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16/5/2016 How do Value.able graduates calculate forecast valuations?
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HOW DO VALUE.ABLE GRADUATES CALCULATE FORECAST VALUATIONS?

ROGER MONTGOMERY
October 1, 2010
COMMENTS (255)
I know of no other book in the world that discusses the
concept of calculating future intrinsic values. You may think
that is a bold statement, but its true. I have seen many
books that claim to reveal Warren Buffett’s intrinsic value
formula, but not one that lays out, stepbystep, what
investors need to look at to determine whether intrinsic value
is rising at a satisfactory rate in the future.
I confess to chuckling recently when one investor told me
that they were finding it a little difficult to source the data
they needed to calculate future intrinsic values. They also
believed that my book lacked an explanation for how to
calculate future intrinsic values.
So I asked whether or not they had even thought about
future intrinsic values before having read Value.able? Sheepishly, the investor accepted that my book
was much more valuable than they had initially concluded and subsequently told other people.
I have not found any other book in the world that has taken that little Buffett quote about finding
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16/5/2016 How do Value.able graduates calculate forecast valuations? « ROGER MONTGOMERY
businesses growing intrinsic value at a “satisfactory rate” and making it part of a clearly explained and
defined investing process.
And for those of you who are looking for a reference to forecast equity per share in Value.able…. see
Page 188, Step A.
The missing worked example for future equity. It’s easy!
How can you estimate future equity if you don’t have a forecast number such as those readily available
in analyst research notes? It’s easy. Take the last known equity per share figure, add the estimated
profits, subtract the estimated dividends, add any capital raised through new shares issued and
subtract any equity paid back to shareholders through buybacks and you have it.
Here’s an example: In the 2010 annual report for The Reject Shop, equity at 30 June 2010 was
$51.543 million (click here to see) and there were 26.034 million shares on issue. Dividing the 2010
ending equity by the shares on issue ($51.543/26.034) equals equity of $1.98 on a per share basis.
According to Commsec (click here to see), consensus analyst estimates for 2011 earnings per share and
dividends per share are $1.028 and $0.744 respectively.
Starting with the 2010 equity per share of $1.98, add the earnings per share of $1.028 and subtract
the dividends per share of $0.744 to arrive at an estimated ending equity for 2011 of $2.26. (If you
are aware of any shares issued since the end of the financial year, you may want to take the amount
raised and divide it by the number of shares issued and then add that result to the $2.26)
Now that you have seen it done, how easy is that?
A global movement begins!
I couldn’t be happier that a small group of passionate Australian value investors are even
contemplating future intrinsic values! Nobody in the world is presenting you with estimates for intrinsic
values, two, three or four years out and I have never seen any investor ever do it. I know of nobody
else in Australia doing that, nobody has written about it before and I haven’t ever come across anyone
else in the international business media discussing it either.
And now you are all doing it! It has become part of your vocabulary.
Think about that for a minute… after reading Value.able, investors are now estimating future intrinsic
values, posting their estimates at my blog and Facebook page,and chatting about them online in
forums and in boardrooms where previously nobody was.
If before reading Value.able you weren’t discussing future intrinsic values and now you are, then my
book has had a positive impact and I am delighted. And all for just $49.95!
Consider how you are now subconsciously framing your investing decisions with future intrinsic values
in mind.
Warning!
Don’t blindly combine numbers with Value.able’s valuation tables to produce intrinsic values. As I say in
my book, you MUST understand the business and its prospects. I devoted an entire chapter to cash
flow and its calculations. Don’t ignore it. I also devoted an entire chapter to competitive advantages.
Don’t ignore that either.
Recently, Buffett sold down his holding in Moody’s because it had lost some of its competitive
advantage. He isn’t selling because he has recalculated intrinsic value. It’s the competitive advantage
that drives the intrinsic value.
Be careful you aren’t so focused on the intrinsic value number that you ignore all the other important
factors.
Its one of the reasons I have my Montgomery Quality Ratings (MQRs). They are my own filter to help
narrow the universe of companies to conduct further research on.
I put a lot of effort into writing my book and making an investment plan out of the best of what the
world’s most successful investors have revealed, published and taught. And I am delighted that you
have allowed me to share that with you. Thank you.
Where do I get the raw data Roger?
I have previously posted a document called ‘Source Data’,
where Value.able graduates contributed their solutions to
obtaining the data. Because I am receiving so many requests
for help finding the data, I thought it useful to republish
it. Click here or click the Value.able Source Data button to
the right.
I was saddened to hear that one Value.able reader thought
getting the data was all too hard and gave up. That’s like
knowing there’s silver and gold a metre under your feet but saying that grabbing a shovel and digging
is just too hard. If you don’t want to do the work that’s fine, but please don’t blame the guy who gave
you the map, the pick and the shovel.
Using the information in my Source Data document, you should now be in a rock solid position to start
estimating future intrinsic Value.able values.
Take a look at the Source Data document and you will see that the raw data is freely available. Indeed
every single number you need to estimate the current intrinsic value is also available in a company’s
annual report, and its all free at ASX.com.au.
With sources like Commsec and the formula I have given you for future equity, you can now freely
estimate the forecast intrinsic value as well. Just go to ASX.com.au, click on the announcements link,
select the company code and the year you need and voila! All the information is there in the annual
report.
Value.able outlines the way I invest. I don’t have a green button that I press each day that
automatically goes and buys the best opportunities. Value investing requires research and analysis. We
can build devices that give us some short cuts, but they don’t replace the need to understand the
business and the risks.
Why are my valuations different to Roger’s?
If everyone uses exactly the same inputs, our Value.able valuations will all be identical. Any differences
therefore are due to different data. Some examples of sources of variation are:
Online brokers’ ROE numbers are calculated differently to the way I suggest in Value.able. They use
ending equity and I suggest average equity.
Generic net profit after tax figures available on various online summary lists may or may not remove
abnormal/significant or nonrecurring items. Intrinsic values should be based on recurring profits,
revenues and expenses. (Yes there is some subjectivity in this).
I have noticed many of you using 10% discount rates for all companies. As I suggest in Value.able,
this may be too low in some cases.
There are a variety of reasons and your Value.able valuations are different to mine.
Recently on TV I indicated that my valuation of Telstra was closer to $2.30$2.50, but one Value.able
graduate produced $3.68. I suspect that the difference is simply the choice of discount rate. Many
investors will use a low discount rate because TLS such a big company with plenty of liquidity and very
low risk of significant change. I however might use a higher rate because I want compensation for the
fact that its future prospects are opaque and its profits haven’t grown a dollar in a decade.
Thinking about differing results, I am encouraged that many Value.able graduates were able
to replicate my results exactly, or within a couple of cents.
Value.able will stand the test of time because it is based on a method of investing that works. It is a
method of investing that requires time to demonstrate its value. And in time I look forward to hearing
many more of your success stories.
Only a few First Edition hardback copies of Value.able remain. So if you haven’t purchased your
reserved copy yet, now is not the time to ponder.
There was only one print run of the First Edition hardback. The paperback Second Edition will be
available in mid November.
Posted by Roger Montgomery, 1 October 2010.
Mi piace 11 mila
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may
contain general financial advice 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 advice from a financial advisor if
necessary.
POSTED IN COMPANY VALUATION, INSIGHTFUL INSIGHTS, VALUE INVESTING, VALUE.ABLE.
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COMMENTS
255 thoughts on "How do Value.able graduates calculate forecast

valuations?"
GRAHAM THOMPSON said on OCTOBER 29, 2014 AT 9:21 PM:
Hi Roger, I enjoyed the book on my kindle however I cannot read all the tables on this
device. Can you refer me to another source that would allow me to find a readable copy of
both of the tables.
Maybe there is a kindle tip someone can help me with to enlarge the tables.
Much obliged and thanks for the great read and sound information.
Graham
ROGER MONTGOMERY said on NOVEMBER 4, 2014 AT 10:44 AM:
I graham,
Please call me on 0416 109 242 and will sort out a solution for you.
BEN-NEYNENS said on JUNE 8, 2015 AT 4:19 PM:
I found that if you log into your kindle library at https://read.amazon.com/ and
view on a big screen, then the tables are readable. Not a hack that will work for
everyone but it suited me okay.
ADAM said on APRIL 25, 2013 AT 6:13 PM:
Hi Roger,
Just wondering – what is the formula underlying valuation table 11.2? As soon as the
return on equity exceeds 40%, the table doesn’t work. Or is it your view that if a company
has a higher return on equity, it’s unsustainable and so better to avoid?
Much appreciated.
ROGER MONTGOMERY said on APRIL 26, 2013 AT 4:40 PM:
I am pretty sure I say exactly that in the book.
PETER CHAPPLE said on MARCH 12, 2013 AT 12:20 PM:
Hi Roger / team,
I recently purchased the Value.Able book and thought it was very easy to read,
particularly for a novice investor like myself. I tried out the valuation on a couple of
businesses that I had reviewed and thought that had quite sound economic
characteristics; Webjet and Carsales. I was disappointed to see that my valuations came
out quite low compared to the current prices.
It took me a while to work it out but I think it is because the equity per share is very low.
There seems to be a lot of shares on offer. Does that sound right?
Thanks,
Peter
ROGER MONTGOMERY said on MARCH 13, 2013 AT 3:12 PM:
Not a lot of bargains around at present Peter. That of course won’t prevent their
prices rising further. Valuing a company is not the same as predicting its price.
IAN WAYLING said on AUGUST 16, 2011 AT 11:33 AM:
Roger
How do I calculate from the Comsec site the analyst’s forecast for the whole amount paid
by a company in Dollar amounts for Dividends paid, the not just the cents per share.
Ian
ROGER MONTGOMERY said on AUGUST 16, 2011 AT 9:22 PM:
Hi Ian,
I hope someone here can help you with that one.
RUSSELL ROBINSON said on JUNE 6, 2011 AT 8:55 AM:
Thanks to Roger’s blog, getting the source data for previous years is easy.
And getting forecast EPS and DPS are easy too.
Also, estimating EQPS is covered elsewhere on the blog, so that’s easy too.
Forecast NPAT is much harder. I usually just multiply previous year’s NPAT by forecast EPS
growth, and then check for recent earnings guidance, half year report, etc. to get a “feel”
for a reasonable NPAT value.
Does that sound right?
But, when I valued two recent companies BRG and ORL, I have real trouble getting
anywhere near Roger’s current valuation.
Based on Roger’s Eureka Report article on 25th May, he has:
BRG MOS: 11%
ORL MOS: 16%
I value ORL at between $7.03 at an RR of 10% and $6.19 at an RR of 11% giving a MOS
range of 11% to 26% based on it’s closing price of $7.79 on 24May.
Since Roger doesn’t say what RR he is calculating his MOS on, I can accept that I’m
wiithin the ballpark for ORL, but it’s still a significant difference either way.
It all goes very bad with BRG…
I value BRG at between $2.22 at RR=10% and $1.94 at RR=11%, giving a MOS range of
51% to 72% based on it’s closing price of $3.35 on 24May. Even at RR=9%, the MOS
is 30%.
So, this tells me there’s something really wrong with my NPAT, Outstanding shares,
and/or Shareholders Equity.
But, I’ve scoured the recent documents for BRG and cannot find the problem.
I have:
Share: 130mil
Sh Eq: $165mil calculated from EQPS of $1.27, based on last years EQPS plus forecast
EPS – forecast DPS
NPAT: $27mil (which seems reasonable given the strong first half)
Any ideas where I’m going wrong or what I might be missing?
ROGER MONTGOMERY said on JUNE 6, 2011 AT 10:37 PM:
Hi Russell,
I can see reasons for the difference. I trust someone might help. All the best and I
hope you aren’t one of those people trying to reverse engineer everything.
Strange how some people would rather spend a months trying to nut it out
instead of paying a few dollars and have it done.
RUSSELL ROBINSON said on JUNE 6, 2011 AT 10:48 PM:
Hi Roger,
No reverse engineering.
Really? Do people hang round here trying to figure things out rather than
buy your book?
I bought and read Value.able last year.
Here’s me: http://www.facebook.com/photo.php?
fbid=10150311973187788&set=a.10150161072792788.319220.162035452787&t
I’ve rescanned chapter 11, but I can’t find why I seem to be getting the
wrong numbers.
I plan to reread the entire book over the coming weeks.
If you have a hint, I’d really like to know – you can email me if you prefer
not to publish it.
Hey Russell,
Delighted to hear it. The difference is simply the way you are
estimating forecast profit. But of course, the way I calculate intrinsic
value is quite different to the Value.able version which is simplified to
make it easy to understand and adopt. Of course, in its simplified
form, it remains very effective.
RUSSELL ROBINSON said on JUNE 7, 2011 AT 9:59 AM:
Right. So you think they are going to make a lot more profit
this year?
Yes, that’s fair enough.
I’ve now noticed the Value.able method can be very “lumpy”
(I think “discrete” is the mathematical term) because the
difference between 16% ROE and 18% ROE on BRG is $0.53
in IV.
And to get that change in ROE, requires a significant jump in
NPAT.
