current CEO.
So the ORL business is far from risk free. It depends on continuing success in brand promotion and recognition, plus design that hits the spot for the brand conscious market. The former is maintained by a high marketing spend and this in part contributes to the comparatively high selling expense.
Regards
Lloyd
Jason
:
Hi Lloyd and Ashley,
Thanks for the thoughts. I was trying to establish the costs of doing business ORL and trying to work out whether to include the selling expense (as opposed to just CoS). Including it gives you a non-sense answer when you divide the costs by costs of sales since they are about the same amount (ie CODB ~ 100%) but given the continuing nature of the cost and its importance to the businesses as you have pointed out I think it needs to be factored in.
Maybe I will look a bit more into the CoS ratio however I think that would miss ineffective businesses which run high admin/rent/financing costs.
I will have to think on this for a little while longer.
Thanks again.
Ashley Little
:
Hi Jason,
A few blogs back their is a great Blog about cost of doing business I can’t fault this Blog (just can’t remember who did it)
Ashley Little
:
Hi Jason,
Their is a sub blog a few weeks ago about the cost of doing business for WOW…..I can;t fault the end outcome…(I Just can’t remember who wrote it.)
See if you can find it or maybe retail expert Ken can help
Hope this helps
Ashley Little
:
Hi Lloyd
Agree entirely but marketing costs are separately listed in the accounts and I presumed that a large part of the costs you refer to are in that area but I could be wrong
Lloyd
:
Ashley,
You are right. I didn’t go to the accounts. Rather I assumed that the marketing, advertising etc were rolled into the selling expense line as is done in some other outfits..However, on checking the accounts I see you are correct. The high selling + admin + marketing expenses means they are really relying on the brand recognition to carry the day. To Jason’s question the high relative selling expense may reflect the fact that they have little or no money tied up in store ownership when compared to Noni B? I know nothing of the latter’s business model but this is a point Jason could readily check with reference to the balance sheet Property Plant and equipment line.
Apologies for any confusion I may have caused in making an assumption as to what was in the Selling expense line without reference to the actual accounts.
Regards
Lloyd
Nic Arena
:
Great to see you on commercial TV Roger (for those of us that don’t have foxtel). Shame that it was cut to shreds. I said to my wife as you flashed past the screen that “I think that was Roger … but I couldn’t be sure”. I had to rewind the beyonwiz to see if it was really you. Hope you had a great holiday. Nic.
Gale
:
Hi Kerry,
The stats look like The Reject Shop. My IV is only a few cents different, using 11% RR, but maybe others are using a higher RR.
What do others think?
Regards, Gale
Rici Rici
:
sorry Roger but my time is more VALUABLE than to wait for tv shows like Today Tonight.
Roger Montgomery
:
I have never watched the program myself (like many of you, I am often working at that hour) and of course I expected – being a commercial broadcaster – they would trim the comments in the interests of time. While I was however surprised by just how much of the interview was cut, I was most stunned by your reactions to the mere mention of the program. I did not realise there was such a groundswell against any TV show. Thank you for all of your insights and for all being so candid. I think any Tv network that wanted to appeal to the many who read this blog, would do well to read this thread. Thank you again.
Ashley Little
:
LOL Roger,
Don’t mean to appear arrogant and condesending but that shows target audience if for people who’s IQs are slightly lower than the people on this blog.
At least you know now that if you ever .want to advertise your services then TT will not be a good place.
Steve
:
Switzer an excellent show and Peter always manages to secure really interesting and informative guests – from CEO’s of well known companies (and smaller interesting ones) to top fund managers and analysts etc. From an investors perspective I personally think the show shouldn’t be missed. Today Tonight on the other hand, well that’s a different story. They are just so inflammatory and misleading. Tabloid television. The scary thing is though it is one of the top rated shows. So while a lot of us don’t like it there must be a lot of people who do
Roger Montgomery
:
Hi Steve,
I am sure they were joking so no need to jump to his defence. Peter’s show is indeed excellent and I really enjoy being a part of it.
