Value.able TV #2: Were you like a kid in a candy store today?

Global markets | Comments (154)

Value.able TV #2: Were you like a kid in a candy store today?

The US stockmarket had its biggest one day selloff since the GFC last night.

Back on 1 December 2008 the Dow Jones plunged 679.95 points. Last night the US market dropped 511 points – that’s a 4.31% decline. All 2011 gains were wiped out.

The Dow Jones Index is now down 10 per cent since May. The US is officially in recession territory.

Humans instinctively have an aversion to a debt crisis, but not a solution. And how do investors (not Value.able Graduates) react in such an environment? With fear. And it is that fear that drove our market down 4 per cent today.

But has anything significantly changed that would result in the intrinsic value of Decmil falling 12 per cent since yesterday? I will let you judge and respond accordingly.

Value.able Graduates, stick to our mantra: put together a portfolio of extraordinary A1 businesses that you believe will be much more valuable in five, ten or twenty years time.

If you are yet to join the Graduate Class, click here to order your copy of Value.able immediately. Once you have 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).

Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 5 August 2011.

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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154 Comments

  1. Davey W
    :

    Hello everyone,

    Keen to take advantage of the resources boom, I have been looking at some of the big mining companies. My BHP valuation must be far too high – if I’m right on this one, it is one hell of a bargain! Here are my calculations – have any of you valued BHP? Please set me straight if you see any glaring errors!

    SOI: 3,358
    Average Shareholder’s Equity: $45,020
    EPS: $3.87
    DPS: $1.38
    NPAT: $13,009
    Dividends: 4,618

    Step A. EQPS: $13.41
    Step B. PR: 36%
    Step C. ROE: 29%
    Step D. RR: 11%

    Step 1&2.
    Income: $13.41 x 2.727 = $36.57
    Growth: $13.41 x 6.086 = $81.61

    Step 3.
    Income: $36.57 x 0.36 = $13.17
    Growth: $81.61 x 0.64 = $52.23

    Step 4.
    $13.17 x $52.23 = $65.40

    IV = $65.40

    • Ash Little
      :

      Hi Davey,

      I am not using 11% RR FOR BHP.

      If you look back through history and the historical price movements(which I know we shouldn’t) the market has put a RR of about 14-15%. Which I think I always thought was about right.

      Just my View

      • Davey W
        :

        Hi Ash,

        Thanks for your input – using a RR of 14% I get a much more conservative intrinsic value of $44.19. I suspect my valuation is still too high, but it seems to be at least ball park now!

      • Ash Little
        :

        Hey Davey,

        Having a quick look at forecasts for 2012 it may be very cheap but as the biggest input is commodity prices who knows.

        I think they will go up but I am usually wrong on these things.

      • Stuart
        :

        Ash,

        We all love your work but have become concerned that you are “usually wrong” so many times lately. If I was right as often as you were I would be very happy. Don’t talk yourself down.

  2. Davey W
    :

    Hi everyone,

    I do feel like a kid in a candy store – I’m just having a little trouble deciding which candy’s to buy! A good problem to have I suppose.

    I have done a IV calculation on Cohlear (COH) based on the preliminary 2011 final report, but I know that my result isn’t right. I was hoping a fellow value.able grad might be able to highlight where the mistakes lie. Here goes:

    SOI: 56,680
    Average Equity: 470,796
    EPS: $3.18
    DPS: $2.1
    NPAT: 180,114
    Dividends: 118,948

    Step A. EQPS: $8.31
    Step B. PR: 66%
    Step C. ROE: 38%
    Step D. RR: 11%

    Step 1&2.
    Income: $8.31 x 3.409 = $28.33
    Growth: $8.31 x 9.094 = $75.57

    Step 3.
    Income: $28.33 x 0.66 = $18.70
    Growth: $75.57 x 0.34 = $25.70

    Step 4.
    $18.70 + $25.70 = $44.39

    IV = $44.40

    I am confident that this number is way to low, but I have gone over the numbers a couple of times and can’t see the error in my ways. Any help would be greatly appreciated!

      • Sara
        :

        Hi, Davey,

        Haven’t got Valuable with me to check the final calculation, but I think your ROE, EQPS figures are right. I have a slightly higher PR 71% base on SOI of 56,596,077. I think your calculation is right. I believe this is one the case where as Roger said some A1 companies are simply trading at a price much higher than their IV and stay high for many years.

        Now a question to Roger. Can you please shed some lights for us on the IV for NVT? I came to an IV of $7.39. Does it appear such a discount to you as well? It worries me a bit about their debt level at the moment. Many thanks!

      • SteveB
        :

        Hi Davey,

        My IV is $47.45 for 2011, RR:11%, using prelim final report. In comparison, the only difference i found was our EQPS figure. I used ending EQPS as indicated P.188 step A & p.190 step 3, not avg. equity.

        Maybe i read it wrong or maybe both of us are right. Either way, our IV’s are close.

    • Matty
      :

      Hi Davey,

      Your numbers look pretty spot on to me. In my opinion, you may want to question your RR. For a company like COH which now has net negative borrowings and a strong Roger Cash Profit of $239mill. (132% of reported profits) it would seem this company is financially pretty strong. If COH doesn’t deserve an RR of 10%, then I would like to know what company does?

      Also if you look into the 2012 forecasts, I have COH valued in low $60’s based on RR 10%

      Just my humble opinion and my calculations may stand to be corrected just like my portfolio has. (I can post the corrected numbers in red to match my portfolio if you like.)

      Matty

    • Craig B
      :

      Its not way too low Davey, simply a great business that seems to always be trading way above its IV.

      I actually clock it a touch lower, though I use starting equity.

    • Ryan Joyce
      :

      Assumptions and calculations all look good to me. It has been discussed on this forum before that COH has traded above IV for a long time, similar to WOW over the last 5 years. I think this is a common occurence for a high profile, popular, stable earning business with high returns on equity. The reason may be that there arent many companies with the same performance figures as COH in the ASX50.

      • Davey W
        :

        Thank-you all very much for your replies – I’m surprised and relieved to hear that my IV calculations are around the same as you guys have. It sure is expensive at the moment!

  3. Ryan Joyce
    :

    Hi All,

    I have also completed an intrinsic value calculation for JBH and I believe the approach many people seem to be using for calculating the 2011 IV has a number of fundamental errors caused by the way a share buy back affects IV using Roger method. Using the Book Value for 2011 (after share buy back) in IV equation reduces the IV substantially but at the same time you are using the 2010 Book Value to calculate ROE (or an average). This is fine generally but not in the case of the share buy-back. In this instance you are getting all of the downside from reduced equity but none of the upside from increased ROE.

    I would suggest that for a sensible IV you could use one of two combinations. Combination 1 would calculate ROE on 2011 earnings and 2010 Book Value but in the IV formula I would use a “theoretical book value” of 2010 BV + 40% of 2010 NPAT. Combination 2 would calculate ROE on 2011 earnings and the 2011 Book Value, giving a much higher ROE, and in the IV formula I would again use the 2011 Book Value. You will note however that using these two methods will still give quite different answers IF you use the same discount rate.