If one was to provide more entries in the Value.able tables
between the ROE figures, then it would be more continuous.
I can see how your more complex calculation would do this
sort of thing.
It’s always good to know I’m *understanding* the concepts
and procedures more as I progress through this.
I appreciate the guidance and the afterbook support.
BTW, I sold down my crappy portfolio to be 60% in cash last
week. Lucky timing as it turns out.
All buys (except for a small portion in truly speculative stocks)
from now on will be according to your method.
That’s why I’m so keen to make sure I’m getting sensible
numbers out of Value.able.
My plan is simple:
1. Consider the stocks you’ve identified as A1A3 (I’m looking
forward to hearing more about your A1 service!)
2. Generate an IV for those stocks.
3. If there’s a chance of them becoming discounted to IV, I’ll
then do my research on them and decide whether they are for
me.
Also, that research may adjust the IV (e.g. this *should*
happen with the BRG stock once I forecast their NPAT better).
I guess the best way is to do the research first, but I don’t
have time to research stocks that are unlikely to become
discounted to IV and therefore I’ll never buy.
Comments and criticisms welcome!
When I reread Value.able, the above plan may change of
course.
Russell, You have been given an inch but may have
taken a mile. Some of your subsequent assumptions
aren’t right. I can see it will just take time.
SATBIR said on DECEMBER 6, 2010 AT 4:16 PM:
Does anyone know of a good screening software (preferbly free) so that we are able to
input our parameters such as ROE, Debt/Equity and it spits out all companies that meets
the set parameters?
We might be able to find companies which have a ROE of over 15% over the last 5 years
or so. This narrows down all the companies we have to research.
Cheers
Satbir
MATTHEW R said on DECEMBER 7, 2010 AT 12:58 AM:
CommSec and E*TRADE have this kind of function but it is a bit limited in the
ratios that you can search (ROE is one of them however)
Does anyone know of others worth trying?
SATBIR said on DECEMBER 2, 2010 AT 11:15 AM:
All the fellow investors
I am just wondering if some one can help me with a valuation. I just read The Book and
am trying to apply some knowledge and value CBA. I have used the following:
Equity Per Share: 22.73
Payout Ratio: 81%
ROE: 16.8%
RRR: 10%
If I follow Rogers methods I seem to arrive at the valuation at around $37. I have heard
Roger say lots of time that the banks are trading at their intrinsic value. CBA is trading
around $4850. What am I doing wrong?
I would appreciate any help.
Thanks in advance
Satbir
PHIL said on DECEMBER 1, 2010 AT 5:29 PM:
Roger/ Bloggers
My confusion continues (my fault). Are these definitions right?
Margin of Safety the difference (positive or negative) between the current share price and
the intrinsic value
Required Return the % appreciation you hope to see in the share price in a given year
(e.g. the 814% range used in the Value.able tables).
Cheers
MATTHEW R said on DECEMBER 1, 2010 AT 10:53 PM:
Hi Phil,
Have you read Value.able ? I think this is covered by Roger…
Margin of safety – correct. The larger the better. Negative means the price is
above the value – stay away.
RR – not quite. With your method I’d be putting a couple of hundred percent in
:) Some posters have developed their own quantitative methods of calculating the
RR but personally I think RR should reflect a qualitative assessment. I believe
there is an appendix in the soft cover version of the book covering RR – maybe
get your hands on that to see what Roger says on the topic.
Regards,
Matt
PHIL said on DECEMBER 1, 2010 AT 5:23 PM:
Hi Chris/ Matthew,
I’m a bit confused by the wording of your question/ response.
Chris, you say “…EPS and Net Profit. I have noticed that while for most companies they
are usually the same or very similar…”. Do you mean if you divide NP by # shares it is the
same as the EPS figure? (because obviously EPS is per share and NP is not). Are you
asking whether to use NP or NP before abnormals in your EPS equation?
Matthew, as we know
EPS= NPAT x # of shares
EqPS = end or avg equity / # of shares
but you say “…calculate what the whole company is worth (in millions/billions) by using
annual report profit and average equity figures and then divide that by the number of
shares on issue for a per share value.”
It sounds like you are mixing the equations for EPS and EqPS.
I’m curious to know why.
Cheers
ROGER MONTGOMERY said on DECEMBER 1, 2010 AT 10:07 PM:
Hi Phil,
EPS = NPAT / # of shares not EPS= NPAT x # of shares
Hi Phil,
Sure, I’m happy to explain my thoughts. You can do it many different ways but to
me this makes the most sense. Whatever way makes the most sense to you is the
way you should do it. But note, I’m not mixing the equations, I don’t use EPS
and EqPS figures to calculate the IV.
The reason I don’t use EPS is that not all EPS is the same. For example you can
calculate EPS based on average shares on issue, ending shares on issue or
weightedaverage shares on issue. Which one is correct?
Instead, take the more reliable and comparable equity/profit/dividend figures
from the annual report and work out what you would be willing to pay for the
whole company, then divide that BIG figure by the number of shares on issue at
the end of the financial year to get the value of each share.
Buffett does it this way, so that is good enough for me :)
Regards,
Matt
Buffett on this: http://www.youtube.com/watch?v=sLXNnim4ec
Sage words when he says he only looks at the price after he has estimated
the value – for fear it will affect his estimate
ROGER MONTGOMERY said on DECEMBER 3, 2010 AT 11:02 AM:
Thank Matthew,
I concur.
SATBIR said on DECEMBER 4, 2010 AT 12:17 PM:
Roger
Any plans to come to Brisbane in the near future? Any presentations
for ASX?
Satbir
Hi Satbir,
I have one more session this year for the ASX, but its in
Sydney.
CHRIS said on DECEMBER 5, 2010 AT 11:49 AM:
Hey Phil.
I don’t mix the equations of EPS and Book Value.
I like Mathew prefer not use the per share values on companies.
I use NPAT instead of Net profit before abnormals as in my opinion it
is the correct one to use. The main reason for my question is that
pretty much all the forecast earnings I can find come in EPS.
As you say it is best to keep everything consistent throughout
calculating IVs. So if I am using NPAT to work out the current IV. I
don’t really want to use forecast values given in EPS as the are based
on net profit before abnormals when calculating future IVs. I
currently use an higher then normal margin of safety on companies
that have a history of normal abnormal spending to allow for the
difference.
I hope this helps explain what I was getting at. Also does anyone
else have any thoughts on my logic?
Chris
CHRIS said on NOVEMBER 29, 2010 AT 4:33 PM:
Hi Roger,
I have a question regarding what information to use when finding Intrinsic Values. I use
CommSec to get my values and have noticed something. In the Source Data information
you provided you have circled both EPS and Net Profit. I have noticed that while for most
companies they are usually the same or very similar the EPS value actually correspond to
the ‘Net Profit before Abnormals’. A good example of this is BHP.
My question is which figure should i use? Any insight would be very much appreciated.
Chris.
ROGER MONTGOMERY said on NOVEMBER 30, 2010 AT 5:13 PM:
Hi Chris,
I am sure you are about to be hit with a tidal wave of suggestions for that one.
MATTHEW R said on NOVEMBER 30, 2010 AT 9:02 PM:
Hey Chris,
Welcome!
There are many different methods but the most important thing is to be
consistent between companies and through the years. On top of that, always
demand a margin of safety.
Most here would recommend going directly to the annual report and using the
profit before abnormals (unless abnormals are a regular feature, in which case
they are “normal”).
EPS can be calculated different ways and you introduce more error when you start
with that. Instead, calculate what the whole company is worth (in millions/billions)
by using annual report profit and average equity figures and then divide that by
the number of shares on issue for a per share value.
KALYAN said on NOVEMBER 7, 2010 AT 7:43 PM:
Thanks a lot Matthew. That was a very detailed analysis and very very helpful.
And yes as you have mentioned, there are other emotional factors (such as keeping my
parents and the inlaws happy :)) that I can’t put a dollar value on.
KALYAN said on NOVEMBER 3, 2010 AT 11:24 PM:
Hi Roger,
I’d be very keen to hear opinions on applying Value.able investing to Property investment.
I’m currently renting an apartment for $2200 a month and looking to buy house for
$900k. With a 20% deposit ($180k) my repayments over a 15 year period are $6900 per
month.
Scenario 1: If I don’t buy a house and keep saving $4700 i.e. the difference between loan
repayment and rent, I will end up with a cash lump sum $846,000 in 15 years (before
interest). And if I invest the savings regularly into quality shares etc. there is a chance of
greater returns albeit at an increased risk
Scenario 2: Buy the house and repay $7100 to the bank for the next 15 years. The house
may (highly unlikely in my personal opinion) double in value $1.8 mil in 15 years
So, what do you think is a better Value.able investment?
Look fwd to your insight and response.
MATTHEW R said on NOVEMBER 4, 2010 AT 10:56 AM:
Hi Kalyan,
A similar discussion occurred here: http://rogermontgomery.com/whatismy
smsfinvestmentstrategy/#comment3240
I will think you will find buying a house was not favour.able !
Regards,
Matthew R
Hi Kalyan,
Thanks for posting that here on the blog. I am very hopeful you will get a
response soon and that it will be an after tax response.
Hi Kalyan,
I have done the numbers.
First of all, the only way to do this is to make a few assumptions. But in investing
you do that all of the time, for your information here are the assumptions being
made…
The Assumptions:
(1) I have set house price growth at the rate of general inflation and assumed
that to be 3%. I have not considered whether current house prices are currently
above or below that trend line.
(2) As inflation reduces the value of money you will find each repayment is easier
to make, therefore I have assumed that you are a very diligent manager of your
money and increased your repayments each year at the rate of inflation. This of
course assumes your income also rises at the rate of inflation, which I hope for
your sake it does :) Equally, I have increased the rent you pay and the amount
you add to your savings account each month in line with inflation.
(3) I have taken the interest rate on your mortgage for the 15 years as 7.51%
(4) I have incremented the spreadsheet monthly. If you pay your mortgage off
fortnightly, weekly or use an offset account then you will see your mortgage drop
faster, and your savings rise faster.
(5) I have calculated interest before the addition of mortgage repayments /
savings additions
(6) the above are the conscious assumptions that I have made, there may be
unconscious one’s I’m not aware of, and I don’t know what they are :)
(7) Oh yes, and I’m not an accountant, although I did do Yr 12 accounting about
7 years ago, I’m conscious of that, and I guess so should you be! :)
The Results:
First up, with my assumption of your rigid budgeting skills and therefore your
ability to make inflation your friend I have managed to reduce your initial
repayments to only $5536 a month. But, in 15 years those repayments will be
$8625 a month, although they will feel the same.
THE RESULTS AT 15 YEARS
If you buy the house:
House Value: $1,402,171
Loan Amount: $15
Equity: $1,402,156
To get the same result from the money you save by continuing to rent you will
need to get a 4.6% after tax return. Here are the different pretax rates that you
would need to get depending on your marginal rate of income tax:
Tax Rate Pretax return required to get 4.6% after tax return
20% 5.75%
25% 6.13%
30% 6.57%
35% 7.08%
40% 7.67%
45% 8.36%
Next you have to think about whether the house is good value right now. When
you can get 6.5% pretax in a government guaranteed savings account you have
to wonder which is the better investment option.
In many ways the above just confirms, in a rather longwinded way, the previous
discussion that I submitted a link to – houses are not great investments.
As I’m sure many are aware, buying a house is not all about the dollars and sense.
A lot comes down to emotions, stability in the absence of vagaries of a landlord
and the feeling of owning where you live. The value of that is harder to estimate,
but it is just as real.
Best of luck with your decision!
I’m just resubmitting that last list because it didn’t come out so well
Tax Rate………Pretax return required to get 4.6% after tax return
20%…………….5.75%
25%…………….6.13%
30%…………….6.57%
35%…………….7.08%
40%…………….7.67%
45%…………….8.36%
ROGER MONTGOMERY said on NOVEMBER 6, 2010 AT 5:22 PM:
This is good work Matthew. I am sure Kalyan wasn’t expecting such an
investment of your time. Thank you.
MANNY said on DECEMBER 9, 2010 AT 11:55 AM:
Hi
Roger, first of all thank you for writing such a easy to read and
understand book. I only purchased your book 2 weeks ago and have
read it. I must say, it seems like I will be a Value.able convert. I have
not done any IV calculations yet but planning to get stuck into it
very soon.
1. The first two companies I was going to do IV calculation was for
TRS and TOL. TRS got hammered by shares going down 21% today
due to profit downgrades. What are your views on TRS (Reject
Shop)?
2. Secondly, it’s great to see fellow members of this blog contribute
in so much detail (like these comments from Matthew on Kalyan’s
question). Only to throw my 2 cents worth on this point, I just want
to check from Matthew if he took into account the power of sticking
extra money in offset/redraw account if you have a home loan (in
my experience it is very useful). If we go only by paying the
stipulated mortgage repayment and increase it only by inflation (as
you have assumed) over the 15 years, your calculations look ok, but
if you throw in extra money in offset the equation changes because
you pay much less interest (remember we need to compare interest
with rent and not mortgage repayment with rent). For e.g. an extra
money in offset is making Kalyan around 12.3% (assuming he is on
a minimum 38.5% tax bracket). This is calculated based on 7.5%
(your interst rate assumption) home loan interest rate. For e.g.
