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Value.able: It’s a trap!

Media Room, On the Internet | Comments (12)

Value.able: It’s a trap!

Many shares that appear cheap based on their fundamentals may just be harbouring dark secrets. Read Roger’s article at www.eurekareport.com.au.

INVEST 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.

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12 Comments

  1. Peter M (Mully)
    :

    Hi Roger,

    I’ve been doing some research into the retailing sector recently and came across an excellent article comparing in store with online retailing which I thought may be of interest to others. Here are some of the key take outs which I thought were particularly interesting.

    1. Price comparisons across 99 products (online vs in store) revealed that prices were 19% – 64% cheaper online. Books (64%) and cosmetics (44%) revealed the highest discounts.

    High labour and rent costs represent approximately 70% of in store retail operating costs in Australia and are a key contributor to the above pricing differentials.

    2. Australian online retailers have only taken approximately 9% of industry growth since 2005.

    3. In store retail sales CAGR is expected to slow to 3.6% (down from 5.9%) over the next 4 years whilst online retail sales are expected to grow 20%+ a year.

    In the US, internet retailing has taken 19% of retail industry growth since 2005. In the UK, the number is 39% during the same period. It is expected that online penetration in Australia is likely to reach 8.4% by 2015.

    4. Online retailing is expected to have the greatest impact on the in store non food retail category. Food retailers are expected to be relatively unaffected by online retailing (eg WOW, MTS).

    5. Electronics & electrical, department stores, clothing & footwear and newspaper & book retailers are expected to be the most affected (eg JBH, HVN, MYR, DJS, PMV, BBG)

    6. It is expected that of the $18bn increase in sales, online retailers (at current growth rates) will take more than $10bn of it.

    6. There is a view that current consensus earning forecsts for non food retailers may be as much as 11% too high.

    7. Consumers who shop online are wealthy, educated and employed. Generally, online shoppers are more affluent and spend more than shoppers that don’t shop online. Online retailers are currently successful in “stealing” in store retailers’ best and highest spending clients.

    8. According to the RBA, the number of Australians who have used their credit cards overseas in the past 5 years is up more than 130% which suggestes that Australians are travelling more and buying more products from overseas retailers.

    9. Relatively high returns/margins in Australian retailing is likely to attract international retailers to Australia.

    10. Consumers are expected to welcome lower prices on a wider range of products and well known brands avalable online.

    11. The Productivity Commission review currently underway is expected to recommend that the Government remove the under $1,000 GST free threshold on overseas online purchases to level the playing field and ensure competition is on the same tax base. Whether the government adopts such a recommendation is another matter given the unpopularity associated with the intoduction of new taxes.

    12. Whilst the traditional retailing industry thinks differently, there appears to be a view that in store retailers have had it too good for too long and have been over earning. As such, competition from local and international online retailers may not necessarily be a bad thing.

    Hope the above is of some interest.

    Peter

      • Lloyd
        :

        Peter M,

        Peter M,

        In my opinion, that is amongst some of the most valu.able intelligence posted on the blog. It reinforces many of the concerns I have regarding the sustainability (or lack thereof) of the current state of play in retailing sector and the commercial retail property sector. Certainly the projection of past rates of return in these sectors into the future is problematic at best, high risk at worst.

        Thanks for the insights.

        Regards
        Lloyd

      • Peter M (Mully)
        :

        It’s a pleasure Lloyd. Glad to have been able to reciprocate considering how much I’ve benefited from your contributions to the Blog.

        Regards
        Peter

    • Paul Middleton
      :

      Excellent summary Peter.

      Important to bear in mind in all of this discussion that some in-store retailers can and are becoming effective on-line retailers. They can probably maintain their cost advantages of scale (purchasing power), and transport (delivering locally).

      Fascinating times, following which companies are nimble and adapting to changes in consumer behaviour. Insightful investors (i.e those schooled here) will continue to be able to decipher the extraordinary businesses.