    My calculations gave the following

    Combination 1 – ROE 46%, 2011 BV (theoretical) = $21.11, PR 60% (as stated in financial report), Discount Rate 12% gives IV equals $21.11.

    Combination 2 – ROE 88%, 2011 BV = $1.54, PR60%, DR = 12% gives IV equals $29.

    However given the much higher debt to equity ratio that JBH is now operating at the associated risk I believe it is appropriate to demand a higher return and therefore a higher discount rate. This led to me calculating a third combination.

    Combination 3 – ROE 88%, 2011 BV = $1.54, PR 60%, DR = 15% gives an IV of $21.65

    Interestingly enough this is very close to the combination 1 IV which I think is appropriate given the fundamental business has not changed and the IV formula (if using a higher discount rate) has not rewarded the business for taking on a large amount of debt.

    I also calculated a 2012 IV. It assumed 8% EBIT growth, no significant items and $16m in interest costs. This gives a 2012 NPAT of $134m. This gives ROE of 88% and a 2012 BV of $2.08. Using PR of 60% and DR of 15% this gives an IV of $29.25. This suggests a large increase in IV, however if they continue to only pay 60% of their earnings out their BV will increase quickly, reducing ROE sharply and in turn decreasing IV; alternatively if they increase their payout ratio this will maintain ROE but also decrease their IV. So either way I think this figure is unrealistic and either a higher payout ratio or lower long term ROE would need to be used to calculate a more accurate valuation.

    • Roger Montgomery
      :

      Hi Ryan. You are spot on and there are some useful suggestions there. Thank you for taking the time to contribute to the community’s knowledge library. What a fantastic place to congregate when the market is throwing so many fat pitches.

      Using my method on JB Hi-Fi, I get a valuation of $17.30 for 2012 and about $20.08 for 2013. Hope that helps. Of course be sure to keep conducting your own research and seek and take personal professional advice.

      • Craig B
        :

        The great thing about the price on offer at the moment is that the variances in IV calcs performed by various contributors (and Roger) are rendered obsolete.

        The child is clearly underage and shouldn’t be driving the car!

    • Peter Pitsos
      :

      I can understand your methodology Ryan and 24hrs ago would have agreed with you unconditionaly, however after thinking about this today, I am taking the approach that there are no fundamental errors in the valueable methodology, regardless of the buyback. Infact I stand by it more now.

      Before the 2011 report was released, I had punched in the numbers inclusive of the buyback in my Valuable model to forecast the IV for 2011. I couldn’t believe the forecast IV was less than $14. I was convinced that I was doing something wrong. So I waited for the annual report and to my suprise it confirmed that my forecasts for 2011 were accurate.

      Think about it for a minute –
      JBH is in full swing rolling out stores , they need capital to roll out and yet they buy back shares and give 173m back to shareholders – and take a loan to do this.
      Does this make logical sense ?
      What is the real reason behind this ?

      In my mind management have simply leveraged the company for the potential of higher “leveraged” returns. However if you leverage you are also increasing risk to the downside.
      Whilst most of us are confident that JBH will pay down debt quickly, the fact is that they have increased risk to the balance sheet and they are no longer an A1 because of the high D/E ratio. Infact Roger has indicated an A3.

      So to my mind, Rogers value able model was “flagging ” a fundumental change to the business and an increase in risk. Hence the low forecast valuation of less than $14 for 2011.
      The valueable model was telling me ” tread carefully ”

      We can all make changes to inputs so they make sense in our own minds.
      I have concluded that I should input the numbes as they stand. If`the valueable model is signaling something, then I should be listening to it.

      In saying that I too have a IV over $20 for 2012. But I am investing in a company with more risk on the balance sheet now.

      My thoughts anyway.

      cheers

      • Ryan Joyce
        :

        Hi,

        I agree that they are now leveraged and should undergo a quality rating review and be subject to an increased discount rate, as per my combination 3. However the sharp reduction in calculated Intrinsic Value is purely a timing issued used by using two different book values in the intrinsic value formula. The large change in intrinsic value will tell you that something significant has happened regarding the business, whether it be profits or capital structure and that it should be investigated as all purchases should.

        However you must question whether the intrinsic value has declined from around $20 in 2010 to $14 in 2011 and then back to around $20 in 2012. I dont believe it has and that its needs to be calculated in a slightly different manner though still on Rogers IV principles of ROE, PR, DR and BV.

        For example you could calculate the intrinsic value of the business on a monthly basis if you had access to the management accounting reports. It would obviously jump around a lot more due to the shorter period. But if you were to calculate the IV as at August 2011 based on the monthly reports for July 2011, i think you would find the IV would be closer to your 2012 $20 value as the timing issue caused by the buyback would be removed.

  4. chris b
    :

    Hello All,

    I was playing around with the JBH HF result and got some really aggressive increases i value for next 2 years. Current Valuation is around $13.99, but rising to $29.45 next year and $36.77 the following year.

    My inputs are:

    Current – ROE of 50%.POR of 69%. Average Equity of 222.8. RR of 10%. i also adopted $109.7M as the net profit figure to be conservative.

    2012 – EPS of $1.459, DPS of $0.87. This gives an average equity of 181.46(prior Years equity of $152.3 and projected being $210.6). This gives a POR of 60% and ROE of 79%(adopted 60%). No new shares issued. A RR of 10% gives a valuation of $29.45.

    This seems a little agressive to me, but I can’t find an error – any ideas/suggestions?

    • Duncan
      :

      Chris,

      You have the POR decreasing from 69% to 60%? So you think they will retain more profits and spend it on what? Rolling out stores even faster?
      I think it more likely the POR will continue to increase further as they run out of profitable ways to deploy the extra capital. See what shifting the POR ratio up each year does to your figures.

    • Andrew
      :

      I saw the same thing. However my thoughts are you need to think about the large increase in debt. The EQPS+EPS-DIV formula works great for a company with no debt as the changes to equity will be roughly exactly what is retained by the company. JBH is not that company any more and has a large share of debt which as it is repaid will see Equity increase, ROE decrease. Also, i believe the POR will be a bit higher than 60% as well, I do not believe that JBH will reduce their pay out ratio, instead it will likely go up. If they do it will only be temporary to help repay the debt.

      Until i solve this puzzle i cannot confidently forecast JBH Value.

      • chris b
        :

        cheers guys, yes the POR should be dialled up. I had put that in from forecast figures, but should have thought about what it was telling me further.

        One further question on cashflow, and the impact of the higehr debt.