$10000 put in offset saves him $750. To earn $750 after tax he will
have to earn $1230 gross. Having said that, I think the shares
investment if done based on Value.able will generate more than
12.3% and hence is a better option than property. But I don’t agree
that sticking money in the bank at 6.5% and then paying tax on it is
better than property. The second point I have is that 3% increase in
property is conservative. Historically, I think property has done
better than that.
Anyways great work all and I plan to be active on this site now.
Cheers
Manny
Hi Manny,
Welcome to the site and thanks for your contribution.
Regarrding TRS, I did write a column last September
indicating that I had sold the stock and weill review that and
provide some insights into the downgrade including why I
think the announcement might be deficient in explaining all
the reasons for TRS missing the mark. I will write again about
the company on my return.
Hi Manny,
Thank you for the encouragement!
You make valid points. Regarding offset, I didn’t include the
effect of one on the outcome (and I disclosed this in my
assumptions). You are correct, it will make a difference, but I
wasn’t sure how to efficiently incorporate it in to an excel
spreadsheet estimate each year.
In reality, the major effect of an offset account is to bring
forward repayments. ie, as soon as money is paid in to the
offset account (wages etc) the amount is applied against the
mortgage (reducing the principal on which interest is
accruing), and continues to be applied until it is taken out (ie
to pay a bill or a credit card) or permanently applied to the
mortgage in the form of a repayment. In addition, there is
what I call the “slush” balance of the account which is the
average amount in the account, and for most people sits
between $1,000 and $5,000 and this fluctuates depending on
how much money they have coming in, going out and how
much they like to have sitting in “slush”. This is very much up
to the individual circumstance and so there is difficulty in
quantifying it, so I didn’t.
However, for my own interest I’ve gone back and incremented
the spreadsheet weekly. Choosing a weekly repayment cycle
negates an offset accounts advantage of “bringing forward”
repayments (unless you are paid more frequently than
weekly). It does not account for the “slush” but if you were to
take it as $3,000 on average then $642 of pretax money
would be saved each year. Not a hugely significant sum.
I did the numbers on weekly repayments and there was very
little difference. The alternative investment has to perform
between 20 and 50 basis points (1/100 of a percent) better to
equal the return from the house.
Finally, the use of 3% as a long term growth rate is based on
inflation, not historical house price growth. You can also base
long term house price growth on GDP, which is not a
dissimilar figure.
I agree recent historical house price growth has been (much)
higher than that. But I keep thinking about what is the
sustainable driver of house price growth? My belief is that it is
rental yields but I welcome suggestions.
Regards,
Matt
MANNY said on DECEMBER 15, 2010 AT 11:42 AM:
Hi Matt
Good points. Just some other related comments:
Well I guess if we apply value.able concepts to property
then indeed potential rental income is probaly the only
metric that can be used to come up with some type of a
valuation. If we go by Roger’s and Warren Buffet’s veiw
(which I agree with) i.e. not to factor price when
calculating value, then potential rental income (and not
rental yield as that relies on price) is really all we have to
work out some kind of valuation. Having said that I
don’t believe we can still accurately work out a value
until we have a few more metrics that can relate to
some multipliers for e.g. proximity to CBD (x 2),
location/street (x 0.5), major train station (x 2.5) etc
etc.
Second point that I am very much interested in having
peoples opinon on (Roger maybe we can have another
Blog/discussion for this ) is about “Leverage and Share
Investing”. I strongly believe (and have worked
numbers too) that individual investors (or mum and
dad investors as media calls us) will make more net $ by
property investement even though the percentage rate
of return on Asset value in property is historically less
than Share investing. Reason being people use a lot of
leverage (80 to 100 % loan) to buy an investemnt
proerty. Whereas shares are either bought fully paid or
using margin loan but very consevatively. So even if
shares return double the percenatge return the net
wealth generation for so called mum and dad investors
will be greater with property.
I suppose we need to get educated on how to use
leverage properly for shares, risks, how will IV
calculations be impacted etc. I personally think it is a
good discussion to have everyone’s view point (unless
you have already had that. I wouldn’t know as I am
new to this site). I personally do use a margin loan but
very consevatively because I am concerned of the risky
fluctuations of share price that is in our face everyday
(unlike in property that is not listed on any property
exchange :) ).
Regards
Manny
IAN said on NOVEMBER 2, 2010 AT 10:03 PM:
Hi Roger and all,
I am new to all of this but I am really interested in Roger’s methods. I have reviewed all of
my holdings and judging by the IV I am in reasonable shape except for one. I am
currently holding Argo (ARG) and have been unhappy with the performance. Having read
Roger’s book I think I can see why (ROE ~5%). My question is, should I be calculating IV
for Argo (IV ~$2.60)differently to the rest of my holdings? Is there something special
about Argo that I need to take into consideration?
Cheers,
The reported statements do not tell the whole story of ARGO’s performance
because not all of the profit made by the portfolio is represented.
For example, company XYZ makes a profit, pays a dividend and retains what is left
over. But ARGO only reports the dividend from XZY as their profit. The amount
retained is not reflected in the ARGO accounts.
By the same method, you can also see how ROE of ARGO has nothing to do with
the underlying ROE of the ARGO portfolio. For example, if every business that
ARGO owns cancelled it’s dividend ARGO’s ROE would be zero, but the portfolio
ROE would be unchanged.
Another way to value ARGO is to look at the NTA. If the portfolio was sold and
ARGO closed shop that is what would be distributed to shareholders (the after tax
NTA).
However, the NTA is based on price and as we know here, price and value are not
the same. To *truly* value ARGO I would like to be able to value all of it’s
individual holdings.
Warren Buffett discussed this topic in one or more of his shareholders letters. The
same problem affects the valuation of Berkshire Hathaway (I don’t remember
specifically which letterss but I do recommend all of them as required reading).
I hope this provides you with some ideas to further your research,
Regards,
Matt
Thanks Matthew,
What Matthew is referring to, Buffett called “look through earnings’. Google
that and it should narrow your search.
IAN said on NOVEMBER 6, 2010 AT 11:11 PM:
Thanks Matt & Roger, I will certainly look in to it.
GRANT said on OCTOBER 31, 2010 AT 2:36 PM:
Would very much appreciate any knowledge or insight into companies I am currently
researching, WOR and TSM. I am a slow learner and am not there yet on future IVs and
could do with some help!! So far for WOR I have got
2010 : EQPS: $7.49 PO: 64% ROE: 16.4%
2011: EQPS: $8.04 PO: 61% ROE:??
2012: EQPS: $8.08 PO: 62% ROE: ??
I am having difficulty finding forecast equity and NPAT figures. Where do I need to look??
I have no forecast figures to use for TSM at all and would appreciate any help, feedback or
direction. Thanks
PHIL said on OCTOBER 14, 2010 AT 6:39 AM:
Has anyone done an IV calculation for Forge (FGE)?
Roger I think has a 2011 forecast around $4.80ish
Another IV advocate on YMYC said he thought it was worth at least double it’s current
price (he said that when it was about $3.70ish) but of course he doesn’t use exactly the
same method.
I can’t find DPS and EPS forecasts so I’ve merely done a EOFY 2010 calculation based on
the annual report figures.
EOY equity 93.38
# of shares on issue 78.76
DPS 0.07
EPS 0.38
NPAT 29.45
BOY equity 48.78
ROavgE 41.43
Using a RR of 12% I got an IV of….. $10.23 (gulp!)
Can anyone share their thoughts on this?
Mucho thanks!
ROGER GIBSON said on OCTOBER 21, 2010 AT 11:18 AM:
Hi Phil
I don’t know if you have found them yet but there are several calculations of IV
for FGE on this blog starting with Nic on 1/10/10. Have a brows higher up the
page.
GEORGE said on OCTOBER 12, 2010 AT 8:59 PM:
Hi all,
Im very new to investing and shares but am very keen to learn. I followed the steps in the
book and just picked BHP as an example. But feel that the calculations are way out for
some reason. I used the figures from CommSec. Ive tried to explain each step so that I
can get some feedback where I am going wrong. Here are my IV for 2010 and 2011.
2010
EQPS: 10.18 (56934/5589)
EPS: 262
DPS: 102.1
Payout: 38.97% (102.1/262)
NPAT: 14926
Avg Equity: 53087 ((56934+49240)/2)
ROE: 28.12% (14926/53087)
RR: 10%
Multiplier 1: 11.90 (10.18*3.000*.3897)
Multiplier 2: 44.88 (10.18*7.225*(1.3897))
IV: $56.78
2011
EQPS: 12.79 (56934/5589)+3.5730.963
EPS: 357.3
DPS: 96.5
Payout: 27.01% (96.5/357.3)
ROE: 26.22% (14926/56934)
RR: 10%
Multiplier 1: 9.5 (12.79*2.75*0.2701)
Multiplier 2: 57.66 (12.79*6.177*(10.2701)
IV: $67.16
Any advice is greatly appreciated.
ROGER MONTGOMERY said on OCTOBER 13, 2010 AT 5:57 AM:
Hi George,
I am sure there will be a variety of suggestions for you and let me know if you
need any further comment.
ROGER GIBSON said on OCTOBER 8, 2010 AT 10:43 AM:
Hi Roger,
Since moving to a Value able approach I have found myself investing much more in small
and mid cap companies which is where much of the value seems to lie. My portfolio now
seems much more volatile with larger daily swings than I am used to from the blue chips.
Is this an inevitable consequence of value investing and anything to worry about?
ROGER MONTGOMERY said on OCTOBER 8, 2010 AT 2:36 PM:
Hi Roger G,
Volatility in the short term will be greater the more heavily weighted you are in
more volatile companies. Position sizing and portfolio construction is something
that is worth reading up on or preferably taking personal professional advice
about that is relevant to your financial needs and circumstances. We haven’t
addressed portfolio construction and it is an essential part of investing.
Recently the mid caps and small caps is where the value has been but that is not
always the case. Woolworths was recently trading at its intrinsic value and earlier
in the year at a slight discount. I wouldn’t consider being fully invested in small
thinly traded issues. Only time and patience will ensure that your portfolio has
much larger companies included.
Seek and take personal professional advice to ensure you aren’t taking on more
risk than you can handle. For me volatility is not risk, but not everyone will see it
that way and it sounds like you are watching your portfolio daily which is not
what I do. If you have bought the right companies you can be comfortable with
the market turned off for a long time, or the mail being three weeks late. Do chat
to your adviser – someone with knowledge of your risk profile, financial needs and
circumstances.
ROGER GIBSON said on OCTOBER 19, 2010 AT 3:36 PM:
Thanks Roger,
Your book is a great book and does a lot to give us all improved confidence
to go out there and make our own investment decisions. I like many have
been to financial advisors/planners (and a few) and found them, well, find
me a polite word for pathetic. I try and balance risk, requirement,
circumstance and opportunity and look forward to volume two hoping that
you will lift my portfolio management to the degree I believe that you have
lifted my share selections and management. You have given yourself a lot
to live upto if you do try another book!!
Hi Roger Gibson,
They’re very encouraging things to take the time to write so thank
you very, very much. What an advisor should provide that you need
but won’t find here, is advice related specifically to your needs and
circumstances.
LEIGH said on OCTOBER 7, 2010 AT 8:48 AM:
Currently looking at the mining services area and came across ANG. Looks like it is trading
at a considerable dicsount to IV, with great future earnings growth. Could you please
advise of a MQR for this business, and also MIN.
I am surprised that there is not more discussion on MIN, with it also trading at a relatively
large discount to IV. It to looks quite attractive.
Hi Leigh,
Thanks for taking the time to post your comments. Austin engineering is a B1 and
I have its intrinsic value rising at 6.1% per annum for the next few years. Given
the companies from this sector that I own are A1 and have intrinsic values rising
at much faster rates, I have preferred them. MIN on the other hand is indeed one
worth looking at.
Hi Roger/ fellow bloggers,
In your article above about forecast valuations you note that your IVs and our IVs can
differ for different reasons.
After working with someone to try and create a spreadsheet for the Value.able method
I’ve noticed the following:
– once you enter historical data for the previous FY as a ‘base’ year, the only variables that
need to be sourced and entered into the equation are really the DPS and EPS forecasts.
Of course if things change during the year then several elements of the Value.able
‘equation’ might need adjusting…
BUT, as of the moment that you sit down to do the forecasting, DPS and EPS forecasts
seem to be the only numbers you need to project IVs past the ‘base’ year.
Having said that, I would expect that if you and I and anyone else were to chose a
company, enter our 2010 EOFY info to create our base year, then the IVs we come up
with should be very close if not the same to one another. This assumes two things:
– we both chose the same RR
– we both follow standard roundup and rounddown practices
Now, after saying all that and boring you to death, here is the actual practical example/
question I have:
– you just posted an article in the Eureka Report where you value carsales.com:
2011 $3.77
2012 $4.65
2013 $5.24
Assuming everything I have mentioned above, I’ve tried to recreate the same numbers.