Lloyd
:
I am sure Peter S is always up for a cheap shot and can take it on the chin. After all, he throws a few at Roger!
Ashley Little
:
My Very Humble apologies guy.
My Comment were tongue in check
Go Pete.
Cheap research for Roger though.
Switzer is a great place to advertise if he ever needs to
fred
:
Grant, 15 mins is plenty of time for me.
Kerry P
:
Hi Guys,
My first try
EQPS = 1.98
Payout ratio = .695
ROE = 45.3
RR11%
Stp 1) 1.98 * 4.091 = 8.10
Stp 2) 1.98 * 12.626 = 24.99
Income 8.10 * .695 = 5.63
Growth 24.99 * (1-.695) = 7.62
Est IV = 5.63 + 7.62 = 13.25
This seems a little higher than the general concensus
any ideas why?
All data is from E*trade Ballance Sheet
Ashley Little
:
We would love to help you Kerry but we need to know what company you are refering to
Nic Arena
:
Hi Kerry,
If you are referring to The Reject shop my IV for 2010 is $12.23 and $13.90 for 2011. I have similar figures except for payout rate which I have use 75% due to the high ROE over the past 4-5 years because they can’t keep reinvesting the earnings back into the company at over 40% ROE for ever. Hope this helps Nic.
Kerry P
:
HaHa; Sorry guys
Forgot to mention it was indeed TRS, thanks nick that helps a lot
Ashley Little
:
Good first effort Kerry,
Now you want to buy it at $7 or $8
Andrew
:
Hi Kerry
have a look at the homework thread. I think there would be close to a hundred calculations of the reject shop in 2010. For what its worth mine was as follows:
NPAT 23351
Equity 51,543 & 40,428 (average 45,985.5)
ROE 50.78% (used 50% on the spreadsheet)
Dividends 16,103 for a 69% POR)
Shares 25,973
EQPS $1.98
RR 11%
Step 1 $1.98 X 4.545= 8.9991
Step 2 $1.98 X 15.263= 30.22074
Step 3
Income 8.9991 X 69%= $6.209379
Growth 30.22074 X 31%= $9.3684294
Intrinsic Value for Reject Shop $15.58
The difference between yours and mine seems to be due to ROE. Everything else seems to be the same. My figures came from the annual report which i always reccomend when it comes to completed years. I only use broker info for forecast IV’s
Lloyd
:
Roger,
Today Tonight – nah! Not even your wisdom is worth that pain. Switzer is about as far as ‘ll go and about as much as I am prepared to suffer!
Regards
Lloyd
Adam
:
Just about the decline of ABC Learning honestly not worth watching as most TT stories have no substance
Roger Montgomery
:
Arguably not a high enough margin of safety Adam! Great to see you applying the tenets of Value.able with discipline.
ken fraser
:
Stephen, I agree FGE seems to be the best value buy out of all the stocks at the moment. Ken.
Roger D
:
Guys its just a 20 second commentary on ABC learning, dont get too excited!
fred
:
come on roger we are your loyal supporters , tell us before 3.45pm so we can check it and buy some.
Grant
:
I hardly think 15 minutes is long enough to conduct your own research Fred!
Plus the story was about a dog, not a winner unfortunately…
ken fraser
:
Recently listed MLD is looking cheap on their up graded half year forcast. Ken.
Stephen
:
Ken,
I remember looking at MLD closely before it listed and I agree it looked encouraging and below its IV.
I think at the moment though it’s over $2.00 so may just about be at IV. You’re right though in saying that if its earnings do come in above estimates it may need a recalculation of IV that’ll make it worth a second look.
For my money, I like Forge Group (FGE) a lot more than MCE given its vertical structure of services across the mining industry, and it’s below IV as well as its expectation that it will exceed its profit guideance.
