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Which businesses excel in the business of wellbeing?

Which businesses excel in the business of wellbeing?

I am guessing from the many emails I received this week about healthcare stocks that the quantity may have something to do with the sector being in the headlines (remember it is an election year)?

Government numbers show that spending on healthcare is expected to nearly double as a proportion of GDP over the next 40 years. With fewer babies being born and people living longer, it is inevitable that the population is ageing. In the next thirty years, the proportion of the population aged over 65 will double to 22% and in the next forty years, the number of Australian’s aged 85 and over is expected to increase from 1.8% of the population to 5.1%.

Government estimates show that this will exact a heavy toll on the cost of providing health and the following chart reveals where those costs for the government and opportunities for healthcare companies lie.

Using government estimates for GDP growth, the above charts suggests the government will spend $38 billion on medicare and $68 billion on the PBS in 2040. Figures such as these have provided the large community of buy-and-hold investors with a sound investment theme to pursue. But in some cases this theme has led to some extremely irrational pricing, as we will discover.

There are more than 20 healthcare stocks listed on the ASX that essentially fall into two categories.

1. The provision of care and related services. This can mean pathology companies such as Sonic Healthcare, private hospitals such as Ramsay Healthcare, and providers of specialist ancillary services, such as software provider iSoft.

2. Research and development. This can mean companies that produce generic pharmaceuticals, such as Sigma, or research into and development of cancer drugs, such as Sirtex.

Like another exploratory industry, the mining sector, the size of these companies can vary from the very small, such as Capitol Health with a market cap of just $15 million, to global blood products and plasma giant CSL, which has a market cap of about $20 billion.

The ideal combination of characteristics for a healthcare company that an investor would seek out is no different to those that should be sought more generally; a very high quality balance sheet, stable performance, a high Return on Equity, little or no debt and a discount to intrinsic value.

So what do I think are the superior businesses? Following is a table of my findings.

Using a combination of 15 financial hurdles, I note that the best quality companies, but not necessarily the cheapest in the sector, are CSL, Cochlear, Sirtex, Biota and Blackmores.

Do you see that Search box to the right, just under my photo? You will need to scroll up. Type CSL, Cochlear or Blackmores into the box and click GO to read my past insights. And if your appetite remains unsatisfied, visit my YouTube channel, youtube.com/rogerjmontgomery, and search there too (there are many videos in which I talk about CSL and Cochlear).

I should point out that each of the remaining three – Sirtex, Biota and Blackmores – are generating high Returns on Equity and has manageable or no debt.

The lowest ranked by quality are Primary Healthcare, Sigma, Australian Pharmaceuticals and Vision Group. I won’t be buying these at any price and their Returns on Equity are less than those available from a risk-free term deposit.

Alchemia, which manufactures a generic treatment for deep vein thrombosis and pulmonary embolism, Phosphagenics, with its patented transdermal insulin delivery system, and Capitol Health are also low in terms of quality and also highly speculative because they are yet to report profits. Analysts, however, are forecasting profits for all three in 2011 and 2012 and Alchemia is forecast to earn more than 30% Returns on Equity after a loss in 2010.

In between this group are companies whose quality is neither compelling nor frightening; these are businesses that if I was forced to by I might only if very large discounts to intrinsic value were presented and in some cases, only if I was happy to speculate – which generally I am not. Sonic, Ramsay (search RHC for more analysis), iSoft, Pro Medicus, Healthscope, Halcygen Pharmaceuticals, ChemGenex, Acrux and SDI fall into this band.

I have ranked all of the healthcare companies by their safety margin: a measure of their discount or premium to the current year’s intrinsic value. This reveals that some companies are trading at discounts to intrinsic value. As an investor you need to be satisfied that the companies you choose also meet your quality criteria, which should mimic your tolerance for risk.