This is what I got for 2011:
(ROE 60% by your tables; 61% by forecast)
DPS 0.184
EPS 0.232
RR 10% $4.41
RR 11% $3.86
RR 12% $3.41
The 11% RR number comes the closest but unless your DPS and EPS numbers are
different, considering what I’ve mentioned above, I would have expected to get the same
$3.77 as you.
This is a heck of a long winded way to say… I didn’t get what you got but I’m hoping by
laying out my reasoning you might see where I went wrong.
A final question do you chose your RR based on a company’s market cap? Or is it
something you intuit based on cash flows, stability of returns, management history,
competitive advantage, etc.?
A MASSIVE thank you in advance to you (and any other blogger who has the patience to
help me out). Cheers!!
Hi Phil,
I can think of a bunch of reasons why our valuations differ beyond EPS/DPS.
Firstly of course, one thought is that we may actually have quite different EPS and
DPS figures which produce different returns on equity. My ROEs are lower than
yours, particularly FY2011. We also may have different figures for required returns
(you are increasing the RR in future years presumably to compensate for less
certainty about the future). Why bother? If you are less certain about teh future
for this company, move on to a company you are more certain about. And I may
be plugging in an estimate for new shares being issued – 2.5 million were issued
and $2.1 million raised in 2010. Is there a reason why you think that wouldn’t
happen again (exec options/incentives/DRPs etc)? By the way, who was the
“someone” you are working with to try and recreate the spreadsheet? That
sounds even more intriguing.
Matching my numbers is not the point of the book. Spend time thinking about
the competitive advantage of the company, whether its sustainable, getting
stronger or weakening. Carsales’s is getting stronger. I can get $4.25 for 2013
valuation using my extrapolation method (remember that I always have two
valuations to produce a range – see very early post comments on this blog).
PHIL said on OCTOBER 7, 2010 AT 4:50 PM:
Hi Roger,
Thanks for the quick response. To answer some of your questions:
– I can see how us having different DPS and EPS forecasts can also change
the NPAT forecast which will change the ROE forecast….bit of a cascading
effect.
– In my above blog entry I showed what I got for different RR calculations
because I was trying to find the RR that best matched your numbers. That
was my way of testing myself to see if I was calculating things correctly.
– I didn’t know forecasting the number of shares was part of the method. I
wouldn’t have a clue how to go about that. Any tips?
– the ‘someone’ helping me create a spreadsheet is my girlfriend :) I have
no clue how to use them and she does plus she’s a business management
analyst so she’s also checking my Roger homework lol.
Thanks again!
Hi again Phil,
Intriguing indeed! Always an interesting story when the word
“someone’ is used.
PHIL said on OCTOBER 9, 2010 AT 4:30 PM:
Howdy Roger,
Yeah, sorry, no great conspiracy there :) Just my partner the
smarter half lending a hand.
Did you have any thoughts about how to forecast ‘shares on
issue’?
Hmmm, what about this….. if I look at the annual report to
see how many options are outstanding and when they are
expiring could I use that as a guide of sorts? Not everyone will
exercise their options but if the company has enough cash
and thus no reason to issue more shares it might be a rough
guide.
(I’m very new at all this so this is just a guess)
What do you think?
Thanks again!
Phil
Hi Phil,
A shame really – just the smarter half. Regarding
forecasting shares on issue, you do need to get the
best number available. Exec options need probabilities
applied to determine their chance of exercise but there’s
a simple approximation and that is to assume roughly
the same proportion as the previous year and the same
can go for DRPs. Its not perfect but the more you add
the more conservative the valuation.
Hi Roger,
Thanks for the tip on shares on issue forecasting.
We’re still working on that spreadsheet. I think
I’ve seen you and others post on the blog that
you use one too. It sure would save a bit of time.
Just making sure we’re able to input variables
whenever they change so we can keep the
forecast up to date. I’m going to have to take my
partner out for a few extra romantic dinners I
think to thank her for the help with Excel.
Question if you were to put a ‘Recommended
Reading’ appendix in your book, what would
some of those titles be?
Have a nice weekend!
Phil
ROGER MONTGOMERY said on OCTOBER 11, 2010 AT 10:02
PM:
Hi Phil,
Take her somewhere special. She deserves
it. I will consider a recommended reading
list for a future blog post.
GURKAMAL KANWAR said on OCTOBER 6, 2010 AT 9:23 PM:
Hi Roger
Thanks for the article. I enjoyed your book very much.
In regards to calculating the intrinsic value, any reason why you don’t use operating
cashflow or Owner’s Earnings (as described by Warren Buffett) to calculate the intrinsic
value. Wouldn’t that be a better measure than Net Profit?
Looking forward to your response.
Kamal
Hi Kamal,
Many A1 companies generate cashflow (recall my chapter on the subject) that
equals or even exceeds the profits. In those cases profit is a proxy for cashflows.
In other cases using cashflow or owners earnings (Profit + depreciation –
maintenance capital expenditure) is required. What interesting to observe is the
success of the method even just using reported company profits (but only for
those companies that do generate ample cashflows).
JS said on OCTOBER 6, 2010 AT 6:40 PM:
Hi Roger and All,
This is my first post here. Congratulations on the book Roger. I enjoyed reading it and I
learned a lot. One thing I might have missed was the timing of a valuation.
I calculated IV using 2011 forecast figures. Can I compare it to today’s closing price to
determine if it is trading at a discount? Or should I compare the closing price to the 2010
IV calculation?
Thanks.
JS
Hi JS,
Welcome to the blog and thank you for posting. I am delighted to hear that you
liked my book and hope it has a positive impact. Regarding the timing of use of
the valuations, you can go any way you like but be consistent across companies
and across time.
EDWARD ASPELL said on OCTOBER 6, 2010 AT 4:57 PM:
Roger,
How do you calculate the IV (step 4) of DCG when the pay out ratio is zero?
Hi Edward,
When the payout ratio is zero the first component is zero and since the process
adds the two components together, the remaining value will be equal to the value
of the only the second component.
SHUO Y said on OCTOBER 5, 2010 AT 11:06 PM:
Hi Roger,
Taking wealth management course at uni this semester. Seems like I finally found a
finance course with some practical use in real life!
Just interested in your thoughts on an upcoming IPO, Maca Limited. High ROE, debt is a
concern for me but seems well priced.
Thanks!
Shuo,
I have heard good things and will run through the prospectus soon. It will have
to be superior across many measures to the mining services companies I already
own. Why buy the fourth best thing when you can buy more of the first best
thing at a discount to intrinsic value?
JARRAD STUART said on OCTOBER 7, 2010 AT 10:43 AM:
Hi Roger
I have just skimmed the prospectus and it looks good. On the surface of it,
the company is trading at a discount to I.V. and it is a high quality business
after raising money to strengthen the balance sheet. Now, I will have to
look at the prospectus in more detail.
Compared to its bigger competitors whom you have mentioned as A1/A2
companies, it appears to be in the next rung down the ladder. However
compared to NRW Holdings (possibly its closest competitor) which also
services second tier mining companies, Maca Limited seems superior.
I am worried about declining net profit margins from 20092011. However,
a strong order book of $540million suggests there is plenty of scope for
winning and delivering contracts at reasonably attractive margins. The
order book underpins ‘bright prospects’ for revenue growth in the medium
term. As the company grows, economies of scale and increased brand
recognition may enable the company to gradually increase margins it the
future??
I would be very interested in a MQR rating, I.V. and thoughts from
bloggers!
P.S. It appears there is an art to crushing rocks!!
BRENT said on OCTOBER 5, 2010 AT 10:39 PM:
Roger,
Industrea, a company I believe you follow recently announced it would pay back $35.8
million dollars worth of convertible bonds at a price of 44c per share and another $4.6 mill
worth at 39 ents per share.
The repayment will be supported by a new $40.4 million debt facility from a member of
the syndicate of existing lenders.
Could you please explain how this would affect 2011 IV for the company.
Best Regards,
Brent
Hi Brent,
Regarding industrea; ‘convertible’ is not the same as ‘converting’. Borrowing
money to pay down a debt is generally driven by better terms. In the first
instance, one would expect the repayments to be lower, which should boost
profit. In the second instance, the cancellation of the securities removes the
prospect of a potentially dilutive issue of shares upon conversion. The impact on
intrinsic value of the first factor is positive, the second appears to be neutral
because the securities weren’t equity.
CRAIG said on OCTOBER 5, 2010 AT 10:10 PM:
Hi Roger,
Just wondering, will your 2nd edition have any new/updated content?
Regards,
Craig.
Hi Craig,
That sounds like a great idea. Now you have got me thinking!
JOHN M said on OCTOBER 5, 2010 AT 9:10 PM:
Hi Roger,
I first would like to personally thank you for all the time and effort you put into helping
investors like myself in this blog. I have really enjoyed reading your book and watching
you on the Business channel and I am finding the whole process very educational and
invalue.able.
I hope I am not repeating a question you have already answered but I would like you to
verify if my forecast intrinsic value calculation process is sound. I am only very new to
these concepts and some of the terminology slows me up, but I am very determined to
work my way through everything until it becomes second nature to me.
I understand how to work out the forecast equity as you have shown in this blog. To
work out future ROE I have used the formula: future NPAT= Future Earnings per share
multiplied by the Shares Outstanding. Then I have worked out the future ROE in the
standard way: future ROE= future NPAT divided by future Shareholders Equity. Is the
future NPAT formula correct. I can’t remember seeing this anywhere and I am only
guessing that this is correct.
Thanks
Hi John,
Your process for future ROE is sound however you may want to consider
switching to a calculation that uses average equity rather than ending equity.
Thank you for your encouraging words about my book and this blog. I think its
all of you however who are making this blog so useful and valuable!
JOAB SOH said on OCTOBER 5, 2010 AT 8:47 PM:
Hi All,
I also had a go at building the intrinsic value calculation in excel. I thought it would be a
good idea to build a range of forecast IV. This can be based on analyst forecast or
extrapolation of historical results. Not trying to be too scientific about it, but a range
allows me to have a better feel of how wide the forecast IV is. Let me know if anyone
thinks i am over complicating it
Agree that IV is only one component, understanding the business and it’s competitive
advantage is equally important.
Cheers
JS
Hi Joab,
If you go back to the very early posts of mine, you will find I do exactly the same
thing. Let me encourage you to continue down that path.
AUSTIN said on OCTOBER 5, 2010 AT 9:22 AM:
Thanks everyone for posting their calculated IV for DWS. Interesting…. Although varies,
we are still very close to Roger’s calculation. (depending the RR we select i suppose). I’m
happy with 10% return for most of my calculation.
REX said on OCTOBER 4, 2010 AT 8:19 PM:
Hi Roger
I’ve valued Wofit at 3.24 and subsequently knocked it out on the I value.
The kicker I’m finding is despite the very very good ROE’s, it’s the div payout ratio that is
the kicker. If the payout ratio is > 50%
My calculations based on Commsec data
ROE 68% – excellent
However, payout ratio of 86%!. Why aren’t they retaining a greater portion with an ROE
that high
Therefore
Equity per share .41 (End equity 86M/210M shares oust)
Table 1 multiplier of 5 (using 12%) for payouts = 2.05
Table 2 multiplier of 25.158 (using 10%) for retain = 10.30
Apply 86% 2.05 = 1.76
Apply 14% 10.30 = 1.44
Add the two and I get 3.20
Shares are trading at 4.85
Now I know Wotif is a brilliant online, award acheiving business but is it a good time to
buy them ? or what am I doing wrong
BTW Quick ratio shows .6 quick ratio
Cheers
Rex
Hi Rex,
There are many value.able graduates here who have an opinion and useful view
about WTF, so I will invite everyone to post their thoughts again.
RAY said on OCTOBER 7, 2010 AT 3:11 PM:
Hi Rex,
You are thinking along the right lines. Have a think about what these numbers
mean for the business as well. In order to add value for owners, WTF would need
to be able to generate returns on retained earnings that equal or exceed the
current ROE, otherwise the ROE will fall.
What does this mean for a business like WTF that has low capital requirements?
Are there opportunities to grow the business by retaining more earnings and also
maintaining the current ROE? If there are, why are management not pursuing
these opportunities?
If retaining more of the earnings does not add value to the owners, then they
should pay them out and let the owners reinvest the capital themselves.
Hi Ray,
Thanks for answering Rex’s questions.
Just to clarify Rex, where Ray says “If retaining more of the earnings does
not add value to the owners” it means retaining profits at a high rate of
return on equity and certainly higher than the required rate of return. You
will find all of this in Value.able.
GREG W said on OCTOBER 4, 2010 AT 4:31 PM:
Hi Roger and fellow bloggers,
Firstly great article Roger regarding future yr instrinsic values. I have a far better
understanding now of the process going forward and are setting very conservative RR’s
but am finding it difficult to know ROE to use in future years.
Can you or any other bloggers give me some help.
