Well informed, well rewarded
Roger Montgomery’s ValueLine column for Alan Kohler’s Eurkea Report was a favourite this year. In August he investigated Matrix Engineering, a company that has tripled in value this year and whose shares almost doubled since his article was published.
Montgomery liked the look of the annual report figures from the specialist mining services provider (revenue of $102 million and profits of $18.2 million) and thought that revenue could double over the next 12 months, though profit will depend on the level of increased production from a new $29 million facility in WA and currency movements. He bought them, at $3.42 but valued them at $6.05–9.00. Matrix closed December 23 at $6.33, an increase of 85.09%. Great call, Roger.
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.
Odell Schumm
:
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Andrew
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My CBA value is $48.42 which i got from the annual report
EQPS of $22.97 (35570/1548.7)
AROE of $16.95% (5680/((31442+35570)/2)
Table ROE of 17.5%
POR of 63.75% (3621/5680)
RR of 10%
zoran
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MY CBA VALUE IS $ 56 or did Rogers book CONFUSED us all.
Andrew
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What are your inputs Zoran? I don’t get anywhere near that until 2012. Would be interesting to see how you came to that figure.
ken fraser
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I have MLD IV 2011 $2.98 trading at $1.70 RR 10%. I bought more today. Roger likes these but I don`t know what price he has on them. Ken.
Matthew R
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Hi Ken,
As you are someone who has looked at MLD closely, where do you see their competitive advantage?
I couldn’t readily identify it but if I could be convinced I might join you on the register! :)
Regards,
Matt
Ash Little
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Hi Ken,
Use a RR of 15% and see what you come up with
RR of 10% should be reserved for very few companies and if interest rates keep rising it should not be used at all
Hope this helps
Greg Mc
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You’re a harsh taskmaster, Mr Little, with your RR of 15. Alright it’s illiquid, lacks a big competitive advantage, directors don’t know what it’s worth…..hmm.
I used 12% as my RR at the time I bought them shortly after the float below $1.50 and had an IV at the time of $2.10. Arguably the RR of 12% is being generous too and I have changed my RR formula since then.
I concur with Matt R’s view that it lacks a significant competitive advantage and that is one of the reasons that I wouldn’t put a big slab of funds into it. I do still have my small holding and I think it is a little undervalued so I’m not inclined to sell prior to seeing the results in Feb but I’m not buying at these prices. Do take my opinion for what it’s worth though (which is not much).
All the best,
Greg
Kent Bermingham
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I have since re done my IV on CBA on Etrade site and come up with $43.90 today.
Two different valuations using two different sources?
Roger Values CBA > $50 what am I misssing out on?
My IV is based on figures as at last Annual Report is Roger basing his in 12 months time??????
Kent Bermingham
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Sorry Based RR on 10%
Thankyou
Kent Bermingham
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Your comment is awaiting moderation.
Fantastic Result
Could someone please tell me where I have gone wrong with my CBA IV
Info from Comsec 26th Dece 2010
Current Equity 35047 mill
Current Issued Shares 1542 mill
EQPS = $22.73
NPAT = $5617 mill
Div per Share $2.9
Reported Div = $4472 Mill
Payout Ratio 80%
Prior Years Equity $30922 mill
ROE 18%
IV $45.48
Please help as I am just learning
merry Xmas to all
Matthew R
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Hi Kent,
Using your figures:
The average of “Current Equity” plus “Prior Equity” = 32985
ROE = 17% (profit of 5617 divided by average equity of 32985)
Payout Ratio of 79.6%
Using a RR of 10%, your figures and the tables in the book that returns a value of $40.37
Let me know how you go a second time around,
Regards,
Matt
Matthew R
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correction – I use a formula in a spreadsheet that calculates the Value.Able table values, it uses the exact ROE and therefore differed slightly
using 17.5% in the value.able tables and the corresponding multipliers for a RR of 10% I get a value of $41.74
John M
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Hi Kent,
Using your commsec figures I get pretty much the same intrinsic value.
I don’t know what RR Roger has used, but if you use RR=9% the Intrinsic value = $51.61
CBA has a MQR of A2, has been around for a very long time and Roger says that big 4 bank on an island is a definite competitive advantage, not to mention the personal cost involved in switching between banks; so there is a good chance he used the RR=9% in this case, which would be the difference in your IV to his.