Take a close look at Biota, for example. Its price of $2.38 is significantly lower than the estimated intrinsic value, however you will also see that the return on equity is forecast to fall from 50% to 11%. There will be a commensurate decline in intrinsic value in coming years and the apparent discount will no longer exist, meaning that unless return on equity improves considerably in a few years it will cease to be a good investment.

If my portfolio approach were to include some exposure to healthcare then my first choices would be CSL and Cochlear. These are both well managed, large-cap businesses with stable returns on equity and zero or low levels of gearing.

My next preferred exposure would be pathology and radiology operator Sonic, alternative medicine distributor Blackmores, and liver cancer treatment marketer Sirtex

Finally, if I was comfortable speculating on stocks then the companies I would seek to conduct further research on would be the two pharmaceutical minnows, Halcygen and cancer drug developer Chemgenex. Both companies are forecast to generate attractive rates of return on equity in 2011 and 2012 and have little or no debt. Halcygen is also currently trading at a discount to its estimated intrinsic value.

REMEMBER… Before making any investment decisions, my comments should only be seen as an additional opinion to the essential requirement to conduct your own research and see a qualified financial professional.

Everyone is capable of being terrific investors, you just need to remember that there is serious work to be done by YOU in the business of investing.

Posted by Roger Montgomery, 25 March 2010


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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  1. Hi Roger

    I have been studying ACR Acrux which at the time of this posting last year was $2.27 but “valued” $8.90. On 24th March they have announced on 24th March a 60 cent maiden dividend, (total payment of $100 milllion from a current cash balance of $147.1 million) which was flagged late last year. Since which in the last week, the price peaked at $3.70 before losing about 18% in the last two days. I understand short term price movements are not indicative of the underlying fundamentals.

    The dividend is a result of royalty “milestone” payments the company received from Eli Lilly pending the release of it’s patented “Axiron” product in the US market. Going forwards the company can expect to receive up to a further $195 million and sales royalties from Axiron which are not estimated.

    Indications for the current period seem to be quite positive, with no debt, revenue increased 18% for the 6 month to December 2010, and profit by almost the same % in that period. The most glaring anomaly I can see is that EPS whilst having improved markedly from 2009-2011, is virtually halved going into 2012, the reasons for which I cannot quite understand based on the most recent half year report figures and stated revenues pending. I can only assume that the recent revenues are something of a one off event, and the company does not have any equivalent developments occurring in the immediate future.

    I wonder if you can provide any further insight into this stock at present. I should say I am yet to master the calculations in the book for IV and still battling to understand the finer points of assessing all the different statistics which may explain why I find this stock so puzzling based on it’s previous A1 rating and recent successes with it’s products.



  2. Hi Roger,

    Do you have analyst info about Starpharma? They appear to be worth a good look.


    • Hi Steve,

      I have just spent a bit of time with a “pharma guy”. I will give him a call and see what he thinks. Give me a week or two to get back to you on that. By the way, if anyone has a request for a valuation of a company quality rating, just post a request here.

  3. Hi Roger,

    As you may recall I do sometimes comment on your blog. I have said that before, but will repeat it again, you are doing great job and we all appreciate it so much.

    This time I would like to share my concerns about the way you report the intrinsic values. Being an engineer and scientist I look at numbers and judge them by the number of significant digits that are provided. What I am trying to say is if you write, for example, a number of 1.26 it suggest to me that this is very accurate (up to 2 digits) reading or description of some kind of phenomena. It kind of tells me that by providing this many digits only the last one is less certain that the previous one.

    Since you are relaying on forecasted figures eg. ROE why do you use that many significant digits in description of the intrinsic value? We all know that forecasts are not accurate and if you relay on them your intrinsic values are going to be as good as them. I believe that your valuations would sound more credible if you round them accordingly. Please do not take this as criticism. But as Warren Buffett said it is better to be approximately right that precisely wrong.

    Of course you may disagree with me and this is fine too. I will still come back and read your blog, listen to what you have to say and read your long awaiting book.

    Thank you for your great job.

