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ValueLine: Vroom vroom

Media Room, On the Internet | Comments (43)

ValueLine: Vroom vroom

Australians are expected to buy more than a million cars this year. So apart from carsales.com.au, what other businesses in the automotive sector are worth a look? Read Roger’s article at www.eurekareport.com.au. Click here to read Roger’s insights on Carsales.com.au.

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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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43 Comments

  1. Roger Gibson
    :

    Hi Roger,

    FAN has come up on my radar as at least 20% below IV, a good record and growth prospects. Have you looked at it recently?

    • Roger Montgomery
      :

      Hi Roger G,

      FAN has been on my list for a while now. Yes it is cheaper than its intrinsic value, but think about whether you want to own a furniture business. Tough businesses. Whats the sustainable competitive advantage?

  2. glenn matheson
    :

    Hi Rob W
    Thank you for the feedback, I take your analysis on board and continue to try and refine my IV results.
    regards Glenn

  4. Gavin
    :

    Seems there is two Gavin’s here.

    In relation to HLD – what were they thinking when they sold Beanie Kids. Based on my two young daughters (who, along with all their friends are obseessed with collecting beanie Kids) I would have thought there should be huge brand recognition value attached. $2.5Million what a bargain.

    Just try substituting some other fluffy toy as a present for a six year old and you will soon learn the brand power of ‘Beanie Kids.’

    The other Gavin.

    • Lloyd Taylor
      :

      The other Gavin,

      I think the answer to your question is that fashion is a fickle thing at any age, let alone amongst six year olds. Sustainable growth requires a broader demographic and less fashion dependency.

      Regards
      Lloyd

      • Gavin
        :

        Hi Lloyd

        You could be very well right. Though I was disappointed at seeing it go. The brand has been enduring (at least in my circle of kids/nieces.)

        I was impressed enough with the ‘Beanie Kid’ concept/product to do some digging and was delighted that it led to HLD and a way of getting exposure.

        Seems the hit to earnings from the sale has been flagged at 500K for a sales price of 2 Million upfront plus a 500K earn out. Seems cheap to me considering the 12 years of ground work and the future potential.

        I think there was enduring brand value here and scope for the brand to be expanded as content for internet, games, kids tv programs etc. which in turn could halve facilitated geographical expansion.

        At any rate I guess it’s all academic now. The company wants to focus elsewhere. I have got to decide what I do from here with my holding.

        Trying to get my head round the following in deciding where I want to go with HLD:

        The power of the the Mothecare brand franchise for Aus
        .
        Their ability to operationally manage a business.

        Commitment to Minority holders – Are the new private owners of Beanie Kids associated with the directors in any way.

        Probably should just get out because a major premise for my investment has changed but the potential of the mothercare concept is keeping me in, though in my case I think I’m guilty of capitalizing hope at the moment; I’m trying to undo that situation with research and understanding that justifies me staying in rather than a sale if appropriate. Thanks for sharing your thoughts on the company.

        Regards
        Gavin

  5. glenn matheson
    :

    Hi All
    Need some checkers to see that I am on the right tram re JBH.
    2011 estimate.
    Assuming constant growth rate, 109 mill shares on issue.
    Assuming last year nett prof margin (no margin growth) 4.3%
    Also steady POR 60%
    therfore 3.200 *4.3% = 137 mill NPAT
    assuming 10% downturn in profit 137-13.7 =123.3NPAT(pressure on margins)
    Equity =LY293 +retained portion54.8 =347.8
    BV =3.19
    ROE =35.45%
    ….2011 IV RR of 10%
    1.1=3.5
    1.2=9.353
    3.19 *3.5=11.16
    3.19 *9.535=30.416
    por 60% *11.16=6.696
    40% * 30.416 =12.166
    therefore IV = 18.862
    feedback would be appreciated, am I being to conservative.
    regards glenn

    • Rob Walker
      :