        I work out negative cashflow of $208M, with the following calcs:

        Cash – ($24.5M) – 27.2 down from 51.7 less
        Borrowings – $197.9 – 232.5 up from 34.6 less
        Capital – (9.8) – 98.5 down from 108.3 following buyback add
        Divs paid – $4.36M – 75.84 up from 71.48

        Comments appreciated

  5. Pat Fitzgerald
    :

    Hi Roger

    SomnoMed Limited [SOM] is a tiny business which I think will get upgrades to their 2012 earnings forecasts from analysts.

    SomnoMed Limited is a medical device company and designs, manufactures and markets a range of oral sleep appliances for the treatment of sleep apnea, snoring and bruxism.
    SomnoDent can be a first option for patients with mild and moderate conditions, before the use of CPAP.

    SOM believe they have the best product of its type in the market.

    Revenue is increasing, they have no debt and the ROE is increasing.

    They were cash flow positive in the June quarter.

    Events that may assist in revenue growth:

    In December 2010:
    SomnoMed announced the signing of an exclusive, world–wide distribution agreement with
    Zephyr Sleep Technologies Inc. (“Zephyr”) for MATRx, a new product based on remote controlled mandibular positioner technology (“RCMP”). MATRx (I think it is still awaiting FDA approval ?) is anticipated to improve patient care by enabling
    Physicians to identify and characterize patients suitable for the SomnoDent® sleep apnea therapy. A MATRx study uses very similar methods to those currently used to determine the effectiveness of continuous positive airway pressure (“CPAP”). As the same testing for the widely accepted CPAP treatment will now be used for OAT patients, sleep physicians will be more comfortable prescribing the
    SomnoDent® oral sleep apnea appliance.

    February 2011: Medicare reimbursement in the USA.

    Market launch in Q4 of the next generation of the world’s # 1 oral sleep apnea appliance. The SomnoDent G2 will again raise the standard in comfort, compliance and treatment for the patient and the doctor.

    My IV for 2011 is 19 cents and currently my IV for 2012 is $1.50.
    I think this business will continue to grow over the next five years or more and I currently have a small amount invested in them.
    There are currently lots of better businesses at bargains but some may want to add SOM to their watchlists.

  6. Jeff
    :

    Roger,

    while I am sure the A1 service will be valuable whenever it is released it would be pretty handy to have access to right now! Graduates have been waiting “with bated breath” since May/ June when you first mentioned it. Could you maybe give us an expected date for release, to calm some nerves?

    jeff

  7. Matthew D
    :

    The Rio Coal and Allied proposal looks to be valuing C & A at around 2 x its IV for next year.

  8. Adam
    :

    G’day,

    A tad confused on calculation of payout ratio. Going by Roger’s initial valuation spreadsheet, I was under the impression it was simply a matter of dividing dividends paid ($M) by the Net Profit. I’m noticing that the analyst data sheets I’m reading lately seem to calculate it as DPS/EPS. Can someone please set me straight? I’m starting to doubt a lot of my IV calcs.

    I don’t comment much/ever but I’ve been around since the start and am grateful the quality of comments here is above and beyond the average stock chat room. Rumours and innuendo I can do without. A few less Buffett quotes would be nice too but you can’t have everything. :)

    I know gold and resources don’t get much of a look in here, but I’ve done quite well with MML and the GOLD ETF over the last 12+ months. I understand it can be a divisive topic, but I’ve found it to be a pretty good hedge against general market movements.

    Cheers.

    • Ash Little
      :

      Hi Adam,

      The payout ratio has been dicussed before here and I think the conclusion was that was long as you are consistant over time it won’t matter.

      Regarding Gold, I heard a rumour that QE3 will start tonight so to give on of my favourite quotes and yes it is not Buffet……….”Don’t sell your gold stocks”

      • Adam
        :

        Cheers, thanks for that. I’m no gold bug but I still think it has its place as a store of value. Tonight will be interesting – I don’t think anything that Uncle Ben says or does will help (it hasn’t so far but he’s stubborn if nothing else) but as you know, it all depends on what Mr Market thinks. My opinion doesn’t matter.

      • Greg Mc
        :

        You’re not speculating again are you Ash? Tsk, Tsk. Mind you, I can well imagine the Bernank riding in with as many QEs as deemed necessary. Didn’t Argentina run out of printing paper for the presses once?….I forget which country that was.

        Roger mentions (above) the market throwing many fat pitches at the moment, as it did in 2008/9. At the time, I was swinging with the best of them as I had already cottoned on to his way of thinking, but without the proper framework to identify and value businesses, I was swinging with my eyes closed. Luckily, I still connected with a few but things are much easier this time around! Thanks again, Roger.

  9. Brad
    :

    Sorry to seem like a Cassandra but I can’t get over the line on any retailers other than CCV and ORL.

    BTW nice arbitrage in CCV with stock at 61c and bid possibly to come at 91c from EZCorp. If bid falls over, my Val is 95c.

    Even money favourite paying 2/1 – Nice odds…….

  10. Peter Pitsos
    :

    Just a couple of interesting things I noted in revaluing JBH as a result of the buyback and increase in payout ratio.

    The share buyback reduced equity per share from 2.71 to about 1.55 per share
    The payout ratio increased to 69% on the declared Dividends.
    Both of the above inputs have a negative impact on share valuation.

    On the upside the ROE increased to 49% as a result of the buyback.

    Putting in the latest set of numbers, as noted above I come up with a valuation below $14 using a RR of 10% for 2011.

    If I strip our the clive robinsons restructure charge and add post tax earnings to NPAT then ROE jumps to 60% and value jumps to 18.46 for 2011.

    Going forward on the outlook statement for 2012 things aren’t looking bad at all – I anticipate EPS around 1.29 ( based on outlook statement ), ROE increases, EQPS increases and the stock is valued back over $20 for 2012.

    A quick question for Roger or bloggers,

    Using the “balance sheet cashflow” analysis, the borrowing increased from last year by 163k – THis results in a “total entity cashflow” of negative 103.6k – Now we know that the increase in borrowings was for the share buyback.
    So is this a true reflection of the “total entity cashflow” or do we need to make some adjustment because the raising of debt was used for the buyback.
    If we need to make an adjustment, what do we adjust ?

    Thanks

    • Roger Montgomery
      :

      Thats an easy one Peter and there are a couple of options. One is to reverse out the borrowings or you can have a look at PP&E – but thats part of the store roll out and normal to the business.

    • Nigel
      :

      Hi Peter, I was also puzzled by what appeared to be a negative cash flow, but then I had used 88mil as the dividend payout, I think that is an error, because the extra 167mil (paid out as a dividend for the buyback) should be added to the 88mil then you get a very healthy 66mil positive figure.

    • Matty
      :

      Just to chip in my own musings on the valuation. I assumed that the restructure charge was a once off, but to counter this I reduced the average equity by taking into account that the share repurchase was carried out in May. My ROE then falls to just under 50%. With a RR of 10%, POR 65% I get IV $12.50.