    Best Regards

    Irek Baran

    • Hi Irek,

      Thank you for sharing that insight. You raise an excellent point. The apparent precision can be misleading. In response can I say, that if the value is $1.26 or $1.27 it shouldn’t matter. You are trying to buy at $1.00 or less (assuming you have done your research and sought personal professional advice). Thats how I try to be approximately right!

  4. Helo Roger,
    I enjoy your very interesting presentation on Your Money (Sky Bussiness Channel.). I noticed on your Website the
    Which businesses excel in the business of wellbeing?,that you have a valuation on Sigma Pharmaceuticals of $0.56.
    Does that mean the Sigma is a buy at current levels??

    Kind Rgards]


    • Hi Peter,

      Let me repeat the comments I made to Shuo earlier:

      I posted that “Wellbeing” article on March 25th and Sigma’s share price was ninety cents. I estimated its value at 56 cents but noted that it was one of the lowest quality companies in the group and “I won’t be buying these at any price and their Returns on Equity are less than those available from a risk-free term deposit.” The company’s quality has not changed and therefore a lower price (for me) does not make it more attractive. So even though it is now trading at circa 30 cents, I don’t believe it is investment grade. Having said that some fund managers have a different view and believe that there IS a price at which everything can be made attractive. Such an approach can be successful, but I believe there’s also more risk. One has to decide on the strategy and process before investments are made and then that strategy needs to be applied with consistency and over a long period of time.

      It may be that Sigma is cheap and it may be that the price rallies significantly on a shift in sentiment and amid the prospects of a turnaround, but that is not the type of investing I engage in. I simply like to buy the best quality companies when they are cheap. You tend to find very few companies that meet the criteria when the market in aggregate is expensive.

      One response to that is to lower one’s standards to allow investments to be made. The other response is to make no more new investments. I subscribe to the latter for myself. That does not make it the right strategy and it certainly doesn’t make it the only strategy. It just works for me. How you invest is entirely up to you, but always seek personal professional advice.

  5. I listen to you on Sky news and read your blog quite often. Your
    insights are very much appreciated.

    You may have mentioned Sirtex as a good company. Looking at their 2009 annual report I noticed that not many of their board members actually own shares in the company. Darren Smith the company secretary owns the most at 15,000. I find that somewhat disturbing given the potential that they talk about in their presentations and reports. If it truly is the next liver cancer treatment, shouldn’t they all want part of that company.

    What are your thoughts? Are they restricted under some agreement if not why are they not invested given the potential of SRX?

    • Hi FC,

      Its a good question and one that should be put to the board and management. Here are some comments I made in response to a question posted on “Who picked the top stocks? Stock Pickers’ Showdown”:
      Its currently an A1 however that status hasn’t been consistent in the past. Its ROE is excellent and it hasn’t had any real debt since 2007 and the company’s equity has grown via retained earnings since 2004 rather than new capital. I notice a fellow fundie Don Williams at Platypus ( a guy I have a deal of respect for having chatted together on several occasions) went substantial in early March. If they can maintain their return on equity as equity grows, and continue their present dividend policy (ie. not increase the payout ratio and thus retain profits profitably) they are worth possibly $7.70. But don’t take my word for it I am first digging around for some industry views.

  6. Hi Roger,

    In light of the announcement by Sigma Pharmaceuticals, I thought I could add something. I am a pharmacist and I have heard some things about Sigma recently that make me think it should be on the “avoid” list. I don’t know if it is in your A, B or C list but I think it can be downgraded not only on the announcement but on some of these rumours as well. Also, they have initiated a share-giveaway program to pharmacy customers based on supporting their business etc. Seems they really like to issue shares and we all know what that does to the valuation!