      Hi Glenn,

      I used EPS of 131.1 and DPS of 79.1, shares=108,344,000,
      NPAT $142,040,000 Aver Equity $ 321,170,000
      Roe 44.23%, RR 12% (for Retail) my IV for 2011 is $21.10.
      Please note I use Commsec or others for Future EPS & DPS data, I try not guess the future profit, I am not very good at it .
      This method (normally) puts me in the ball park of Roger and others.
      I would call 12 % RR as conservative and 10% as a little aggresive for this stock.
      Your ROE is a lot lower than mine, this is the main difference that I can see.
      Cheers
      Rob Walker

  6. Henry
    :

    Hi Roger,
    I found a weak spot of value investing. Value investing is a long term investing, since it may take a long time for share price to reach IV. So for example, if one bought a stock at say 25% discounted to IV and it takes 5 years for price to reach the IV, this means one only make 5% per year. This is a bad investment.

    In your long time experience in value investing, on average, how long does it take for share price reach it’s IV ?

    • Roger Montgomery
      :

      Hi Henry,

      You are right on the point that value investing is a long term proposition. Value investing involves buying businesses, so there is every expectation at the outset that the returns will come over time and from the performance of the business. Where I think more thought is needed is that there will only be a 5% return. In your example this is only true if the intrinsic value doesn’t change. Read the chapter in my book on this subject.

      • Craig M
        :

        Hi Roger and all
        just wondering about the collective thoughts of the KKR takeover of PPT. Looks like an incredible bargain for PPTs shareholders(I’m not one). A while back I calculated an IV in the low $20s and have ignored the business ever since. Along comes a famous professional investment organisation and offers nearly twice what I think they are worth.
        Have I calculated the wrong IV? I don’t think so, it might be the fact that they can borrow at 2% and PPT has some long established businesses that look rock solid. At an RR of close to 5% we get close to the price they want to pay and they still make a profit – maybe. This is the same mob that took over Nabisco in the 80’s portrayed in “Barbarians at the gate” I reckon if they want to pay those sort of prices, good on ’em. This might be a precurser to some speculative behaviour – I saw an add on CNBC from a foriegn investment bank offering a margin loan “$200,000 down we will lend $1m at 2.43%” I fell of my chair and thought that will get the punters salivating. Not us value investors we will have retreated long before the party cake is taken away because all investing is value investing and anything else is pure speculation.

      • Roger Montgomery
        :

        Hi Craig,

        The price that Private Equity pay (whether it be Perpetual or some other company) is a function of strategic thinking (who may be in the market to buy it back in three to five year’s time) and leverage, rather than passive ownership for the long term. The arithmetic is easy to follow. I have exaggerated the numbers for the purpose of illustration. Company A generates EBIT (earnings before interest and tax) of $10 million and private equity in this example pays nine times EBIT or $90 million. Assume the private equity group use $10 million of their client’s money (equity) and borrows $81 million for the purchase. After operating the business for a year, they manage to extract a 5% improvement to EBIT, which rises to $10.5 million. If they manage to sell the business for nine times the new EBIT figure (or much more if they are the Queensland government), the company will be sold for $94.5 million. After paying off the $81 million in borrowings the remaining $13.5 million (no tax in this example – speak to the vendors of Myer about how) represents a 50% return on the equity contributed by the clients of the private equity group.

      • Craig M
        :

        Hi Roger
        thanks for the arithmetic, looks great when the glass stays half full ie. interest rates stay benign and key personel don’t head for the door(main asset in funds management as you would be very aware). I guess the gods of finance or barbarians have it figured to 2 decimal places though, me being a mere mortal must stick with value investing. Lucky me

      • Lloyd Taylor
        :

        KKR and PPT… its simply a highly leveraged pass the parcel game. Don’t be the patsy buying the parcel after KKR!

  7. Gavin
    :

    HLD

    Hi Lloyd

    Thank you for your thoughts, I too am a shareholder,,$0.37,,(I bought it for the long term growth story) and now we have some “Smart” money in it too.

    Can’t imagine it will be a smooth run but Management seem to be putting the base for growth in. (Time will tell).

    Thanks Lloyd/Roger

    Gavin

    • Lloyd Taylor
      :

      Gavin,

      Expect a few bumps along the way – this one is a five year plus growth story. That said, I attach a lot more certainty to it than most resource sector growth stories.