      The really interesting part I find is when we look into next year what the ROE will look like on this reduced equity. If we assume the forecast 8% increase in sales goes straight to the bottom line then I get an ROE of 83%. Is there something I am doing wrong?

      IV goes from $12.5 to $25! (I also assume 70% POR) This is on a 10% RR which I am reluctant to do in this market, but as I now realise, we should be looking at businesses whose value is rising at a good clip……

      RR probably depends on business risk factors and interest rate settings as I understand but in this market I am looking at all the safety margins I can get and still getting a few buy signals.

      • Ash Little
        :

        Hey Matty,

        If you use analyst forecast then I am getting a lower for 2012 but not massively.

  11. Brad
    :

    Would you prefer to lend the US Government $100k @ 4.3% for 30 years or buy MCE @ $5.50, VOC @ $1.95, ZGL @ .38c?

    It’s a no brainer.

    BTW, the US will not default, the US Fed prints greenbacks! The currency will almost certainly decline and inflation rise but the US will pay it’s debts.

    Furthermore, these rating agencies had Iceland and Ireland as AAA until 2009! Both countries are now broke!

  12. Nic Arena
    :

    Hey Roger,

    What do you think of Advanced Share Registry (asw). It looks quite a good business (possible A1???) just expensive at the moment. I have an IV of 39 cents. Does it get a high MQR and do you think it is expensive as well? Currently 76 cents. Thanks.

  13. Howard
    :

    I just had a look at the cashflow statements for JBH. Either I’m not liking what I see or I’m reading it wrong.

    Operations cashflow: 109.9M
    Investing cashflows: -49.9M
    Company cashflow or free cash flow = 66M thats much worst than 2009 figure of 101.7M

    Moving on to the financing cashflow which is made up of
    Borrowings: 162.4M
    Proceeds from issue: 9.3M
    Share-buy back: -174.1M
    Dividends Paid: 88.4M

    I can add back the dividends paid (88.4M) back to their cashflow of 66M, but it looks like the buy back was financed by borrowings and new shares issued so the buyback money should not count for their cashflow.

    I was under the impression that this company was sitting on a mountain of cash in their bank account and with no where else to spend it, decided for a share buy back, if that is the case then why did they borrow 162.4M?

    If this is the case then their cash at year end 2011 is just over half of year end 2010. (27.2M and 51.7M respectively), but now there is alot more debt.

    This is also reflected on the balance sheet, with total Net assets for 2011 and 2010 at 152.3M and 293.3M respectively.

    Am I missing something here?

  14. Roger Gibson
    :

    Perhaps it’s time to reflect on a bit of Kipling:

    If you can keep your head when all about you
    Are losing theirs and blaming it on you,
    If you can trust yourself when all men doubt you,
    But make allowance for their doubting too;

  15. Jim
    :

    Thanks Roger
    Enjoyed watching you at the Expo on Friday. Talk about great market timing with the Expo and Value.Able TV. “InValue.Able” at just the right time. As I am on a diet ,I’ve actually been in the fruit and veggie store, not the candy store. As I have some more cash, I will visit the store a few more times yet I suspect before this is over.

    Looking forward to your thoughts on JBH’s report today- I notice much lower equity, higher but manageable debt, and higher profit with lower comparative dividend payout. Overall seems at first glance better than expected and future increased ROE.

    Cheers
    Jim

    • Roger Montgomery
      :

      Hi Jim,

      Big buyback produced the lower equity. Higher debt likely to be reduced rapidly thanks to strong cash flows. JBH had a period seven or eight years ago with higher debt too.

  16. William A
    :

    Alright

    The mighty JB Hifi has released its full year result this morning

    By just plugging in the numbers from their annual report, my IV has gone down to around $11 (10% RR, 47.5% ROE , 76% payout ratio). If anyone can confirm if my calc is correct that would be much appreciated.

    BUT, this is just touching the surface, will have to look at the managements discussion analysis and notes to financial statement.

    Will post more later one once I go through the annual report.

  17. Andrew
    :

    Have to admit that my somewhat positive feeling this morning about JBH has been stunted some.

    Depending on whether you want to include the money taken up by the clive peeters restructure they either had a drop or increase in profit. I went with the lower one as i believe restructure costs are not imaginary and there for should be taken into account.

    The increase in long term debt pushed my gearing ratio up from 6.10% to 134.81%. I think this would be due to the buy back, am i right?

    I know that JBH has great cash generating abilities and had a interest cover ratio of around 38x so have a bit of future wriggle room and should be able to deal with this but it is still not something i like to see.

    Their cash profits using rogers back of the envelope balance sheet method came up with a -178,604 which is not a good stat however JB Hi-Fi has had negative cashprofits fairly often. The difference being that back then it was a growing company and not a mature one.

    Not surprisingly the dividend payout ratio increased (if you are using the lower profit figure) to about 80%, that was a little higher than i expected but about what i did expect if you compare it against the normalised profits which see’s it drop a bit closer to 65%.

    Interesting was their comment about sales on their online store which grew by 51.6% and their intentions to launch an online music streaming service. I guess unsurprisingly JB Hi-Fi see’s their future online. not 100% sure what to think of their online streaming service they are rolling out willl need to learn more. I think they have a great brand that will mean people will jump on board but it sounds awfully like they are about to pick a fight with Amazon and Apple and if that is the case i am not quite sure they have the punching power.

    I am going to need to take a more detailed look into it before i come up with my final view on the results, at the moment i am not to enthused.

    Interesting to see what other think. i’m off to reflect and get rational.

    • Andrew
      :

      by the way, just quickly calculated my value for 2011 and came up with $10.03 so using that as a guide it is expensive. If using the normalised amount of 134.4m i get around $16.50.

      This has been done on a 11% required return. So unless in my analysis for 2012 i can see a huge upside i will be staying away for a bit and waiting for it to get even cheaper.

      • Andrew
        :

        Final thoughts now that i have thought about it a bit. The major factor of the valuation was the drop in EQPS and costs associated with clive peters restructure. This was mainly due from what i can see to the big increase in non-current borrowings.

        Although the increase in borrowings is high i would think that it is manageable for JBH.

        I saw no huge signs saying that they have been adversley affected by online retailing and everything else that is going on and their competitive advantage has still not gone anywhere. Perhaps sales growth was not as much as it could have been, especially when you consider things like the Ipad2 came out this fianncial year amongst other hyped up technology products.

        I would like to see that long term borrowing figure start to decline at a decent clip.

        Despite my 2011 valuation falling to $10.03, i am expecting (and waiting some more accurate forecast information to confirm) that 2012 IV will be significantly higher.

        My opinion is that the companys competitive position hasn’t changed and i expect next years results to be a bit better as well as being able to gather how they are going with the repayment of the debt. There are better bargains developing elsewhere which offer me more than JBH so i would prefer them anyway.

        JBH is not the quality company it once was, it is still a good one though. I would just like them to get rid of some of the debt and bring it down to an acceptable level before i jump back on them.