    • Hi Michael,

      It an interesting one, because its balance sheet looks ok which would give it a high rating but the debt is known to be off balance sheet and related to the funding of debtor balances. The company has put unnecessary pressure on its cash flow by extending payment terms of up to six months to some of its larger customers. This of course helps fund the customers growth but if they become large enough their clout makes it difficult for Sigma to rein in those credit terms without losing the customer to its competitors, Symbion or API. Furthermore, its valuation has been declining for some time and if you subscribe to Ben Grahams view of the relationship between price and value, you don’t want to own businesses whose values are declining. Thank you by the way, for sharing your professional insights Michael. I hope to encourage more contributions from industry sources across all sectors here.

  7. Hi Roger
    May I request MYS (my state) valuation please.
    Tassie financial institution and may not have any analyst forecasts.

  8. Hi Roger,
    Why does FGE have a negative net Debt /Equity (-23.7%)?
    I guess debt free with cash in the bank.
    Thanks Greg

    • Hi Greg,

      Correct. Cash minus debt is a negative number so when the sum is dividend by equity, the product of the equation is negative. Its a good thing in this case. Keep in mind you can also get a negative number when the debt is positive but the equity is negative. Often that scenario means carry forward losses or a writedown. More investigation required.

  9. Roger … Roger … Roger

    Don’t exhaust yourself defending your beliefs against your critics … you have a book to write. You want deciples, not agnostics; don’t encourage them. I think you must enjoy the stoush (it’s the burden of a keen mind), and I think some of the correspondence reminds me of my experience with Ventracorp.

    You win, by the way, with your last line, which I would paraphase to, “In order to make a profit, someone has to make a (perhaps opportunistic) loss” … the Chinese knew/know a bit about Yin/Yang.

    … so get back in your office and write that last chapter, and plan your workshop tour. Then you can sit back, suck on your pipe, and scratch that itch you have to have a debate.

  10. Sorry, my last sentence was meant to say that “its share price will NEVER get below…”.

    Additionally, I find it intriguing that you classify FGE as an A1 company – surely this is from a financial perspective only? From a business profile perspective, there are several flaws with this company including:

    (i) Questionable management who accepted a highly dilutive equity raising to Clough to “strengthen their balance sheet” even though they have approx $35m net cash on their balance sheet.
    (ii) High reliance on contract revenue. Their earnings base is totally comprised of non-recurring revenue. Additionally, engineering contractors have a poor history of having contracts blow-up through poor budgeting.

    • Hi again Alex,

      Yes, I am aware that is what you meant. Unfortunately, the theory about never being able to buy business below intrinsic value, is not supported by my experience and the performance of the funds management businesses I sold over 1, 3, and 5 years. It is a real positive that we have different views about stocks and valuations. How many trades do you think would occur if no-one disagreed? The answer is none! The A1 is a measure of strength and predictability of performance using 15 financial measures that have a great track record of predicting a couple of very important things. CSL, COH, JBH and The Reject Shop are examples of companies that get the A1 rating. They’re the types of businesses that help generate meaningful outperformance for portfolios I have managed. I actually think management know their business very well but they don’t appear to understand or care about capital allocation or valuation. I will be endeavouring to speak to the company tomorrow before writing a column about this very company and management’s decision. Why sell out shareholders at $1.90 and $2.20 when the value in two years could be as much as $6.00 without the injection. It is possible that there are threats that are mitigated by the tie up and it could be there exist some limits to the abilities of management that they feel they need the tie up, but the deal should be at a price that respects both the new and the existing shareholders. Alex, don’t get too hot and bothered about having a different view to others. Remember that every time you buy or sell shares you are disagreeing with the person on the other side of your transaction.

      • Thanks Roger – I greatly appreciate your responses. I’ve actually been a shareholder in Forge for sometime and have achieved some very strong returns. It has an extremely strong balance sheet and a good earnings profile and I still feel its current share price represents good value. I don’t, however, consider it to have the durable earnings profile of CSL, COH, JBH & TRS and thus would not classify it in a similar category.

        I’ve had a brief discussion with management re: their recent capital initiatives and it sounds as though the deal was struck around October last year when the share price was significantly below its current level and that the deal price has not been adjusted accordingly. I also get the feeling that management is struggling to cope with their current project pipeline. I look forward to reading your column.