Hi Greg,
There are a dozen different ways to do this and its worthy of a blog post in its
own right. How is everyone else doing it? To my mind, nothing beats a
conservative adjustment of the number that comes from a very good
understanding of the business’s prospects and earning power.
JAMES said on OCTOBER 4, 2010 AT 4:17 PM:
Hi Roger,
I note Infomedia is one of your top rated companies. I was wondering whether you think
its profits can grow in future years as they have been stagnant/declining for the past few.
The CEO has a significant stake in the company (and has been buying more shares
recently) and the dividend yield is attractive.
It’s ROE is consistently high also, and it is being priced as though its about to go bust.
Do you think it will grow in the future or is it headed for a slow and painful decline?
Hi James,
I have made a note and will cover infomedia in a blog post.
KEN G said on OCTOBER 4, 2010 AT 3:55 PM:
Hi Roger and all,
Lets not forget analysts have a vested interest in all these predictions number one is their
job. The more buy and sell contracts the more commission the more secure is their
employment. You wont see many Sell recomendations from a sponsoring broker.
Hi Ken,
It is a sad indictment that there aren’t more sell recommendations. Perhaps thats
why this blog is so popular. Independence is underrated.
BRAD said on OCTOBER 4, 2010 AT 3:52 PM:
Hi Roger
Re your 4 picks – big bet on the resources boom and China / India continuing?
Cheers
Brad
PS I read Pigs in the Trough on the weekend after you mentioned the author last week. I
thought the Chapter on VRL to be the most “interesting”.
BRAD said on OCTOBER 4, 2010 AT 3:48 PM:
I watched a movie on foxtel last week “Executive Suite”
Made in 1954, story of a properous company that had lost its way – the CEO dies and a
fight for control ensues board room politics, backblackmail, but what really struck me was
that nothing has changed in 56 years (let alone the past 5000 or so………..)
Hi Roger,
I was wondering if you had any type of rules regarding how many times a company’s
book value you would be willing to pay (i.e. no more than 10 times its book value.)
The reason I ask is that I would think it would be more risky to pay 5
times book value for a company with a ROE of 30% for example than a company trading
at twice book value earning a ROE of 20%.
Even though you would make a greater return in the first example (in the
long term) would it be more prudent to go with the second one due to the fact that if the
first companies ROE drops suddenly, you have less to fall back on in terms of book value?
For example Oroton is arouind 10 times BV at the moment – and whilst this is justified
due to the 80% ROE; what if the ROE suddenly drops by half?
It’s value will diminish and you will have less safety than if you bought a
lower ROE company but trading at a lower multiple priceBV. You would make more in
Oroton over the long term (if it maintains a high ROE) but may be taking more risk in
doing so?
Hi James,
Its an excellent thought. Are you proposing that in addition to estimating intrinsic
value, you override the result and the gap between price and value, with the
application of a rule limiting the maximum multiple of equity paid?
I think it would be more conservative and may provide a further margin of
safety to only pay XYZ times the amount of a company’s book value. This
rule would perhaps work best for companies with a low payout ratio
because once the business starts to mature and the payout ratio increases,
the intrinsic value may halve or worse. Do you have any such rule or do
you just require a higher margin of safety for these types of businesses
whose value may halve quickly if their payout ratio increases?
Hi James,
I don’t but now that you suggest such a rule, I think I might. It can
be covered by overriding the payout ratio with an assumption of a
much higher one. I note JBH in the last 12 months increased its
payout ratio and while the intrinsic value still rises in the future, it
obviously rises to a lower number than it did previously.
KEN G said on OCTOBER 7, 2010 AT 11:36 AM:
Hi James
You may wish to read Jain Prem’s book “Buffett Beyond Value” he has some
interesting research when you combine a portfolio of low P/B Value compared to a
portfolio of high P/B Value. and what a large differents it makes over time.
Regards Ken G
Great reference Ken G,
Studies showing the performance of univariate models over time, do
indeed help to reinforce what we are doing here. Picking low price/BValue
portfolios with only A1s will work even better. Have a look at the book
What Works on Wall Street too.
Hi Roger,
Apologies for my ignorance, but this talk about book value per share, are
we talking about equity divided by shares on issue?
Regards,
Craig.
Hi Craig,
Yes. When we refer to book value, I hope we are talking about the
same thing; equity divided by shares on issue.
JOHN said on OCTOBER 4, 2010 AT 12:27 PM:
Hi Roger,
I too got an I/V in the $3.60s when I ran TLS. However I then saw a comment in one of
your blogs about how TLS had capitalised around $1Bn of software development which
therefore did not show up in the NPAT figure. I atributed the difference in the calcs to this.
I am in the process of being “bundled” with TLS services. I’ll be paying a lot less for a
300% increase in broadband limit and a 1000% increase in the capped calls limit from our
family’s mobiles. All this with a TBox and WiFi modem thrown in for free. We’re certainly
happy and I’m looking forward to what all this largesse does to customer retention,
market share and, of course, profitability.
Regards to all, John S
Thanks John S.
I have recently discussed cash flow and abnormals. Whether its a $50 million
market cap company or Telstra, you have to make the same adjustments.
Telstra’s profits have to be adjusted like any other company. Having said that,
TLS cash flow is the highest its ever been. Thanks for your insights about the
home bundling.
CRAIG said on OCTOBER 4, 2010 AT 8:40 AM:
I am wondering if it is possible to work out a valuation for Strathfield Group? Their latest
results are a good start with promising returns on equity and capital. I have bought some
which I calculate as being under their intrinsic value. The big question to me is will they
return to their bad old ways or go on to become another JBH? Look forward to others
thoughts.
Hi Craig,
Regarding Strathfield, what do you think is their competitive advantage? What do
they offer that will make people cross the street and buy from them, goods they
can buy anywhere else?
PAUL said on OCTOBER 3, 2010 AT 4:19 PM:
Hi everyone,
Roger has also devoted an entire chapter on selling. One of the reasons to sell include
being fully invested but found another company of better value. And also, the company
has risen well above value.
I can’t help but think if I’m the only one who has invested companies at a price way
higher than its intrinsic value before coming across Roger. One in my portfolio reads NHC
– I bought it 5 times its intrinsic value, which if sold, I’ll incur a big loss. I wonder about
REX as well. I bought it because I love aeroplanes (a boyhood obsession) but I’m now
wondering if that’s a good investment. Intrinsic value of REX, I had $1.89 (2010) rising to
$2.07 (2011) at 12% RR – straightforward calculation as the company does not pay
dividend. I also have a WDC and MTS, both of which I’ve bought way above their intrinsic
value.
Sorry about the whinge, but just want to share a thought and wonder if there’re others
the same.
Best regards,
Paul.
Thanks Paul,
I am confident you will get a good response to that one! No doubt people have
some real horror stories to share. Be sure to seek and take personal professional
advice.
KEN MILHINCH said on OCTOBER 4, 2010 AT 10:08 AM:
Paul,
You say REX is a straightforward calc, but I get $2.63 for 2010 and $2.33 for
2011 using the same RR% as you. I note that Commsec have the NPAT before
abnormals at $17, but I can’t find any mention of abnormals in the annual report
so I have used the $24 number. My figures are as follows;
LY Equity $125.4
TY Equity $150.6
Avge Equity $138
Shares 112.9
EQPS = $1.33
NPAT $24.6
Divs $0
ROE% 17.83
ROE used 17.50%
RR used 12%
IV for 2010 = $2.63
Regards,
Ken
PS I also got a shock when I did an IV on MQG, QBE etc etc. All gone now
though.
SCOTT said on OCTOBER 5, 2010 AT 6:28 AM:
Hi Paul,
I reckon if everyone was honest with themselves, they would acknowledge that
half their portfolios are not A1’s purchased at compelling prices. I certainly have
WDC, PXS (oh the shame) and CWN (5 times IV loaded to the gunwales with
debt). My objective is to put all that behind me, and build a quality portfolio of
quality businesses. 20 years until retirement, here we go.
Scott
ASHLEY LITTLE said on OCTOBER 3, 2010 AT 4:08 PM:
Hi all
For all of you that blindly using ananyst forecasts here is an article about how accurate
they are in the USA.
http://sethkaufman.posterous.com/mckinseypersistentexcessbullishnessofequ
I understand (but don’t quote me) that the aussie analysts are better. In fact the best in
the world at estimates for Industrial stocks.
They are also totally hopeless at estimating resource stocks future earnings which is
understandable given this biggest part of the earnings is the price of the commodity.
I can’t find it at the momonet but I have a record of the analysts forecasts after the June
reporting season for the last 5 years for BHP. They make interesting reading and to say
they were close would be like saying Roger and I are neighboors.
By the way I live in rural Qld and I believe Roger is in Sydney. Not in the same ballpark
For those interested in earnings growth Warren Buffet wrote a cracking article in fortune
magazine in November 1999. Makes fabulous reading. Just google Buffet November 1999
fortune magazine.
Highly recommend you all read this one
Hope this helps Guys
MARK H said on OCTOBER 3, 2010 AT 2:21 PM:
Hi Ken G,
There’s an article below from the Australian Institure of Company Directors (AICD) that
provides tips on how to spot an underperforming CEO.
http://www.companydirectors.com.au/Publications/Company+Director+Magazine/2010/February/Fe
Stephen Mayne (mayne report) has a top 100 list of directors in Australia, but doesnt
describe how you get in/get excluded, so it may not map true peformance.
Cheers
Thats great stuff Mark H. Thank you for beefing up the discussion with that link.
CALLAN said on OCTOBER 3, 2010 AT 1:35 PM:
Hi Roger,
Seems to be a lot of quality/value in the mining services sector at the moment. If you find
a number of A1/A2 companies in the same sector under IV are you happy to be
overweight in that particular sector or do you “pick the eyes out of it”?
Also MND is undoubtedly a fantastic company and in my opinion has everything a value
investor should look for in a company.
Commsec has forecasted EPS at a ‘satisfactory rate’ for MND and i have a 2010 IV of
$15.64. What IV do you and other bloggers come up with for 2010,2011 and 2012?
Hi Callan,
I think if a sector appears cheap, it might just be. I do prefer to buy the best in
the sector (why buy the 4th best if you can have more of the 1st best) but some
diversification is important too. Be aware of the correlations/covariances.
ALFRED PENSINI said on OCTOBER 3, 2010 AT 12:28 PM:
Roger,
I Have been hesitant to proceed with a program I have set up in EXCEL to determine the
IVs of the Companies I own. After going through the latest blogs I now feel more
confident that the program I have set up has no flaws. When I 1st started comparing my
figures with yours & others that have been posted I was concerned because my IVs
seemed to be “out” by large amounts. However with some of the post putting in the
figures that they used to determin their IV I found that therein laid the problem. I suggest
that when anybody quotes the IV they obtained they should put in the raw figures they
used. Also the comments about not going to far with the number of decimal points is
sound. A workshop would be most appreciated.
AlfredP
Thanks for that Alfred. Very solid suggestions.
BRUCE said on OCTOBER 3, 2010 AT 9:12 AM:
Hi Roger
I have some BBG shares from my pre Valueable investing days, Do you have any
thoughts on this company and the deal with General Pants.
I have calculated Intrinsic value for BBG, but don’t believe there has been sufficient data
published to determine if this is a value adding or destrying aquisition.
Thanks and Regards
Bruce
Hi Bruce,
sometimes we have to wait until the half year or full year results before the impact
of an acquisition is known. WOuld any like to share their BBG valuations please?
PETE said on OCTOBER 5, 2010 AT 6:50 PM:
Like you, I also bought some Billabong shares from my pre Value.able days.
My opinion is that this is a good company and it has performed well in the
past, earning a reasonable ROE (averaging 17.5% over the last few years).
However, Billabong has made several acquisitions and the results of this
(&/or the GFC) has effected returns – ROE dropped to 15% in 2009 and
currently it is at 12%. Time will only tell whether these acquisitions will be
successful and we will see ROE returning to the previous levels. I get
current intrinsic value for Billabong as 7.21 increasing to 7.54 in 2011 and
7.94 in 2012. (This is using ROE 15%, payout ratio 65% and 11% RRR).
So, certainly not at a discount to intrinsic value at present but not too
overpriced.
Great work on Billabong (BBG) Pete. Thank you for the contribution.
KEN MILHINCH said on OCTOBER 5, 2010 AT 8:14 AM:
Bruce,
BBG over the last 10 years have increased their equity by $1.7B and their debt by
$360M for a $104m increase in NPAT. That’s about 5% return on the money.
Further, their ROE has been declining for the last couple of years, as has their
profit margins. They have recently been acquiring a number of businesses,(Rush
Surf, West49, Surf Dive ‘n’ Ski, Jetty Surf) , but have not disclosed the price for
any except West 49. A public company refusing to tell shareholders how much of
their money is being spent on such matters rings very large alarm bells in my
head. Suffice it to say their debt facility has been increased from US$485M to
US$790M. Personally I regard BBG as unsuitable for any kind of investment.(My
IV for 2010 is $5.07)
Regards, Ken
Hi Ken,
Your thoughts on BBG reflect my own. I have never owned it.