        And thats the end of my commentary, sorry for the multiple posts, i know others will have their view and look forward to reading them.

  19. Peter
    :

    Today should be interesting, more so for those taking the value.able route. Some good value around but some (ARB) refuse to fall! Maybe the sign of a good company.
    Is there a complete consolidated list of reporting dates for all our A companies?

  20. Rici Rici
    :

    Personally i am going very very slowly. There are three main reasons

    Firstly that its not current intrinsic value that is important, but rather future intrinsic value.

    Estimates of future intrinsic value are derived from future EPS estimates. If those estimates are brought back, then future intrinsic value will fall from current estimates.

    Secondly, the uncertainty of an intrinsic value estimate can increase significantly when the economy goes through changes in inflection points. For example take the banking industry. One can obtain a reasonable approximation for intrinsic value so long as the economy doesnt enter a recession (ie that the underlying economic fundamentals are reasonably stable). If the economy goes into a recession then the accuracy of the intrinsic value estimates reduce significantly.

    Thirdly, i dont have Roger’s skill with assessing the qualitative elements of intrinsic value.

    In my opinion, now is the time to dip ones finger into the water, but its not the time to bet the house, so to speak.

    • Roger Montgomery
      :

      Good stuff Rici Rici,

      I do hear talk about inflection points a lot. I wonder how many there have been in the last 100 years, the last fifty years and even the last decade. Despite all these inflections, there have been spectacular returns from sound businesses purchased at discounts to their long run worth. Telescopes not microscopes.

  21. AlexS
    :

    On Friday I bought BHP, VOC and topped up on MCE. I am keeping an eye on CPU and COH in the next couple of weeks.

    COH alway has a soft spot in my heart. The first share I purchased was COH back in 2004 at around $22, sold half after a couple years at 36. Bought more later at 52, then sold at 67, and finally sold the original half just a few months ago at 83. There has been up and downs during the year. But my general strategy has always to keep the share for more than a year, for the tax benefit. The current price at under $70 does seem a bit low compare to historical data. Though it is still very much higher than Roger’s $46 IV)

    I am still a novice and small investor, only committing 5K to 10K per stock. Unlike many pros here who can commit large amount at just a few stock, I feel more comfortable spreading my investment around. Currently I have these stocks in my portfolio (sorry, I should’ve post this in the earlier blog entry), and plan to add a few more.

    CBA, NAB, BHP, CSL, JBH, MCE, VOC.

    The banks were mainly for dividends and Just to show the boss at home that we are getting more in the share market than our mortgage offset account. (Just don’t show her the stock price, or only show when they are in black :) )

    Though many of them are in RED now, but I feel comfortable holding them for the longer term.

    Back in the pre Value.able days, my investment strategy has always been to invest in companies which are number 1 or 2 (in my uneducated opinion, anyway) in their field. So I had ventured into AMP, ERG, BXB, ASX, VGH. Paid some fees for lesson learned.

    I am still not ready to be a Value.able graduate yet. I plan to revisit the study material a few more times, and hopefully one day I can proudly display the Value.able graduate paper on my forehead. 

  22. Nick Mason
    :

    Charlie Munger once said that if you can’t face a 50% decline in share price in a company you part own with equanimity then you’re in the wrong game.

    This is what I was thinking of when I saw MCE’s share price on Friday which fell 50% of its previous high. It made me sad, not because of the paper profits I have lost, although because I don’t have any money to buy more after purchasing shares shortly after the CR. Patience is the lesson I have had the most trouble learning in my patchy investment life.

    I don’t have the highest opinion of stock brokers, their share price predictions or earnings predictions although one analyst doing fantastic work is Heath Andrews over at Austock Securities (I am not a client nor do I know him.) His latest research paper on MCE ‘Henderson Factory Officially Open’ available through MCE’s website is a very informative read and his update on the company and the new products they are launching into previously untapped industries is very interesting and I’d recommend it to anyone interested in learning more about the company and its prospects.

    • PaulS
      :

      Hi Nick,
      That is an excellent article Nick. Seems MCE is making some inroads into hiring some of it’s key competitors management and sales teams, most notably Billy Nitsche from Trelleborg (MCE’s main competitor) in the US, with 20 years of experience/contacts. He has noted that the Henderson plant is 10 years ahead of its competitors (on a productivity and efficiency scale) and could be perhaps one of the reasons he has jumped across. I can’t help thinking with such a key signing that product development for Coal Seam Gas may be an avenue for further revenues.
      Cheers,
      PaulS

      • Nick Mason
        :

        Hi Roger,

        Some months ago there was discussion on another broker report also by Heath Andrews although I don’t think this it was this one, dated 10th June. Still, I am often wrong and if anyone can find previous posts on this most recent broker report I’ll happily stand corrected.

  23. Grant Duggan
    :

    I have to admit i have had many ask how i am coping in the last three days with the losses, but thanks to value investing that i started twelve months ago i will admit i am still showing a 10% gain from my starting point, and could not more excited about the opportunities now showing. And even better i currently have three friends reading value-able at present who want to get involved in market, and am certain they to will not look back and seize the current dowturn to their benefit. And all this with many thanks to Roger his contributions, and the Blog.
    Thanks again to all.

    • Roger Montgomery
      :

      Thanks Grant. I cannot predict what prices will do but you will have a great framework to help you navigate those prices…and a great bunch of people here to help you too.

  24. Jason A
    :

    Hey Roger,
    Do you use the Altman bankruptcy model as a part of your calculations of a credit risk in determining A-C rankings? I used the non-industrial version for the companies below and I thought everything was looking about right until I reached BHP then OST:
    Format: Company – Ticker – Ranking – Z score
    Woodside – WPL – B – 2.10
    Virgin Australia – VBA – C – 0.03 (Ouch!)
    TEN Network – TEN – C – 1.44
    Asciano – AIO – C – 0.72
    Westfield – WDC – C – 1.11
    BHP – BHP – B – 4.78
    Onesteel – OST – C – 2.20

    From what I remember in the past, your rankings are more general including the risk of a capital raising where as Altman’s model predicts bankruptcy so I’m thinking there has to be other ratios possibly involving current liabilities, maybe interest cover from expected earnings or something similar to measure short term risk as well as overall default

  25. Ash Little
    :

    Hi Roger & Team

    Be good to interview JBH management on value.able TV

    I am speculating here but I expect a big bounce after the accounts come out

    • Rici Rici
      :

      Ash i think the key will not be the 2011 results, but managment guidance as to 2012 and beyond. Given no profit warnings or updated management comments prior to the release of 2011 figures, i would assume they are pretty much ‘in the bag’.

    • Andrew
      :

      I will be watching these results with interest too Ash. If the results are good, it will be interesting to see if this can overcome the negative sentiment but when it comes down to actual results versus overall sentiment based on fear, the fear will usually win out.