Pat Fitzgerald
:
Hi Ken
Considering they only listed in early November 2010, it looks to be a massive increase on their prospectus forecasts. It looks like well run mining services businesses are still the place to be in 2011.
Greg Mc
:
G’day Ken,
Using a ROE of 45% based on what I think will be around the mid point of the upgraded earnings range and a RR of 14 I get an IV of 2.47 so I think it is a bit on the cheap side still. I think though that there is a ‘rising tide lifting all boats’ situation in this sector right now and even companies that are just ok will go very well for now. MLD in my opinion lacks the attributes that would see it continue to kick goals if the mining services sector cooled off a bit however and that means that while I’ll continue to hold them for now, I’m not inclined to buy more at the current price. Maybe if they dropped 20% more….
As always, take my opinion for what it’s worth, which is not much.
Ray H
:
I agree Roger – Today Tonight is just too painful.
Terry
:
No, its probably the whole milk fiasco with supermarkets.
Terry
:
My guess is EDI Downer?!?! Any clues roger?
Ann
:
Missed it, what was the stock
Emily
:
I hate it when I log in 1 day too late. How long till u tube is up?
John M
:
I missed the show so I searched for the video and found it here.
http://au.todaytonight.yahoo.com/video#
Groves back in the spotlight
Short, nonetheless very important lesson. Warren Buffetts Rule No.1 – Never lose money: I think the ABC Learning case qualifies as an example of losing money.
Michael P
:
Thanks, the link worked. Fascinating advertisment under the video – A mother of three from Queensland is revealing how she went from virtually zero to a $3.5 million in her first 18
months in real estate by giving away her book.. (FOR FREE)
Hope her secret was not riverside property.
Much more interesting reading about ABC Learning in Value.able – Roger on declining ROE and cash flow analysis of this company.
Roger Montgomery
:
Thanks for that John M. I would have liked a few more of the comments I made to have ben broadcast but I also understand how tight the production schedule is for commercial TV.
John M
:
Welcome back Roger. We all missed your insightful insights. I hope you had a very relaxing holiday and recharged the batteries.
Roger Montgomery
:
Thanks John,
Great to be back. Lot’s to do. Back soon.
Jason
:
I wish I knew Today tonight in NSW is different to the TT here in Perth. I waited anxiously through a story about an unclaimed lotto ticket, how sickies today caused a loss of GDP of $30m (the world is falling ..) and a tribute to Heath Ledger.
I’ll wait for the segment to hit your youtube channel
Good luck with the new fund by the way
Brian Aitken
:
Unfortuatley we never received this interview on TDT in the West. I’m looking forward to your posting tomorrow
Brian from Perth
Lloyd
:
Lost in translation?
William
:
Hey Roger just ordered your book this evening. Do you have a rough idea what time i will get it in the mail (Melbourne)?
Thanks Roger
Roger Montgomery
:
Hi WIlliam,
The book I am told is mailed from the Distribution Centre the day after they receive notification. The rest is up to Australia Post. If you have been waiting longer than ten days, you should send me an email.
Scott
:
C’mon Roger, please give us the info here and spare us the pain of watching Today Tonight.
zoran
:
Roger,even for you,I will not give up my friday evening.
Cheers
Zoran
Roger Montgomery
:
Arguably not a high enough margin of safety! Great to see you applying the tenets of Value.able in a disciplined fashion Zoran.
Roger Montgomery
:
Zoran, If the margin of safety is not big enough…
Luke
:
Exactly my thoughts as well.
I’m sure Roger’s insightful comments will be wedged in between a story about fuel prices and a story about the tenants from hell. However, I will suffer the pain of watching Today Tonight just to see what he is up to.
Roger Montgomery
:
Thanks for that Luke, unfortunately it appears to have been a ‘low ROE’ investment and very little in dividends either. Those who suggested the Margin of Safety was too narrow may have been rewarded with a better return.