LLOYD TAYLOR said on OCTOBER 11, 2010 AT 10:43 PM:
To which I would add… Look at the exFGL connection on the Board and
who drove the abortive FGL acquisition strategy that drove the company
into the ground? A leopard does not change its spots. You have been
warned.
Regards
Lloyd
GEOFF CRUICKSHANK said on OCTOBER 3, 2010 AT 8:57 AM:
Hi Roger
I have been trying to organise for myself a standard spreadsheet to present the
information on each company to aid my understanding.
In doing so, I found it illuminating to add a line for long term debt, Funds Employed and
Return on Funds Employed.
You make the point in your book (if I have understood correctly!) that repaying debt is
investing equity at the rate of interest paid on the debt; thus the ROE will fall a little. It
seems to me that ROFE is some measure of how good the basic business itself is. In fact
there might be some value in using your valuation technique, but using Funds Employed
and ROFE as inputs, for comparison?
Hi Geoff,
I see no errors in your reasoning. I will add this; if a company has no debt
(Preferred), then ROE = ROFE.
MICK said on OCTOBER 4, 2010 AT 6:35 PM:
Hi Geoff
I love what Roger has done to my brain; I’ve mushed the same thoughts
around! My (simple?) understanding of things if it helps…
ROFE is the same as ROCE (return on capital employed or simply return on
capital: ROC); ROFE = ROC
Capital is made up of debt and equity, so if no debt, then capital is all
equity in nature. So ROC = ROE (All capital employed is equity capital)
To go a bit further, accounting equation is A – L = E, so no Liabilities (debt)
means Assets = Equity; Therefore ROE also = ROA (Return on assests)
when there’s no debt.
So with NO debt, ROE = ROFE = ROC = ROA
For debtless companies, ROE certainly seems to be the mother of all
metrics; four ratios for the price of one, and less work to do :)
JIMMY said on OCTOBER 2, 2010 AT 10:14 PM:
Hi Roger,
This is my first time posting on your blog. Firstly I’d like to say congratulations on a great
book. It was an enjoyable read. Secondly I would like to thank you for all your hard work
with your blog. It is one of those sites that I choose to visit everday. Your book combined
with the blog has completely changed my investment technique.
I have recently been looking at one of your A1’s in DWS and I’m interested in your IV and
thoughts on the company. My 2011 IV is $2.10 and 2012 IV is $2.27 using RR of 11%. I
note that it is currently trading at $1.56.
Thanks Jimmy
Hi Jimmy,
Thanks for sharing your enthusiasm with me and everyone else. DWS $1.74,
$1.87 and $2.25. No advice. Be sure to seek and take personal professional
advice.
MARK H said on OCTOBER 2, 2010 AT 7:56 PM:
Great Post Roger, thanks again.
Based on your initial print run, I’ve already calculated the future IV of my hard back
version (to 0 DP) and it looks like a winner :)
I hope you are right Mark H. Thanks.
JASON said on OCTOBER 3, 2010 AT 9:59 PM:
You could say the book value (of the book) is the cost . The intrinsic value
(of the book) is the difference in your future investing cashflows discounted
back to the present.
Hi Jason,
Thats a very kind thought. You mean the present value of the
difference in cashflow after the book versus before?
JASON said on OCTOBER 5, 2010 AT 5:19 PM:
Thats the one. Buffett at one stage made a similar comment
about the intrinsic value of education.
DAMIAN said on OCTOBER 2, 2010 AT 7:01 PM:
Hi Roger,
Some of the retail companies look good value (NCK, SFH), but their profits seem to jump
around a bit over the years, not as consistent as I’d like to see. The outlook statements
were quite cautious. I was just wondering do you have some general things you look for
in retail stocks?
Hi Damian,
The question I ask is do I think the company can be much larger than it is now?
Can the concept be big? Once a company has demonstrated high returns and
great management, thats the next question.
STEVE said on OCTOBER 2, 2010 AT 12:39 PM:
Hi Roger,
I’m interested to know what it is specifically about companies such as MIN and DCG that
made them stand out to you as possible investment opportunities. I can’t see either of
these as being at big discounts to IV, whereas FGE does appear to be at a discount (which
therefore makes it easier to understand the interest in this stock). I’m not sure what
jumps out about MIN and DCG compared to others (I assume you’re seeing more than
just low debt/high ROE) but would be very interested to know so that I, and other
Value.Able graduates, can pinpoint similar opportunities. I’m also very curious to know
what you see as being the competitive advantage possessed by these companies as there
seems to be a lot of mining services companies out there.
Thanks in advance!
PS I found your Source data info VERY HELPFUL (I know you attached it to a much earlier
post – I have been using it since then). I have since signed up to an Etrade account which
helps with lots of the info needed
Hi Steve,
Delighted to hear that the Source Data document has been helpful. Regarding
MIN and DCG, they weren’t always at the current traded price. They were
originally mentioned when there was a much larger margin of safety. They also
offered diversification in terms of contracting style and customers and forward
orders underwrote forecasts. Did see DCG as a potential MND and preferred this
exposure to the CHina resource boom than via miners. All A1/A2 and I hope that
puts the current favouritism into perspective.
Thanks Roger.
I noticed that your IV estimation/forecast for MIN is around $15 for 2012.
Can you quickly explain why there is such a big leap in estimated IV in the
years going forward, much higher than the other companies in your list of
9 stocks? If we believed this could occur then would this be an example, in
a general sense, of a situation where it might be sensible to purchase a
stock at the current price (without any large discount to current IV) as the
forecast increase in IV is significantly higher in years to come?
Hi Steve,
The further out you go forecasting intrinsic value, the less reliable
the results because the more prone they are to change. As a result I
still want a discount to current intrinsic value – although I can be
swayed occasionally.
Hi Steve,
If I may Roger, I like quoting Buffet and Twain et.al but the best Montgomery
Quote is “I like businesses who’s Intrinsic Value is rising at a good clip”
So Steve If you forecast the IV for DCG and MIN out a few years you will see them
rising at probably more than a good clip.
Your are right and as Roger says they are no longer at a discount to current IV.
It is important guys that we not only buy businessees at a significant discout to IV
but that IV is “rising at a good clip”.
For example if Fleetwod fell 2030% below IV then I probably still would not buy
as it’s IV is doing not much for the next few years. A 50% fall may be a different
story as I love things at half price.
.
Thanks for this quote Roger and am going to add it to me other Buffet Quotes
Hope this helps others
Hi again Roger
Must give you a bit of back ground and say how delighted I am with your book
I have read a lot books including The Snowball, Buffett The Making of an American
Capitalist, The Real Warren Buffett, The Intelligent Investor, The Essays of Warren Buffett
and The New Buffettology as well as others. Two “must reads’ are The Intelligent Investor
by Benjamin Graham and The Essay of Warren Buffett, Mary Buffett’s Buffettology is also
worth going through but leaves you hanging. Her calculations are somewhat complex and
can vary considerably, but if you are conservative as with your assumptions then a
reasonable return can be forecast.
I would definately recommend your book over Mary Buffett’s. Will order two more shortly
for Christmas presents.
After reading all the above books plus more i have known the direction i wish to take with
investing and i am delighted to find with your book, it has achived to define the way to
value investing.
Another satisfied Investor.
Do you have a Category with a list of the most useless CEOs Directors or others you would
not want in your company. Just finished reading Pigs at the Trough
Regards Ken G
Hi Ken,
Delighted to hear you enjoyed my book, would recommend it over Mary Buffett’s
and also clearly got something valuable from Adam Schwabs book, Pigs at the
Trough. I don’t have a list of most useless CEO’s but I am sure Adam Schwab and
Stephen Mayne could put a very comprehensive list together.
GEOFF said on OCTOBER 2, 2010 AT 7:51 AM:
G’day Roger, You have given us all but one of the secrets for calculating Intrinsic Value,
the one that remains is how are the multipliers calculated for the equity retained by the
company (Table 2).
Hi Geoff,
Working on a way to do that. One suggestion offered by bloggers has been a CD.
KEN MILHINCH said on OCTOBER 2, 2010 AT 7:14 PM:
Geoff,
Table 11.1 is simply the ROE (as a number) divided by the RR (as a number).
For example ROE 37.5 & RR 10 = 3.75.
Table 11.2 is more complex, but once you work out the differential, you can
extend it to whatever ROE you want.
regards, Ken
Hi geoff,
I have said this before on this blog but worth repeating If you have kids in high
school then give the book to their maths teacher.
If the maths teach can’t work it out then think about taking your kids out of the
school
CALVIN said on OCTOBER 2, 2010 AT 7:27 AM:
Hi all
So with Buybacks and looking at CMJ as an example.
I have there 2011 IV as $3.854
To date they have bought back 43.56m shares of a maximum of 73.77m shares with a
cost so far of $142.33m.
So do I divide 43.56 by $142.33 which = 0.306 and then deduct this from my IV which
gives me a new IV of $3.548.
If thats the case, with WOW how do you adjust for them as the only known figure is the
total buy back cost of up to $700m, we will not know the share quantity until the buy
back begins.
Cheers Calvin
Hi Calvin,
No. If a company is buying back shares, it is using equity to reduce the number of
shares on issue. The effect is on intrinsic value but not directly as you have stated.
The change is to the equity on a total basis and on a per share basis potentially.
For example a in the CMJ example you give, the equity will be reduced by
$142.33 million and the shares on issue by 43.56 million. If there was $1billion of
equity to begin with and 100 million shares on issue, the new amounts would be
equity of $858 million $1000 – $142) and shares on issue of 56.44 million (100
million – 43.46). On a per share basis there was $10 of equity per share and now
there is $858/56.44 = $15.20. I hope that helps.
DAVID V said on OCTOBER 1, 2010 AT 10:54 PM:
Hi Roger,
Again, many thanks for your work and illustrations of the hollistic approach needed to be
taken to investing using the IV strategy. The aspect that will always ‘grey’ this strategy is
the determination of what is a ‘competitive advantage’.
A true competitive advantage is sustainable and one which competitors are unable to
replicate.This gives the organisation a clear ‘leg up’ on its competition. A competitive
advantage can be through technological innovation, control of key resources, patents on
innovative processes, significant barriers to entry, product differentiation or cost
effectiveness to name a few. In most cases competitors can imitate processes, products,
systems over time and erode the competitive advantage. My question is at what point (or
maybe what process do you use) to differentiate competitive advantage from a shorter
term strategic benefit? I like ORL and I do own the stock. I see product quality and
management as key differentiators in their ability to consistently deliver impressive results,
but I see these as strategic benefits, not necessarily competitive advantages. What
‘competitive advantage’ have you identified in ORL? Another example would be WOW
where I see a clear competitive advantage in their logistics management. Others have
tried to replicate it, but noone has come close yet.
I appreciate your help and thoughts in this challenging area.
Again many thanks for the book and creating a forum where many like minds can bounce
ideas and thoughts off each other. I certainly enjoy these dialogues.
Kind Regards,
David V
Hi David V.
Oroton’s competitive advantage is one S.MacDonald. Don’t forget my chapter on
the subject in Value.able. There you will find the measure of a truly valu.able
competitive advantage.
CRAIG M said on OCTOBER 2, 2010 AT 2:22 PM:
Scuttlebut before becoming an ORL shareholder: went shopping with wife
and daughters, online and at a store in Melb’s. My impressions were the
staff were helpful and knowledgeable but the products really sold
themselves. I walked away with a new wallet and belt made from very nice
smooth leather. The wife got a very well crafted handbag(there goes the
divvy). Competitive advantage is also in their product line as well as
management. It reminded me of the quality you always see at RM Williams.
I am no expert on handbags but my girls know a bit and they loved it there
– product differentiation? Margin of safety and competitive advantage, tick
tick.
Hi Craig M,
Difference between ORL and RM Williams is financial performance.
100% correct on the rest too.
Bloggers,
I notice a lot of people seem to be getting hung up on the minutiae of “extremely
accurate” IV calculation and/or small difference to IV’s posted by Roger. I think there is a
danger that some may be missing the point in doing so.
A Buffetism (The Essays of Warren Buffett : Lessons for Corporate America (2001), p. 183)
worth remembering in the context of this discussion:
“Managers and investors alike must understand that accounting numbers are the
beginning, not the end, of business valuation.”
Any IV calculation is an approximation, so second decimal point accuracy is a total
delusion. Moreover, the future IV path only as good as the forecasts. Moreover, forecasts
involve the prognostication of the future and the future is a very uncertain place.
Again Buffet (The Essays of Warren Buffett : Lessons for Corporate America (2001), p.
200):
“Intrinsic value can be defined simply: It is the discounted value of the cash that can be
taken out of a business during its remaining life. The calculation of intrinsic value, though,
is not so simple. As our definition suggests, intrinsic value is an estimate rather than a
precise figure, and it is additionally an estimate that must be changed if interest rates
move or forecasts of future cash flows are revised.”
So don’t get hung up if your IV calc doesn’t mach Rogers to the first, let alone second
decimal place. More often than not the margin of safety you seek is going to be almost an
order of magnitude larger than any such difference.