        I have done some significant work on SRX and believe its earnings potential is misunderstood by the market. I expect its earnings to significantly outperform FY11 and FY12 consensus estimates.

      • Hi Alex,

        They’re really useful insights. Thank you. That is what our “Insights’ blog is all about. To everyone reading this column, keep sharing your insights and combined with my valuations, we’ll all be better prepared.

  11. Hi Roger,

    I do not believe that your valuations adequately capture forward earnings potential for these businesses. For example, SRX currently has only 0.2% market share for liver cancer treatment. If it can increase its market share to ONLY 1.0%, it could be earning $150m NPAT (the microspheres are currently only used as a last resort treatment option and recent clinical trials that have commenced are focused on using the microspheres as a frontline treatment in combination with chemotherapy – initial results from these trials are extremely positive and it is likely that the microspheres will increase their market share measurable over the next 1-2 years.)

    A $150m NPAT represents a 337% return on its current equity value of $44.5m. According to your valuation methodology with a 10% required return, this would result in a $1.47 billion valuation on its equity against its current market cap of $335m.

    This company represents by far the most compelling valuation out of the healthcare stocks listed above, albeit with a slightly higher risk profile than the likes of COH or CSL. It is important to remember that COH and CSL were once is a very similar position to SRX. Valuing this company on an historic ROE basis means that its share price will get below your calculated “intrinsic value” and will mean that you are likely to miss out on its substantial appreciation over the next few years.

    Kind Regards, Alex

    • Hi Alex,

      Thats precisely what makes a market. A difference of views. Having said that there is a lot to like about SRX. Good ROE…finally and its an A class company but its performance hasn’t got the sort of predictability that I like to see. Most importantly, you shouldn’t base your valuation on: “If it can increase its market share to ONLY 1.0%, it could be earning $150m NPAT”. That may be true but its an “IF”. I have used a profit of $15 million for 2010 and 22.1 million in 2011. This produces returns on equity of circa 32% for those two years. I am not using historic returns on equity as you suggest I might be. I am looking ahead but I am not basing the valuation on a “337% return on equity” which as you point out is based on the selection of a possible 1% market share – a 500% increase on its current market share. The rate of return on equity I am using is a rate of return that the company may indeed exceed, but also a rate that it may not meet. If I had to bet I would bet that it will do well but what I am trying to impress upon you is the importance of knowing when you are investing and when you are speculating. If you are going to trade in the shares of this or any company be sure to seek personal professional advice.

  12. Hi Roger,

    Thanks for your valuations for the health industry. I was really surprised to see the valuation of Biota at $8.81. Is this correct?



    • Hi Arvin,

      The valuation is correct but its a flash in the pan. The valuation falls precipitously in 2011 and 2012 to less then $3.00 because both earnings and ROE are forecast to decline substantially. I discuss it in the article I wrote for Alan Kohler and repeat here on the blog.

      • I’m glad Roger stressed this point as it cements in my mind how all valuations work. They are not prophecy – just an objective distillation of “fair price” based on historical and forecasted performance. Forecasts themselves are ultimately guesswork, and my own preference is to use historical data (as Ben Graham advocated) to place present prices in context and help me ask the right questions (why is it a bargain? why is it popular?).

        I own Biota and my understanding is that the ROE does fall precipitiously from 2011 if one assumes that Relenza is Biota’s only successful product on which royalties are paid (royalties span a 5-year period from recollection). However, Biota does have other products in the pipeline such as the longer-effecting version of Relenza called LANI, plus it has expanded its drug development program through strategic acquisitions, e.g. MaxThera. However, no quantitative model can predict whether these programs will be as successful as Relenza. Medical R&D is even more perilous than mineral exploration since product investment can fall to zero without warning. However, the payoff is often much much lucrative and stable.