      This means however on the plus side, and i know i don’t need to tell you Ash, that we can take advantage of it and grab us a greater piece of a good or perhaps great business at cheaper prices bought from people who are scared that the US rating downgrade and Greece financial problems willa ffect the amount of people buying ipods in Australia.

      • Ash Little
        :

        Good call Simon

        Had a giggle at that,

        Not a bad result though given the current stiuation

  26. John M
    :

    Friday at the expo was enlightening as always. I have repaired my previously decaying financial structures thanks to your support. My previously naive and fatally flawed methodologies have been replaced with new and improved ones. I have really grown during the whole Value.able journey, thank you very much.

    I find Value.able TV to be very helpful and informative and the name is the most logical extension of your brand. Once again you have excelled in all respects. A1 rating all round. Your twenty plus years experience is much welcome. Regardless of knowledge of Value.able principles, it is always brilliant to have a guiding hand to keep one grounded when all around is spinning in chaos.

    • Roger Montgomery
      :

      Thanks John,

      It was good to see you. On reflection over the weekend I am appalled at the rubbish being trotted out as advice. I heard someone say they advise “waiting until all the negativity has passed”, “wait until the market is going up” – they didn’t explain precisely how you know it won’t go back down! And finally they suggested buying on new highs. Experience suggests all the big sell offs came after new highs… Heard any other pearls?

      • John M
        :

        I concur with your assessment of the rubbishy advice that has been hastily purveyed since the current events have unfolded. Can everybody smell the rotten stench of FEAR.
        I will instead focus on sage advice that you have given in the past. These nasty events will eventually sort themselves out. In the end quality businesses that have been purchased at discounts to intrinsic value will create serious and consistent investment returns over time. Use the telescope not the microscope.
        Shop for businesses like you shop for groceries is another wise Roger Montgomerysm.
        I am in such a joyous mood I can only focus on the positives at the moment.
        Like you most correctly stated on Friday, nothing had changed with all the businesses overnight. It was only the perceptions of all the market participants that had changed. A perceived (and I might add previously known) threat has wiped more than $50 billion off the Australian share market in a short space of time. The human psyche never ceases to amaze and entertain me. I love to watch peoples reactions.
        I just have to ask. Did your portfolio manager complete his mission on Friday?
        Good hunting for this week coming.

      • Greg Mc
        :

        I get the feeling that these people themselves are highly stressed by what the market is doing, but feel that they have to say *something*.

        Obviously wanting to wait until negativity has passed is to need the comfort of having the herd going with them. What a way to match the market return or worse!

      • Andrew
        :

        I know what you mean, during a pretty quiet period of the weekend i found myself watching some old episodes of your money, your call geaturing a TA guy and someone whose views were very similar to ours. I don’t remember either names unfortunatley.

        I still stare blankly in disbelief whenever i hear TA advice where they are basically saying that for example a share trading at $1. If the price drops below $0.90 they would think about selling as it might drop to as low as $0.35 but if the price rises above $1.10 they will start buying as they think it could go higher.

        I always have to sit back and think well if you think it is a buy at $1.10 wouldn’t it make even more sense to buy it at a $1.00.

      • Craig B
        :

        I once trialed a well known service, where the advice was to analyse the business fundamentally, then wait until the price had risen a certain amount before buying.

        Makes you wonder what the analysis was for.

  27. Michael
    :

    From the point of view of investing, the current market correction is providing increased opportunities.

    However, if you are someone who makes most of their money outside of the stock market, if we see continued selling then the negative wealth effect and impact on confidence will significantly increase the chance of a recession. And if that is what occurs, then stock markets gains may be cold comfort for the people that lose their jobs.

    Turning back to the stock market, I am preparing to deploy some cash into the best businesses. I held fire on Friday – it would be rare for the start of panic to mark the end of it.

  28. Craig B
    :

    Standard & Poors.

    I can’t help feeling like the joke is on us.

    Pre GFC these people rated certain mortgage backed securities as AAA while the true risk of their default was worse than Junk, and now they go and downgrade the US Government at a time when global confidence is teetering on the brink.

    They certainly have a sense of occasion.

    While anyone with a memory better than a goldfish would shrug off their assessment, the fact they have generated front page news everywhere suggests this will matter, and to the detriment of the general view of the state of the global financial system.

    Not sure who I’m angrier with. S&P or the Tea Party.

    • Rici Rici
      :

      Buffett has commented on this already. He is not worried, in fact he said it was an ‘error’ to reduce the rating.

      Personally i think its a good thing because it crystalises the issue for the american public.
      Sometimes simplicity is best, and in simple terms, the US has to start getting its debt under control, if not this year, then next or the next.
      One cannot maintain the current trajectory of debt accumulation indefinately.

    • Mark
      :

      Standard & Poors are a sad joke.

      They should have their own rating downgraded to junk status with their failures on company ratings prior to GFC1.

      Interestingly enough Moodys and Fitch have not followed suit with a downgrade.

      This one smacks of a political decision.

      After all the US can keep printing money to get out of their problems.

      Now the EU is a different kettle of fish.

      That is where the really big problems are.

      • Ash Little
        :

        Hey Mark,

        I personaly don’t think american debt is AAA, In fact I don’t think it is the AA+ that S & P rate it…

        Just my view but I would never lend my money to the Euro zone or the US at any rate.and lets hope the creditor nations of the world don’t come quickly to my view

      • Michael
        :

        Ash – as Buffett has said, the US should never default on its debt as it can print more money. The euro zone is a different matter.

    • Chris L
      :

      Why be angry with S&P now for telling it like they believe it to be? If anything it would make more sense to be angry that they didn’t do so sooner. Regardless, the fact is that the managers of the American Government haven’t been doing a good job and have dug themselves a very big hole. Realistically, would you lend money to them on the same terms as say 20 years ago?

      • Craig B
        :

        I don’t know Chris. There’s a bit of a credibility problem with these ratings agencies, don’t you think? Its as though S&P threw a rock in the pond to remind everyone they’re around. I really hope it doesn’t matter as many people suggest. Hopefully cooler heads than mine prevail.

    • David Sinclair
      :

      It is worth mentioning at this point that the S&P downgrade wasn’t because there were questions about the US’s ability to pay its debts but because there were questions about the political will to pay them. As the clock ran down on the deadline to raise the dedt ceiling a number of members of the Tea Party were saying that a default would be preferrable to a deal that didn’t include sufficiently large spending cuts. If that doesn’t make investors nervous about getting their money back, then what would?

      David S.

  29. John M
    :

    S&P ratings downgrade to the US.
    The candy store might have an extra special sale on Monday, Tuesday, Wednesday ….. or we can only hope.
    I am waiting excitedly for the dawning of the new week.

  30. Angela Gioskos
    :

    Thanks for your very timely comments. I was very excited on Friday and bought some stocks that appeared cheap to me.