To borrow a quote, better to be approximately right then exactly wrong. Don’t forget that Roger recently spoke about the banks being at or about their intrinsic values, and he wanted everyone to know that it would be prudent to wait until they were at a significant discount to intrinsic value for margin of safety (as well as greater investment return).
Hope that helps.
Ash Little
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Sorry John but I am getting 6.55% on an at call internet cash account(AAA rate BTW)(or last time I looked I was anyway) so I would never use 9% RR at the moment.
These are risk assets and we need to price risk accordingly.
John M
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No need to be sorry Ash. I really appreciate any feedback. I always leave my ego at the door when I enter this wondrous hall of learning, otherwise how can we learn if we don’t accept we could be wrong. I also acknowledge some of you actually do this for a living so keep the feedback coming.
As we have discussed, I always use a large margin of safety. As we are only approximately right when calculating IV, a fiscal moat emerges from the MOS. Obviously a higher RR creates an even larger MOS so I can’t argue with that.
I would be interested to know what RR you are using for CBA.
Matthew R
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i agree ashley
also, consider your personal tax rate – if you are a high income earner then you need a higher RR
risk is underpriced too often
in my humble opinion, I wouldn’t use anything less than 10% and 10% is only for the solid gold companies with decades of consistent performance through all economic cycles, and then only a purchase at an attractive discount
many might disagree, but you are better off holding a lot of cash all of the time, you’ll sleep better and your portfolio will perform better over the long run
John M
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I totally agree that risk is underpriced too often and that a large MOS is needed before purchasing stocks. Saying that, I think that it is risky holding onto cash for too long. With the likely true rate of inflation burning a 10% hole in your cash, I personally wouldn’t be happy with holding too much fiat currency, especially after you factor in the tax rate (and worse still if you are on the higher tax brackets). Cash can be just as risky an asset as quality companies on many counts.
Cash has no intrinsic value. Its price is the numbers printed on the polymer (which seems to buy less and less goods and services each year), but its true intrinsic value is zero. The dollar is backed by nothing but a promise. Throughout history, all fiat currencies have had a terminal decline in value and eventually all reach the true intrinsic value of zero. When I hear the phrase “this time it will be different” I shudder and wonder how people will cope when the dollar’s price hits its true intrinsic value.
I don’t know what the price of our fiat currency will do in the short term, but to borrow and re-phrase Graham’s analogy, in the long term it will be weighed against its value and will come up dreadfully short. Could happen in the next few months, could take decades, but history always repeats itself. I will cut myself short here, as I could waffle on for pages and pages about cash.
I would love to hear everyone’s views on this topic.
Remember these are my views only, not advice. Always get personal professional advice.
Ash Little
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Hi Kent.
I don’t think you have done much wrong at all.
Forecast payout ratio is about 75% or slightly less.
Forecast ROE is closer to 19% than 18%…… You may not believe it but these small changes will bring your value close to $50 using RR %10
It does not matter much because we want to buy this business at $30 so some small differences in IV really does not matter much.
People say Oh it will never get their.
Well I say good I wont buy it then.
But it wasn’t that long ago ( 2 years Max) that it was $26 and it’sV was not significately different to now.
Opportunities will present themselves
Andrew
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I know, i quite enjoyed that little dip to $26.00 it has made it a lot easier to pay off my upcoming wedding.
It is times like that where the psychology of being a value investor comes to mind as i had heaps of people telling me not to buy any bank shares during the GFC.
Ash Little
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Well Done Andrew,
Hope you have a happy day for the wedding and best wishes for the future.
Make sure you keep posting after you get married as well…..
Kent Bermingham
:
Fantastic Result
Could someone please tell me where I have gone wrong with my CBA IV
Info from Comsec 26th Dece 2010
Current Equity 35047 mill
Current Issued Shares 1542 mill
EQPS = $22.73
NPAT = $5617 mill
Div per Share $2.9
Reported Div = $4472 Mill
Payout Ratio 80%
Prior Years Equity $30922 mill
ROE 18%
IV $45.48
Please help as I am just learning
merry Xmas to all
Kent