    • Craig B
      :

      Peter,

      Just on your last point, number 12, I despair of any argument that treats the noughties as the norm. The credit expansion up until 2007 fueled much retail – and other – activity through that period and retailers crying poor now as people are saving need a dose of perspective, as ever increasing household credit is not in the long term interests of this country.

      Two things re online retailing:

      1. If I was super keen on purchasing a particular item I’d still prefer to pop into a store and check it out. Being impatient by nature, I’d also be disinclined to wait a week or so for something if I was hell bent on getting it. But I’m obviously not normal!

      2. I’m going to miss Border’s. Though with a young family its rare indeed now, I’ve enjoyed more than a few lost hours poking around good book stores, Border’s included. I sure hope stores like Glebe Books survive.

      regards

      • Peter M (Mully)
        :

        Hi Craig,

        Thanks for your comments. In the interests of providing some further clarity and context around point 12 of my initial post, it was made in the context of how the government may respond the Productivity Commission report into the retail industry which is due for releas some time befor November.

        Clearly, being exposed to more competition is a concern for retailers and especially so when the new competition (online) is on a preferred tax basis. The author of the report I’ve been reading would like to think that the Productivity Commission will look further than just recent ordinary sales performance.

        Rather, it will look at the longer term profitability of the retail industry. By doing this, the Commission could conceivably conclude that, due in part, to restrictive zoning laws, the retail industry has been over earning for some time.

        Apparently, research reveals that margins for the entire (listed and unlisted) retail industry shows that since 1992 profit margins have grown from 2.4% to 4.5% and that retail profits have outstripped sales by almost 2-to-1.

        It’s against this background, that the Productivity Commission could conclude that the retail industry has been over earning and new competition is necessary.

        Cheers
        Peter

    • Steve
      :

      Hi peter,

      Thanks for the information. It would be interesting to see the correlation between the increase in Australian dollar and the rise of online retailing. If there is a strong correlation, then a decline in the dollar may well bring people back to the shops simply because the products become cheaper. I think there are some comparisons with the airlines in the sense that people are not that loyal but simply by on price – if it is cheaper at JBH then go there. If it’s cheaper at an online shop then go there.

      The other issue is that I live in Japan and I have an Amazon account and when I buy books (now to my kindle). Each time I do my Australian bank slugs me for fees and charges which adds to the costs ( a good reason to buy the banks I suspect according to your point 8). I am not sure what the comparison is and judging by your information it still may be cheaper to shop online but it would be an interesting comparison.

      I suspect that the high dollar is driving people to overseas suppliers for many electronic goods.It would seem that with many of the goods and services that you can buy online, price is an important criteria – the cheaper the better. In addition to this, I think the impact of online sales needs to be made at the individual company level. For example, JBH is a great retailer and it may see a rise in it’s online sales which offsets the decline in in-store sales.

      In many cases, we will see who are actually great retailers and who has simply being trading on factors other than the apparent skills of management. A book called The Halo Effect has some interesting thoughts in which the author details many companies who ascribed to brilliant management when in fact it was simply external factors such as a growing economy rather than the inherent management skills.

      regards
      Steve

  2. Peter M (Mully)
    :

    Hi Roger,
    Enjoyed reading your excellent article on CCV and realised that I had also inadvertently omitted to mention in a previous post of mine the concerns I had about the headwinds they may be facing in relation to changes to the national consumer credit act. This together with the emergence of Ezicorp as a significant substantial shareholder probably goes some way to explaining why the business has not been particularly well received by the market lately which is a pity because, until these developments, I had been a happy investor in the business but have since lost my enthusiasm for it.

      • Matty
        :

        …your blog comments

        …between the lines?

        …Value.able

        Didn’t mean to try and put words in your mouth Roger.

        Value.able has lead me into some subjects that must be covered in business schools for the leaders of tomorrow. It is the MBA subject I will never get around to doing in a full-blooded MBA school, but nevertheless very stimulating.

        Just read something on cost of capital which I will have to investigate further…. How can spontaneous liabilities offset the amount a company has to raise in debt and equity that they need to pay for assets? By assets I envisage warehouses and shopfronts. How can accrued wages and other variable costs be subtracted from the hardware required to run a business?

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