        Biota is a small percentage of my portfolio to reflect such risks but my analysis of its management, culture and direction suggests that its recent successes are not just a flash in the pan.

        Incidentally, just thought I’d mention here that I feel Cochlear is less a health stock and more a technology stock – closer in performance and prospects to Apple than CSL.

      • I’m glad Roger stressed Biota’s changes in valuation between past and forecasted performance. Forecasts themselves are ultimately guesswork, and my own preference is to use historical data (as Ben Graham advocated) to place present prices in context and help me ask the right questions for a deeper follow up (why is it a bargain? why is it popular?).

        I own Biota and my understanding is that the ROE does fall precipitiously from 2011 if one assumes that Relenza is Biota’s only successful product on which royalties are paid (royalties span a 5-year period from recollection). However, Biota does have other products in the pipeline such as the longer-effecting version of Relenza called LANI, plus it has expanded its drug development program through strategic acquisitions, e.g. MaxThera. However, no quantitative model can predict whether these programs will be as successful as Relenza. Medical R&D is even more perilous than mineral exploration since product investment can fall to zero without warning. However, the payoff is often much much lucrative and stable.

        Biota is a small percentage of my portfolio to reflect such risks but my analysis of its management, culture and direction suggests that its recent successes are not just a flash in the pan.

        Incidentally, just thought I’d mention here that I feel Cochlear is less a health stock and more a technology stock – closer in performance and prospects to Apple than CSL.

      • Hi John,

        Always good reading your contributions. All analysis is fraught with peril. Using forecasts is tantamount to guess work but as Munger once said; if history was all there was to it, the Forbes 400 would be filled with librarians. There’s no simple answer. The past is good for stable companies in industries that are slow to change. That rules out technology companies and biotechs which are in fast changing sectors. There’s an element of speculation involved in biotechs and their next big thing. You are right to have a very small portion of your portfolio employed and it also right to seek a very, very large margin of safety – even then it might not be enough. Positive growth in the intrinsic value of Biota will be dependent on something ‘new’.

      • Hi Roger,

        Even though Biota is a ‘flash in the pan’, with such a big margin of safety do you think it is worthwhile to buy and hold for 12 months or so?

        Thanks and best regards

      • Hi Dean,

        That would be personal advice. I will have to leave that decision up to you. if you follow my blog closely and understand the tenets of the brand of value investing I advocate, you should get a pretty good idea of what my answer to that question would be.

  13. Roger, I’m relatively new to stock market, and purchased in March 2009 [Markett Low], for long term investment, a very large quantity of blue chip shares at very low valuation. BHP,WOW, STO, NAB, CBA, ANZ, WBC, CSL, WES, MQG, TLS, BKW, FWD, AMP, TAH. Some advice please: do I no longer watch the stock market for 20 years and receive dividends and growth, then sell them, or Do I sell some now and reinvest. I am uncertain to reinvest, as it will would be very unlikely I would purchase the stock at such low valuation again.

    • Hi Scott,

      First, can I say well done for taking the plunge when everyone else was losing their heads. The timing of your purchase, occurring as it did when sentiment towards the future and towards investing in stocks was at its lowest, reveals a certain temperament that is rare but highly desirable in the field of value investing.

      The fact that you are now seeking advice shows humility which is another redeeming characteristic for a value investor. Of course it could also mean that you have no idea what you are doing, but I suspect that is not the case. Ypou do appear to have some companies that are very high quality. You also have some companies that have lower quality and are trading at prices that I believe are well above their intrinsic value. Seek personal professional advice before doing anything. Your question however is more philosophical than what to sell and what to hold. Generally, you never want to sell the very highest quality businesses. The highest quality businesses are those I rate as ‘A1’ and whose valuations are rising in the future at a very satisfactory clip annually. Those are the ones to hold. Those whose values are either very low compared to the current price, those companies with lower quality ratings and those whose valuations are not rising at an attractive pace, could be sold with the proceeds invested elsewhere – perhaps in some of the higher quality, better value things you already own. Generally you should keep in touch with the companies you own. The directors could at any time make a decision that changes their prospects or their value and that would be a trigger to reconsider the position. Thats about as much as I can say for now, but stay tuned.