      Regards
      Lloyd

  9. Thai Young
    :

    I am very impressed with your reply, ‘without different strokes’

    This shows you are not only a good stock analyst but also a well rounded philosopher.

    Well Done!

    Thai

  11. fred
    :

    Hi Roger,

    I am now going thru every company to make a great watch list which should take a month or so, any tips on how to go about this
    tough task??????

    Thank you for all your help

    • Harold JANUS
      :

      Hi Fred
      I use a spreadsheet for each company. It is made up for only the 10% required return after tax values in both tables. The beauty is that you can feed the ROE to the values in the tables. If you want to fine tune it with other table & report values you can substitute those when required if needed at a later date, but atleast you get a quick answer. You can also add in the next years predictions such as “for 2011: Last Years Eq. +[EPS – DPS]XNo of Shares”.

      Regards Harold

    • Tony Carson
      :

      Hi Roger
      Fred’s list is going to be allot of work.I don’t know if i can offer it hear on your forum but i would like to buy it when its finished.
      Is there any way you can pass on my email to him. It would give him some incentive to work his way throe all those company’s. I would rather buy yours but i get the sense you would rather teach us the way rather than just sell us a product or list as you could have done that along time ago

      Regards
      Tony

  13. Gavin
    :

    Roger I am a long term holder of TRS and am sitting on a very nice capital gain,,,,Could I please get your value of TRS for the next 3 years.

    Thank you
    Gavin

    • Roger Montgomery
      :

      Coming up Gavin. My estimate of intrinsic value for the Reject Shop is $14.31 and $17.06 for next year. So its trading at a premium now to intrinsic value. That reflect its market darling status now. Be fearful when others are greedy?

      • Gavin
        :

        Roger
        I will continue to hold TRS for the long term, unless there is a change in the business.
        Thank you for your quick response, and the warning.

        Gavin

  14. Gavin
    :

    Could I get your thoughts on HLD, I know it would be hard to put a $ value on it,,,,I was just after your Ideas on the growth of it,

    Thank you
    Gavin

      • Lloyd Taylor
        :

        Gavin/Roger,

        I have built a “financial model” of the business based on the publicly disclosed data, expansion plans and capital structure consequent on recent equity capital input. Obviously, it contains lots of assumption with regard scaling of the business from the presently disclosed cost structure. However, on these assumptions I get potential EPS of -$0.01 (2011), $0.06 (2012) and $0.11 (2013).

        Plug this into Roger’s methodology together with my currently calculated average equity/share 0f $0.25 (2011) rising to $0.42 at end 2013 and you can generate an IV profile (at 14% RR):

        2011 negative value
        2012 $0.74
        2013 $1.41

        Great if you believe it!

        Aside from valuation you have to look at the potential of the Mothercare brand in this country and the scope for consolidation in a fragmented market. I lived in the UK and Europe during some of my child rearing years, and my youngest was born in the UK, so I am a believer.

        That said, as Roger would say….. “Take professional advice”.

        Disclosure: For the record I am not a professional, but I do hold equity in HLD based on my perception of the future potential of this business.

        Regards
        Lloyd

  15. Donald
    :

    Please, can you also add the following blue chips stock in your forthcoming post of your estimate of intrinsic value ?

    ANZ, ASX, BHP, CBA, NAB, MQG, WBC, WDC, WES

    Thanks

      • Craig M
        :

        Hi Luke and Donald
        many of the companies you have asked Roger to value have been covered/valued by Roger and various Value.able Graduates over the last couple of months in numerous Blog posts. Have a look around and you’ll will find a great many opinions and some quite similar valuations. If you have a copy of Rogers fine book you could have a go a doing some valuations also and maybe we could do some comparisons.
        For starters checkout this blog post inundated with valuations.

        http://rogermontgomery.com/how-do-investors-apply-value-able-in-practice/

  16. Luke
    :

    Hi Roger

    Thanks for your great insights.

    Could you please provide your estimate of intrinsic value for the following companies?

    CPU, WOW, QBE, CSL, PTM, KCN, ORG, LEI & JBH.

    Thank you once again.

    Kind regards

    Luke

  17. Greg Mc
    :

    Morning Roger,
    Your margin of safety column in your Valueline portfolio could use some attention.

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