As Buffet said its not simply about the IV but also:
“The key to investing is not assessing how much an industry is going to affect society, or
how much it will grow, but rather determining the competitive advantage of any given
company and, above all, the durability of that advantage.”
In answer to Roger’s question: How do Value.able graduates calculate forecast valuations?
For my part, I ignore the analysts and make my own forecasts based on my
understanding of the businesses I invest in and the competitive dynamics that surround
each of them. (Un)Surprisingly (depending on your perspective), I tend to be closer the
mark in terms of annual profit and business performance in the majority of cases than the
consensus analyst forecast for each business.
Regards
Lloyd
LLOYD TAYLOR said on OCTOBER 2, 2010 AT 9:28 AM:
Following on from the last post I just came across some similar wisdom from
some local talent, Kerr Neilson, MD of PTM who on page 6 of the annaul report
makes the observation that:
“It is selfevident that not all are cut out for the the calling of funds management;
describing a company is very different from understanding it, painting with
numbers does not work particularly well in the hurleyburly exchange of markets.”
Sage words indeed, in my opinion and a caution to not simply focus on the
question of relativity of share price to an estimated IV, or even worse to to believe
that any IV is anything more than an estimate, containing all the inherent
uncertainty that any projection of future cash flows entails.
Regards
Lloyd
Thanks Lloyd,
As I say, calculating intrinsic values cannot replace a solid understanding of
the business. Don’t ignore all those other chapters in my book. Delighted
some of the fund managers mentioned throughout this blog have
purchased my book too.
Great Stuff LLoyd and Roger.
and may i add the most important ingredient of all.
Patience
Thanks all
Hi Lloyd
I would agree with you on trying to match Roger IV is pointless to some degree.
It is good to see people trying to value stock to help them invest and not pay to
much, but the real use for me is what price I would pay that would satisfy my
investment risk. My IV is usually a lot lower than others but i prefer less risk. If
you can buy $1.00 for 80 cent it is far riskier than at 40 cents.
To your last comment on forecasts. A lot of analysts work for companys that
require turnover. You often see EPS in the last 510 years at a consistant 10%
then forecast to rise to 15%?. I remain near the historical figures. I know if
history told you everything the top 100 rich list would be made up of librarians.
A lady called up our local radio station today on a financial 30 minute talk back,
she wanted to know what she should do with shares in Pacific Brands the stock
adviser said they made a profit last year and gave no advice as they don’t cover it.
All she had to do was buy rogers book, she would never have owned them. PBG
trades at 1.09 no div. roe 5.5 put the money in the bank
Regards Ken G
Ken,
I think that history is a good guide to future performance. To depart from
it its necessary to understand the reasons why the business will perform
differently in the next few years and then plug this into your valuation
model, to the level of confidence that you have in the future business
direction.
An example of this effect is businesses (such as funds management) where
the proportion of fixed costs in the business is high, so that incremental
revenue growth flows disproportionately to the bottom line. As a result
ROE (and thus IV) is leveraged more strongly to demand than might
otherwise be the case and in good years IV really gets a lift over what the
historical average might suggest (of course the corollary applies in bad
years).
Similarly resource companies where the biggest determinant of IV in any
year will be the commodity prices you project for the next year or two. If
you believe that iron ore and coal prices could fall by as much as 40% in
the next twelve months, then the recent short term ROE history of BHP,
RIO, etc., is meaningless as guide to the future IV. In fact the long run
average ROE is even problematic in such cases, because in commodity
booms costs rise dramatically and essentially irreversibly, so that a massive
margin squeeze (and ROE collapse) is set up for the moment when
commodity prices loose their head of steam (as inevitably they do).
On the subject of analysts forecasts of earnings growth in any business this
usually starts each financial year 50% optimistic for the next twelve months
and then is ratcheted down under company guidance through the year, so
that in the last six weeks before the annual reporting period they align with
the reported result. The analysts then proudly proclaim the accuracy of
there models and that the company concerned met expectation….yet that
expectation was only established days before the financial reporting period
ended!!!
My advice is to consider the earnings growth analysts are predicting at the
start of the financial year for each business, then reduce the predicted
growth by at least 33% before you put it into your IV calculation. You are
more likely to be closer the mark in terms of year end performance when
you do this than just blindly accepting the optimism of analysts. By the
way, there are plenty of academic studies which confirm the 50% optimistic
bias in analysts growth forecasts each year.
Hope this helps see the wood from the trees when it comes to predicting
the future IV path for any business.
Regards
Lloyd
Hi Lloyd and all,
Here’s one of those studies that I have referred to in the past (as
have others):
http://www.mckinseyquarterly.com/newsletters/chartfocus/2010_07.htm
ROB said on OCTOBER 1, 2010 AT 9:26 PM:
Hi Rojer
Great book, well done.
Would you be able to publish the equations that you use to generate the tables in the
book, it would be a lot more convenient than having to refer to tables all the time.
Hi Rob,
Working n a way to deliver that. A few people have suggested a CD so having a
few meetings about the best way for everyone.
Hi Roger
I am one of the culprits of using 10% RR for all IV calcs. I have put a lot of thought into
this and especially while reading value.able(a masterpiece up there with Graham and
Fisher).
When purchasing a company I want to apply a margin of safety, a discount to assessed
value of course, so why double up on this discount process by using different RR, why not
use one RR and have a level playing field then increase the MoS depending on quality,
liquidity and consistency. I am not saying you are wrong and I hope it doesn’t come
across that way, I’m just trying to add some independent thinking.
We (a mate and I) use two valuation methods in our spreadsheet, the first we developed
prior to value.ables release. The second method is of course value.able but at 10%. The
two have similar results for median payout ratios but show some variability beyond that
range. I reckon I’m about 85% Montgomery and 15% originality and maybe I’m not
completely right but I’m also not precisely wrong either. It has lead me into some very
profitable investments, one being ONT late last year and another being MCE back in May.
My calculations for MCE using both methods, the first using value.able and the second
being our intrinsic value calculator or IntValCal: 2010 9.4512.50 2011 14.4018.87 2012
13.9116.50 2013 14.6316.55. Outrageous of course but so is the MoS.
Another example is WOW (1st Value.able then IntValCal) 2010 23.1422.39 2011 24.98
24.38 2012 27.1926.46 2013 29.5329.13 (no adjustment for buyback yet). In this
example value.able is slightly higher.
Thanks Roger for your time and knowledge thus far. I am evolving but am I steering in
the wrong direction? All bloggers opinions welcomed both positive and negative.
Hi Craig,
Thanks for the contribution. I am delighted to hear you were already on the value
investing path. Your work here will inspire many others so thanks for sharing.
ANTHONY ROLFE said on OCTOBER 1, 2010 AT 8:54 PM:
Hello Roger
I was wondering if you thought of developing a worksheet template that can be utilized in
each valuation.I understand the principles in Value.able with its upfront honest approach
and thanks very much.Also are you thinking about having a workshop(the Montgomery
group)shall we say……again thank you Roger.
Hi Anthony,
A workshop would be a great idea. Yes I am very keen to do that. What would be
the main outcomes you’d like to see from it? Everyone else? I have received many
templates from investors who have turned Value.able into spreadsheets. They are
all submitted on the basis that they will be put up on the blog for free for
everyone else to critique and dissect. Stay tuned!
SCOTT said on OCTOBER 2, 2010 AT 8:12 PM:
I think a workshop would be a great idea. The main outcome would be a
better or clearer understanding of:
a) Future value IV’s such as working with analyst forecasts and raw data
from Comsec
b) Future IV’s taking into account: buybacks, bond repayments and Insto
Placements.
c) A better understanding of A1 to C5, the difference between A1 and A2 or
A1 and B1
Thanks Roger
Thanks Scott. All taken on board.
Hi Roger and readers
The workshop I suggest would also do a comparison with all other forms of
investing or products (such as hybrids) with value investing if that is the
name for Roger’s method
Cheers
Rex
FRANK said on OCTOBER 1, 2010 AT 6:49 PM:
Hi Roger,
Good stuff, I think a slow and quiet revolution is happening in Australia as more and more
people become aware of value.able. I for one have been looking around for a few years to
find a book that provide a decent methodology to help in valuing shares.
Many have suggested DCF. Whilst it is a good way, I find them a bit too tedious and the
number of unknowns just made the calculation too untrustworthy. The method you
suggested whilst requiring some key assumptions (e.g. dividend payout ration, forecast
ROE) is a lot more user friendly and highlights transparently the most important issue
which is ROE. I can easily use your method to filter dozens of companies before doing
more research as opposed to the other methods.
Your book has definitely changed my investment philosophy and I use it as my first point
of reference.
Cheers,
Hi Frank,
I am positively excited to hear that Value.able is changing your approach to
investing and making a difference. Everyone be sure to seek and take personal
professional advice too.
Hi Roger,
I must say my knowledge has improved out of sight since coming across your blog and
reading your book. It almost makes me ill to contemplate how some of the investment
decisions by those managing my super may have been made. And I wonder if the words
“return on equity” have ever passed their lips while they choose my investments?
Regards,
Craig.
Hi Craig,
Yes, I have been wondering the same thing.
MICHAEL said on OCTOBER 1, 2010 AT 6:14 PM:
Hi Roger,
Do you look at revenue growth as well as the ROE? While Oroton has an impressive ROE,
its revenue growth of 7.9% is a bit lower than I would expect for a growing company, and
down on the prior year. This makes me question the sustainability of its ROE.
Thanks
Michael
Hi Michael,
You have to look at likeforlike. This is a business that has been a round for a
while and to still be achieving 10% LFL sales growth is great. They have just
opened a store in HK this week so overseas expansion beckons and we will see (at
very low cost) how that goes.
FRED said on OCTOBER 1, 2010 AT 5:57 PM:
Hi roger,
DWS, I get about for 2010……..$1.20 —2011…….$1.45
BRIAN GARRETT said on OCTOBER 1, 2010 AT 5:49 PM:
Hi Roger,
The book has well paid for itself. no dog stocks left now. Blog confirms I am on right track
with future IV’s – looking forward to you writing your next book.
Regards
Brian Garrett
Thanks Brian,
I am looking forward to writing it too!
RON said on OCTOBER 1, 2010 AT 3:57 PM:
hi Roger,
whats your thoughts on HGN? quality rating and IV. thanks, Ron.
Hi Ron,
Halcygen gets a B2 and there are some very obvious optimistic forecasts for the
next couple of years. The relatively recent capital raising and doubling of shares
on issue is currently expected to be put to very profitable use (seek and take
personal professional advice). I need to take a closer look. Can you share your
insights?
RON said on OCTOBER 3, 2010 AT 12:34 AM:
they bought the old mayne pharma business from hospira for what seems to be a
cheap price. they specialise in super generics and also are contract manufacturers
for several drugs (FESS, Betadine etc.). management is very experienced ( roger
aston) and also has astute property/pub pokie investor Bruce mathieson.
management currently predicts earnings equal or greater to this years.they also
mention that next year cash flow will pay off debt completely. competitive
advantage seems in their R&D for soon to be launched drug pipeline and their
certified manufacturing contracts for well established drugs. high ROE and i
believe next year their rating might improve to maybe an A2. i have IV at 72c
rising to $1 in fY12.
KATHY said on OCTOBER 6, 2010 AT 12:22 AM:
Hi Ron,
Your message prompted me to do a big of digging and I thought you
might find the following useful in your research.
Hospira bought Mayne for 2.1 billion in 2007 because they were interested
in their Oncolytics (cancer fighting drugs). Mayne had generated sales of
AUD $800 million in the year ending 30 June 2006. Oncolytics comprised of
roughly half of Mayne’s product portfolio.
While it looks like HGN acquired Mayne for a cheap price, they didn’t
acquire as much. It looks like Hospira have integrated all the oncology
products into their own business and now have divested the rest of Mayne.
As it stands now, 60% of Mayne’s revenues are derived from a product
called Doryx (a delayed release antibiotic used in the treatment of acne).
There is pressure mounting from competitors to enter this space – 5
companies have applied to the FDA requesting approval to manufacture
generic versions of Doryx prior to the patent expiry date (2022). There is
plenty of upside if all goes well with this product and they increase their
market share. But you are definitely relying on this one product at least
now in the early stages. This is a risk since more than 50% revenue is
derived from Doryx sales.
From my own personal experience working in the biotech industry, it is
high risk but can be highly lucrative if it works out. A bit like mining
exploration. The company I work for (prior to being bought out by a US
pharmaceutical company) started with 5 or so employees and was
struggling financially. They went into administration at one stage but was
rescued and subsequently bought out by a US pharma. Our competitor
down the road was seemingly doing well in the early years, the carpark was
full, they had 100 or so employees. They too were acquired by a large
European company but operations have since been scaled back significantly
(roughly 3/4 of the business is gone). Now our carpark is overflowing and
we have to use theirs! :D
I would definitely have a higher RR when calculating the IV of small
biotech/pharma companies like this one. 14% as a minimum is what I
would adopt (just my personal opinion). And if you have a larger margin of
safety you can sleep at night!
