ValueLine: CSL
The sharp fall in CSL’s share price represents a good opportunity for investors with the courage to swim against the tide. Read Roger’s article at www.eurekareport.com.au.
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.
Lloyd Taylor
:
Roger,
Can I ask if CSL has ever traded at a significant discount to intrinsic value in the last 10 years?
I like the idea of a big margin of safety, but in my experience, rarely if ever does it occur with the top tier of investment grade large capitalization companies.
More usually I find it necessary to consider buying at or near intrinsic value for the best companies, because the big margin of safety is rarely if ever available. I think that this is more so the case in Australia than elsewhere, due to the weight of superannuation inflows into the AU equity market.
Taking the the additional risk of buying the best companies at or near intrinsic value has been rewarded over the long run. Had I waited for the big margin of safety to occur there are many top tier investments I would never have made and I would have been the poorer for doing so.
One can make the case that with 9% and soon 12% of the nation’s payroll going into super, with a large portion of this money chasing the small Australian equity market, there is less risk in buying at the A1 large companies at or near intrinsic value than would otherwise be the case.
Big margin of safety, yes if its available, but based on the actuarial tables I mightn’t be around to see it occur for the best companies in the large cap space! As a result, I take a measured risk in buying the best at a premium to what the true Grahamite might consider. Buffet does the same I believe in many cases, although he sometimes gets it disastrously wrong as in the case of his 2007-08 investment ConocoPhillips (COP), which proves even the best screw up occasionally…..margin of safety in an oil and gas producer…no such thing exists….witness now the value implosion in BP!
Regards
Lloyd
admin
:
Hi Lloyd,
You are right. It is rare for the large, high quality companies to come up for sale at significant discounts to current intrinsic values. Nevertheless occasionally they do. CSL traded below intrinsic value in late 2002 and 2003 and again briefly in 2005. In addition to buying at or near intrinsic value, you need to be very confident that value is going to rise. Also be prepared for larger swings in the market value of your portfolio if you are not buying at large discounts. I hear your weight-of-money argument also and note that there are more managed funds in Australia than there are stocks and far more than large cap profitable stocks! Also note however that despite the 9% flowing into super every year, the stock market did manage to register some substantial falls relatively recently. The weigh of money does not prevent sell offs. Always enjoy your thought-provoking contributions Lloyd. Thank you again.
Lloyd Taylor
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Roger,
What I find interesting in the case of CSL is that for the last twelve months the market pundits are always looking for reasons to sell the stock down.
First is US dollar strength and currency translation impact on earnings, which never materialized to the extent the pundits forecast. Next was Baxter’s quarterly report which falsely suggested that their loss of sales was a result of Obama’s health care program. This saw CSL’s price drop 20% from which it has not recovered. Revealed as a falsity by subsequent competing company quarterlies and by CSL’s own subsequent clarification and FY 2010 guidance, the same pundits have now moved to the weakening Euro as a source of major long term adverse headwinds for CSL’s earnings (again a demonstrable falsity when the sector cost and sales structure of the company is analysed). No mention that locally CSL has sold more seasonal flu vaccine than it can produce and additional supplies are to be imported from Europe (at lower cost in AUD terms than otherwise the case).
The same pundits a little over 18 months back were championing the issue of new CSL equity at $36.75/share for the acquisition of Telacris. The acquisition was stopped by US competition authorities. Then CSL management shrewdly returned the capital via share buy back at a weighted average price approximately 13% less than the issue price. Result: less shares on issue (higher EPS other things being equal) than before the share issue. Where does this figure in the pundits view of value? Answer: no where!
Mr Market at at action in his finest irrationality? I think so.
My view: fill your boots while you can. The opportunity doesn’t come by very often that an A1 company is trading at a conservative estimate of intrinsic value.
Regards
Lloyd
admin
:
CSL represents a very common situation for me. Let me explain. Its not at a discount to today’s value, so strictly speaking the margin of safety is not there. That however depends on your definition of margin of safety. The share price today is at a premium to my latest estimate of intrinsic value of $26.89, however that estimate of value is estimated to rise to $33.04 in 2011 and $37.94 in 2012. The dilemma for an investor is; does one wait for a discount to today’s value or does one take heart from the fact that intrinsic value will be rising to a leave in a few years that is above today’s price? On the one hand, if you waited, you may never have bought some wonderful A1 companies in the last decade whose share prices rallied significantly. On the other hand you avoided some significant declines. In my experience, the least-risk option is to always buy at a substantial discount to today’s intrinsic value.
Greg
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No need to publish this comment
Hi Roger,
The CSLValueLine article does not open on my pc.
I am taken to the eureka website.
I’ve just checked other ValueLine articales, pre-April are PDFs and download fine from your website.
But ValueLine Tatts 7 Apr and onwards point to Eureka website and do not open for me.
For worth it is worth I prefer the PDFs from your web site, less things to go wrong.
Is it a timing issue – one month after publishing it is available as a PDF?
Thanks Greg
admin
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Hi Greg,
The guys at Eureka would like you to read the articles I write for them by subscribing to Eureka. Its inexpensive, timely and valuable. Importantly the content you find here will be exclusive to rogermontgomery.com