    But I am now getting nervous due to the US losing its AAA rating today, for the first time in history. Don’t you think this rather changes things? I know Australia is focussing on China and India for future growth, rather than the USA, but with China being a large holder of US government bonds and with the US likely to go into recession, won’t the downgrading in US credit rating negatively impact China and other nations?

    • Roger Montgomery
      :

      Hi Angela,

      Let me ask you, how do you see the US triple AAA rating loss impacting the sales volume of buckets by TRS or the number of laptops and flat panel TVs Radio Rentals finances? The story about the US credit rating is but one chapter of a very long and slow decline in the value of the US dollar. That will continue. The government in the US will continue to face the consequences of bailing out the banks in 2008/09. But I wouldn’t bet on a recession. After careful research think about an approach that takes advantage rather than participates in it.

      • Rici Rici
        :

        I think this interview with warren buffett dated 8 July 2011 is mandatory viewing:

        http://www.bloomberg.com/video/72153912/

        Notice in the interview some key facts (remember Berkshire Hathaway has numerous business divisions, so Berkshire can act as a ‘proxy’ for the underlying US economy.)

        The key for me is that a number of his business units are showing improvement. The only area not to show improvement are those linked to residential property, and Buffett estimates this will start to improve in 2012.

      • Rici Rici
        :

        Another point i would make here,
        look at the future visability of profit improvement from quality US companies, and match that to Australia.

        I am finding it very difficult to find a broad spectrum of Australian listed companies with good future earnings visability.

        In the US this is not the case.

      • Craig B
        :

        Just one more Roger?

        Alan Oster and Wawrick McKibbon – both interviewed by Aunty this evening, and both dismissing any recession talk for our neck of the woods.

        As Michael Heffernan would say: “Buy with the ears pinned back.”

        He brings such life to an old cliche!

  31. Geoffrey Peters
    :

    Will await expected further fall out this week and reanalyse A1’s BHP, BLK, COH and REH with a view to a ten year hold.

    In the words of Warren Buffett

    • “Be fearful when others are greedy. Be greedy when others are fearful.”
    • “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
    • “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
    • “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

  32. Geoffrey Peters
    :

    Will await more down turn expected this week and buy A1’s COH, BHP, BKL and REH with a view to a ten year minimum hold.

    In the words of Warren Buffett:
    • “Be fearful when others are greedy. Be greedy when others are fearful.”
    • ” I like buying quality merchandise when it is marked down.”
    • “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
    • “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

  33. Brent
    :

    While I am still reading my recently delivered copy of Roger’s book, I did buy on Friday following the market adjustment. WOW and COH, I have had for some time and I believe deserved topping up which is what I did.

  34. ZORAN
    :

    Value.able TV +Roger’s “dress sense”

    My comment was that both episodes are educational and my wife said:

    “Roger’s dress sense was better in the first episode”

    Oh well, some things never change.

    Bought and sold FWDand MCE on same day(friday) twice.

    Cheers
    Zoran

  36. Ken
    :

    Haven’t felt this way since I was a small child waiting for Santa to bring my presents………….thanks Roger and co for taking the fear out of investing. Sleeping like a baby………..

  37. Dino
    :

    zicom! not as was predicted. What do make of future prospects?
    Offshore rig growth- MCE immediately came to mind!

  39. Andrew
    :

    If i had some moeny to invest i would probably be jumping into the market and taking advantage of this correction. The more it goes into the red the more green shows up for me with discounts and they seem to be growing discounts.

    Just in the middle of the competitive advantage chapter in value.able. I found myself reflecting on what you say Roger about Milk.

    We may ask for people to get some tim tams, kit kats, band aids etc but we still say Milk and not dairy farmers etc despite the milk companys and advertising agencies best efforts.

    I started wondering whether the difference is that the food we tend to ask for by brand name are more discretionary and there for are wants and the ones we are price motivated by are more staples and there for a need.

    I than thought about where the big two supermarket companys are having the most success with their price war. this is in areas such as milk, chiken and bread. All staples. In fact when in the confectionary isle and looking where the chocolates are, you will not find a woolworths select brand (although they do exist in buscuits).

    My realisation is that perhaps in order to create a competitive advantage especially when in relation to the brand/loyalty in areas such as food, fashion etc, you first need to make your product discretionary and there for a want.

    My thinking is that by a product being discretionary or a want than it means that the customer gets to choose what products they are after and this allows the brand to sell the product.

    On the flip side a staple or need, means that we will take whatever we can get and there for as it is not a luxury we will simply try to get the best value for money (i.e the lowest price) under the impression that they are all similar.

    This allows me to come to the conclusion that the only possible competitive advantage that you can get in the staple sector is to charge the lowest price run by a strategy about being the lowest cost operator. Can the private companys match the supermarket generic brands in this sector?

    Where as discretionary items allow you to also have a differentiation or focus strategy which could lead to you being able to sustain price increases without losing customers as they have ecome attached to this brand and will unlikely stop buying this product which they buy as a luxury to help make them feel better or satisfy other wants.

    I hope the above makes sense to readers and i am sure it has been covered numerous times by marketing and branding execs.

    I think back to my experiences in woolies, walk down the soft drink aisle and you will see lots of Coke, there is also generic cola but where as people were quite happy to take advantage of cheap generic milk, people will still instictively reach for Coke instead of the cheap generic cola.

    Just thought i would share it as i am thouroughly enjoying and exoanding my learning further on my second reading of Roger’s great book.

  40. Nic Arena
    :

    Nice Value.able TV segment Roger. Does reiterate what we have learnt and should be practising during these “crazy” times? For me a bought some Thinksmart when they dropped to .495 yesterday only to see them drop to 47 cents and thought gee an extra 5% off would have been good. But it rebounded to 54 cents again after that. Like you said I don’t know if it will tumble again next week but I am happy to get TSM at under 50 cents.A top company for the past 3 years and i think with good future prospects. Keep bring on this sell off as there a few other companies that getting close to a buy price.

  41. Philip Shade
    :

    sale time is on now and I picked up JB Hi Fi at 14.00, my first purchase since reading your book and now understanding the market for what it is for the first time. No more fear, just great opportunity in the sales – thanks for helping me finally ‘get it’. At work, colleagues thought I was crazy when I told them its sale time, they were all doom and gloom. Perhaps one day they’ll understand, but for now I’m slowly building up the portfolio one sale day at a time!

    • Roger Montgomery
      :

      Thanks Philip. And remember, you aren’t right or wrong because others agree or disagree with you. You are on the right path. I was on a panel discussion recently where the other panelist suggested waiting for a turnaround and confirmation of rising prices. Later they suggested only buying new highs. The contradiction proved the nonsense that the public are being fed as advice from those with no practical experience apply their suggestions. If they actually applied it in this case they would be broke.

      • Andrew
        :

        Have to admit i am sometimes a bit amused by some of the “experts” advice. I also think back to a few “non-experts” who upon finding out i am an investor try to talk to me about the great new hot tip etc.