  14. Hi Roger

    I would like to know how to value a company into the future called Cellestis?
    CST has No debt, $20 million cash, sells around $40million on a simple blood test for TB, has FDA approval twice, makes 60% profit on each test, has about 3% of the 60 million tests @$20 a market of about 1.2 billion. The incumbent skin test is over 100 years old is known to be unreliable. CST has a patent protection until 2023.The platform for the test is called Quantiferon and is now bringing on new tests for various other diseases so is not a one test company.

    • Hi Terry,

      There have been a few requests for CST and I am well aware of the company. I am planning to cover it in another post in the near future. Thanks for mentioning it. The frequency of received requests is my guide to the topics you would like covered. CST will be coming soon.

    • Hi Geoff,

      The plan is to cover it in another post. As you will see from Terry’s post, it has some redeeming characteristics.

  15. Hi Roger, thanks for the article, interesting valuations you’ve posted and I was surprised to see your intrinsic valuations for both CSL (which I own) and COH (don’t own) drop from earlier postings (You had CSL at $32.87 and COH at $56.30) in Eureka Report as of 24th Feb 2010, (now $28.77 and $45.78) although you have stated in the past you have multiple formulas, I do not know which you were using in this example…

    I was also surprised to read your description of Sonic Healthcare (which I own) as “Okay quality” as this is Australia’s leading pathology business which has on average grown earnings at an annual rate of 24.4% and dividends at an annual rate of 16.0% over the last 10 years. An exceptional performance by any standards. Last year it thrashed its main competition (Primary Healthcare) in gaining market share in Australia and is rapidly (and cost effectively) expanding into new markets overseas (very bright prospects.) Given, its ROE and ROC are not exceptionally high although it makes up for this in other departments.

    Good luck and thanks again for the column, food for thought.

    • Hi Nick,

      The great thing about a consistent approach to assessment of quality and value is that irrespective of changes in sentiment or even window dressing by companies, you can see through most events to the underlying reality. With regards to CSL and COH, you have nothing to worry about. The different values are because of the use of two models as I have described before. I admit most of the feedback has been that everyone would like both valuations posted so that a range is provided. You will have to stay tuned. I will get to that. Back to CSL and COH, both have significant increases in valuations coming in future years (of course that does not mean I know what the share price is going to do). I should let you know however that even if I was to use the same model for CSL, the value has changed from $32.87 to $33.55 for 2010. This change is because of the change in the level of the estimate for the Aussie dollar since the last valuation was conducted. As I publish more valuations you will see the changes correspond to something (internal or external) that has changed and impacted the company.

      Regarding Sonic. Everything you say is true. “BUT”….its just not an A1 when rated across 15 fundamental measures that I use to assess consistency of performance, predictability of performance and credit worthiness. Top quality businesses across all measures get an A1. JBH, FGE COH and CSL get A1. Sonic simply doesn’t. Sonic is a business I said I would be happy to own but at a big discount to intrinsic value. It has increased its intrinsic value significantly from $2.26 ten years ago but its debt has risen from $318 million ten years ago to $1.8 billion today and despite this debt (which should be a boost to ROE) it is generating an ROE of just 13%. I agree with all your points but when you look at mine you will see that the metrics are just not as good as an A1 company.

      I really hope that helps and I sincerely appreciate the opportunity to explain it.

    • Thanks Mick.

      There are few editors that transpose the tables before they get to you so apologies. Make that “Mln” not “Bn”

  16. Hi Roger, just wondering what your thoughts were on PBP (Probiotec), it wasnt covered in your health sector stocks.
    It generates real profits, but it hasnt been listed for long (so doesnt have a long term track record).

    Views appreciated.

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