        Sometimes this includes tips about a company whose share price has hit an all time high. I keep my mouth shut as the market is all about differences of opinions but it just doesn’t make any sense to me.

        If the idea is to buy low and sell high, than buying at the summit just doesn’t make sense.

    • Stephen
      :

      Philip,

      You’re not crazy. I bought some ARP at $7.09. It may drop some more, but I certainly didn’t feel uncomfortable buying it. Doesn’t it make you feel calm when you have some idea of the value of your company rather than worrying about the value of the share!

  42. Phil Harmonic
    :

    One more thing I think will be handy is to give these episodes of value.able TV a number. This one, for instance could be: Value.able TV #2. The next one would be Value.able TV #3. That way, if you remember something that was said in that episode you could recommend it to someone and they could find it easily. Like this one, I could say: “The episode that Roger release right after the big market downturn in 2011, that was in episode two.

    It would make it easier to search for. Just a thought.

  43. Michael Leslie
    :

    Roger

    Your second Value.able TV production was timely and spot on the mark. Thank you again for the reassurance. I was also able to play it to my wife who, I am sure, felt better afterwards.

    Keep up your great work. I am eternally grateful for what you do for your graduates.

  44. Dan
    :

    Hi Roger
    Your book is great… I am half way through it but I am impressed with your ability to put commonsense into jargon, to turn Fundamentals into clear and basic investment meanings.

    May I ask a question RE the PE ratio. On a couple of occasions you mentioned that as an investor one may not want to pay more than 10 times for earnings.

    Is this thought central to the valuation process or peripheral (as long as the price one pays is less than the intrinsic value)?

    Many thanks
    Dan

    • Andrew
      :

      Hi Dan,

      The value.able valuation approach is one that ignores the PE ratio completley.

      I think i know where you are talkign about as i have just started re-reading value.able.
      In value.able the PE ratio of 10 has been used to help show the benefits of companys retaining their earnings or paying it out in relation to ROE. This, at least in my view, was just chosen to help with the exercise.

      The PE ratio was needed to show the results of this exercise in regards to the effect on market capitalisation. I think this is about the only real use of the PE ratio and in the debt chapter Roger says that it is possible that the PE ratio could be much higher.

      The PE ratio of 10 isn’t in regards to investing or valuation. The valuation as you will see as you read further has no price input (this includes PE).

      Hope this helps

  45. Nigel
    :

    I’ll need to do some research on Decmil, but I yesterday I did help myself to more Matrix, same story there, nothing has changed for them either.

  46. Sean
    :

    In the vein of this post (the falls in the market) I am curious if there are any value.able graduates out there that consider demographics (specifically spending patterns) when evaluating the market in general (ie the effect of an aging population and so on)??

    :-)

    • Ray H
      :

      Hi Sean, for me this comes under the quality evaluation of the business as to whether or not it has bright prospects. It is important when considering future growth opportunities, which will impact on the sustainable reinvestment of cashflows at high rates of return.

    • Andrew
      :

      I look at a lot of retail companys. Whilst not necessarily demographics i will consider whether the products being shelved are still relevant to their core market, whether the stores and in particular the register area i walk by are busy, quiet etc.

      I will look at the effects the ageing population may have on that particular business as this i guess is a bit more constant. Some examples would be that it is not unreasonable to think the ageing population may have a positive affect on Fleetwood, Cochlear etc.

      Spending patterns fluctuates a great deal and differes from demographic to demographic so i will rarely use them as i am a long term investor.

      I think what you are talking about is part of understanding the business so i encourage it as long as the information you are looking at is relevant to the company you are researching.

      For example, the US ratings downgrade will cause some jitters and possible sell of, but willt his affect the amount of people buying Ipads at JBH, the amount of people needed Cochlear hearing devices, the demand for health supplements etc.

  47. Darren
    :

    Hey Rogers,
    Thanks for the bit of hand holding, what a crazy day!!!!!!!!,

    By the way what did you think of the ZGL market release, bit of a slow down in the second half, but by and large I thought it was ok. (not worth the 20% sell off).
    Cheers.

    • Roger Montgomery
      :

      Hi Darren,

      We don’t own ZGL after receiving some feedback that some of their lines were experiencing a slowdown. Reaction is perhaps overdone but will wait for all the new valuations because other preferred options may present. Remember Zicom was presented during a period when there wasn’t a lot of value around. That is not the case now!

      • ron shamgar
        :

        just wondering roger, if you sold ZGL from your fund how come you still own it for the eureka report portfolio?

      • Damian Edwin
        :

        “our process also has us still heavily weighted to cash.”

        I’m guessing that won’t be the case in a couple of weeks :)

      • Dino
        :

        It was an in Iv of 69cents in the eureka valueline not so long ago! Will valueline continue to hold zicom?

      • Roger Montgomery
        :

        Hi Dino,

        Haven’t updated the Eureka tables for a couple of weeks. We brought down our internal valuation after discussions with industry about the slowdown. We wrote about our sale in our monthly report to fund investors and also noted the constant selling by directors/founders. As I have said on numerous occasions you cannot manage your portfolios by following what I do. You have to have your own plan and strategy. Whatever your research was that lead you to buy any stock, you have to follow that. I am no obligation here or on any tv or radio program to revisit any stock discussed nor keep you up to date with any changes to my view. Even if you had all my calculations, quality scores and valuations it would be very likely you would produce a different portfolio. Remember above all else: seek and take personal progressional advice.

  48. Geoff Cruickshank
    :

    No Roger, I was not like a kid in a candy shop exactly today, but I felt much more as though the navigational equipment was working than I did in ’87, ’02 and ’07. Some of those times I had much less at risk and no clue what to do, and when the market later was clearly turning upwards I had no real idea what I should buy. That’s what I hope will be the big difference this time around, so thanks again for the book. What a steal at $50 (And get a move on with the software willya?)

  49. Scotty G
    :

    Great stuff Roger!

    It’s good to get a reminder like this and to remain focused on value. Stick to your methodology and buy appropriately. Then sit back and wait.

    For my 2c worth, JBH MCE FGE ORL DTL are all in or close to buying range. Indeed I have purchased some of these over the last few weeks. I’m sure there are others out there that are awaiting my research attention so I’ll see you on the bourse!

  50. Simon Anthony
    :

    All very well to have an anchor but when the tide has gone out and your A1 ship is stranded on a sandbar you have to wait for the tide to come back in before you can start moving again! That is what my ship full of MCE,DCG and FGE passengers will do. In the mean time as the captain of this A1 vessel I’ll invest my capital in buying more of these businesses at a even greater margin of safety rather than lowering lifeboats and feeding my A1 passengers’ substantial future returns to the circling value.able sharks that are in the midst of a feeding frenzy!

  51. Parag
    :

    Very much looking forward to MCE’s report and in particular their cash flows, especially given the positive statements in the ZGL’s announcement regarding increase in demand for off shore rigs.

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