It would be interesting to read others’ thoughts on this business.
Kathy
Hi Kathy,
Wonderful insights! Thanks for sharing with everyone. I am sure
most people here will be more interested in what you have to say.
May I encourage you to continue posting. What are your favourite
companies in the space?
ASHLEY LITTLE said on OCTOBER 7, 2010 AT 9:03 AM:
Great Stuff Ron & Kathy
Keep up the good work
hi Kathy,
thanks for your thoughts and input. i would like to mention that Doryx antibiotic
is under patent in the US until 2022. HGN’s marketing partner, Warner Chilcott, is
under patent challenge in the US courts from generics rivals. It seems that such
actions are common and tend to be unsuccessful. bare in mind that if the
challenge is successful and FDA approves generic versions than this company will
be under pressure. they are currently 20% under IV but that wont be rising
enough unless they manage 10%+ profit increase.
interesting one to keep an eye on.
while we are in that space. i would be very interested in your thoughts on
Alchemia (ACL). their generic version of fondaparinux is due to be approved any
day!! now by the FDA. forecast profit in 2 years from this will be about 25million.
during that time they are in phase3 trials for their HAirinotecan (HyCAMP) drug
for colorectal cancer. their board is quite experienced also.
cheers Ron.
KATHY said on OCTOBER 11, 2010 AT 11:17 PM:
Hello Ron,
I am aware that Doryx is under patent till 2022, however this is a very long
time and anything can happen during this time! There’s a risk that another
company could release something on the market that is more effective. It is
impossible to know what will happen.
ACL, looks promising on the surface but as an investor I know very little
about what management want to do with their profits (ie payout ratio?). I
can’t calculate forecast IVs because there is no forecast EPS data available.
This is hard to predict. Can IV keep rising at a fast rate year in year out?
Can they keep increasing revenues? ACL is high risk just like HGN for the
same reasons I mentioned earlier on.
The problem with this industry is you really have to understand what the
company does. I work in the industry and I don’t have a clue most of the
time! You end up working on one specific project and that becomes your
area of expertise. It is impossible to keep up to date with everything
science has many niches. Technologies also always change. It is a big race
out there between many research groups (both private and public) to find
the greatest cure for an illness. If I were to invest in a speculative biotech,
I’d have to read all the scientific literature to understand their drug or
treatment. I don’t think this is necessary with large companies like CSL due
to their large drug portfolio. Another thing we don’t know is what the raw
data is like. How are the experiments being conducted in these biotech
labs? How do you know the research isn’t poorly designed? How do you
know results aren’t being fabricated/fudged? There was an Australian
biotech company that did this. This would be very disappointing for
investors.
But who has time for all that research? Unfortunately I don’t. I find it hard
enough at work, so I don’t see any point in complicating my investment
life! I am just being honest about how I see it. However you may have a far
better understanding than I do. I was never cut out for science. A GP would
most certainly have a greater insight than I do. That would be a definite
advantage. :)
I problems I have with small biotech companies:
– Management of companies these sorts of companies have the view to
release a drug or two, make money and then reinvest some or all profits
back into their R&D. R&D costs big bucks though and it doesn’t always
work out favourably for shareholders. Large pharmaceutical companies (like
Pfizer, Hospira, CSL et al.) have the cash to pump into R&D without it being
detrimental to the company. They also have a large range of drugs in their
portfolios so the risk is spread between them.
– New drugs that have not been tried and tested in the marketplace can be
problematic if people experience adverse side effects. It is not always
known until it is too late. Drug companies have withdrawn medicines from
the market for this reason. The most recent one is Reductil (weight loss
medication) due to the risk of heart attack. Antidepressants and hormone
treatments are also a bit hit and miss with different people. Some
individuals just don’t respond well to some medication whereas others do.
Sorry to sound like a downer. I think it is tough finding a “Reject Shop”
equivalent in the biotech sector. If you would like some exposure to health
care there are some great options (Roger these are my favourites):
– CSL
– Cochlear
– Blackmores
All have a great track record, and a competitive advantage. CSL has many
products, so its not so important for you to understand all the science nitty
gritty. Just look at their track record. It speaks volumes.
(PS: I am a shareholder of CSL and COH)
Happy investing guys,
Kathy
Amazing effort Kathy. Thank you for spending so much time sharing
your insights with everyone. I am sure it is sincerely appreciate by
everyone, no just me.
JIM CAINE said on OCTOBER 1, 2010 AT 3:03 PM:
Hi Andrew,
re WOW, this is what i did –
EPS 7570/1232 = BV 6.14
POR ave of DPS/EPS over 2010 – 2013 = 70%
ROE 2020/6812 (09) =30%, 2020/7270 (10) = 27% ave = 28.5% ( so use 27.5 in
tables)
RRR I chose 10% for large retailer
then from Table 11.1 use 2.75 as multiplier
from Table 11.2 use multiplier 6.177
so steps
1. $6.14 x 2.75 =$16.88
2. $6.14 x 6.177 =$37.93
then
3. $16.88 x 0.7 = $11.82
4. $37.93 x (10.70 = ) 0.3 = $11.38
add $11.82 and $11.38 = $23.20 to get IV.
All my data came from Comsec.
each time I do this my IV comes out slightly different. Using slightly different figures last
time I got $24.15.
I hope this helps. I’m still teaching myself. Jim Caine
Hi Jim
Great work seems to me your are approximately right
Yjay is the important thing
DAVID V said on OCTOBER 1, 2010 AT 10:36 PM:
Hi Jim,
For WOW I have them at 2010 $26.09; 2011 $29.22 and 2012 $31.71. One
thing to remember whne doing this is that you are not trying to match everyone
else’s valuation but create your own IV based on your risk profile, your
assessment of the company’s risk profile, potential ‘devaluers’ in the companies
financials ………. There are many variables and ultimately you just need to feel
comfortable you are in the same ball park and can see IV growing through a
competitive advantage. I used a POR of around 70%; ROE of 30% and RR of
10%. The only difference I can see is that I think you selected the wrong values
from the tables – 10% and 30% should give you factors of 3 and 7.225.
Keep up the efforts and don’t devalue the fact that you are on the mark!
TYLER said on OCTOBER 5, 2010 AT 12:07 AM:
Hi Jim, not sure how you got 6.177 for table 11.2, at a 6% RR i get around 36 IV
ES said on OCTOBER 1, 2010 AT 2:57 PM:
does anyone have valuations for bhp for next year
i am getting 100.5 !, for next year using e trade estimates and rr of 11
Hi E
mine is not quite that high but it does look silly.
Aanlaysts for resource stocks over time have been exactly wrong instead of
approimately right
Hope this helps
Hi Es
My initial IV for BHP in 201011 was around $60 using an RR of 12%. I decided
to be a bit more conservative with the ROE and my current IV for that year is
$47.21 (ROE 30% – probably not too much of a reach since ROE has averaged
28% over the last decade and profit has increased on average by 38% per
annum). I don’t want to get too hung up on the IV as it is not an exact science.
Suffice to say that even on a very conservative valuation on my amateur figures
BHP looks underpriced for the coming year assuming all goes well in Asia.
My estimates for 201112 and 201213 are $57.58 and $48.26. So the IV may be
declining in the out years, (which makes sense given that new supplies will come
on line from investment elsewhere and Asia may also cool, especially if the US,
Japan and Europe remain flat). For me these values indicate that there may be
some upside in BHP possibly giving some compensation for the many things that
could go wrong.
Interested to see what valuations others get and whether you think I am being
much too generous?
Ron
BRUCE PAYNE said on OCTOBER 2, 2010 AT 10:03 AM:
Hi Es
I used RR of 12 to give a higher margin of safety but have run the numbers with
RR of 11 to come up with:
2010 ROE 30% $48.35
2011 ROE 35% $77.23
2012 ROE 35% $94.07
This is using Commsec forecast’s and a payout ratio of 30%.
Regards
Bruce
Thanks guys
I think its all about tinkering with the numbers, but it does appear BHP is
better value than most resource companies. It does have consistent high
ROE for many years now for a resources company, suggesting it does have
a durable competitive advantage probably because of size.
Es
austin
I get 2.03 for 2011
with rr of 11
but i was using the 37.5 roe, this may be too high ?
JIM CAINE said on OCTOBER 1, 2010 AT 2:37 PM:
Hi Roger and fellow valuers,
I am very pleased to see this post as I sometimes find the number of variations
overwhelming. Some of my valuations seem to be correct but some differ significantly. I
think I’ve got the basic method down pat and I’ve recently added the idea of margin of
safety. I’m still working on future intrinsic values though. As others have said this blog has
been enormously helpful in that I can see the same numbers that I get as well as differing
valuations. Roger is to be commended for his generosity and willingness to help. I take
some comfort in the idea that, as Roger says, I’ve learnt so much is a quite short period of
time.
I’lll post some figures for Andrew on WOW shortly.
yes agrred jim,
Three cheers guys for Roger and helpers (if any)
great stuff guys
Hi Jim
Don’t be overwhelmed, you have embarked on the value investing journey
and it looks like you are on the right path. Not everybody gets it straight
away and some never do but you have, fantastic! Don’t worry if your values
differ a bit the Margin of Safety is the central concept and that’s what we
are looking for.
and Ashley yes three cheers to Roger and helpers but also to you, you’ve
put in some great effort and it should be commended.
Thanks Craig,
will hold you to that beer at the Aussie woodstock for capitalist convention if it
gets off the ground
CRAIG M said on OCTOBER 5, 2010 AT 8:45 AM:
Definitely Mate, hopefully Roger can see the value in such a gathering.
Judging by the popularity of the blog Roger would have no problems filling
a venue.
Any thoughts on the subject Roger?
Hi Craig M,
I am very interested in running something highly engaging, practical
and value.able!
Roger,
A hypothetical if you will.
You have $1M to invest in the Australian share market, but you can only choose one
stock.
Dividend payments are not a consideration but capital growth is.
Which one would you choose ?
regards, Ken.
Hi Ken,
I wouldn’t bet the farm on one stock. It would be spread between a few holdings.
MCE, MIN, FGE and DCG would be in the mix.
Roger,
Nice try, but you don’t get away that easily. Naming four is cheating !
Remember this is a hypothetical and I stipulated you could only choose
one. ( and at today’s prices I should mention)
Regards, Ken
Ok, Ok Ken. I would say MCE. But just as I love all my children, I
don’t really have a favourite.
CALLAN said on OCTOBER 1, 2010 AT 5:12 PM:
Hi Roger,
Could you share some further insight into DCG? Currently has a low ROE of
8.7% (commsec), didn’t think such low ROE would fit your criteria.
Is there something in their accounts which may be skewing the figures.
Eager to hear your views,
Callan
Hi Callan,
I doubt very much the commsec figure you have given for Decmil
Group. I have ROE of 2224%. I hope that helps.
Hi Callan,
Grap the accounts and look at profits from continuing operations niot the
net profit figure.
Hope this helps
Hi Roger
Great post and very helpful examples.
Can you shed some light on how the EPS and DPS forecasts published on sites like
Commsec are done? Do these figures usually come from the company itself or from
independent analysts who study a company, so may come up with varied estimates. I
expect the accuracy of estimates may differ widely depending on the company, eg if
profits depend on commodity prices or other unpredictable factors like currency. So like
the weather the forecasts may not come true.
Hi Steve,
There is some terrific research available about the accuracy, optimism or otherwise
of analysts forecasts. The numbers on Commsec would come from an
independent data vendor that receives the analysts forecasts and the consensus
number is an aggregate/average.
ROB said on OCTOBER 1, 2010 AT 12:06 PM:
Hi Roger,
I devoured your book last month the day after recieving it and have since been dipping in
and out of it as I continue my investment education. Is there a derivation of the
unmodified equation you could point me towards?
Thanks for entertaining my mathematical leanings :)
Also, what is your take on CBA – it’s exposure to the housing market, the recent iffy data
used in a presentation to assure oveseas investors, and the recent managerial
renumeration increases?
Hi Rob,
Check out Richard Simmons book. The answer is there.
MATT SMITH said on OCTOBER 8, 2010 AT 11:31 AM:
I bought that book 2nd hand online from a Delhi book store for AUD$30
inc postage and it arrived in three days.
AUSTIN said on OCTOBER 1, 2010 AT 12:01 PM:
Anyone get DWS at
FY2010 = $2.00
FY2011 = $2.20
Am i anywhere close? Cheers.
Austin,
For what it’s worth I get $1.79 & $2.16 using 11% RR.
Regards, Ken
MATT said on OCTOBER 1, 2010 AT 1:36 PM:
Hey Austin,
Using ROE of 35, RR of 12% & PR of 80% I’m getting
FY2010 = $1.52
FY2011 = $1.67
bit more conervative, so i have it at current value.
Hi Austin
I may be to conservative.But i like the company
I used ROE 30%.
RR 12% which is rather high but it is small company with 100% franking
Payout 80/20
Y10 – 1.31
Y11 – 1.40
analyists 2 year forecast 13.6% which seems high when us look at the last 4 years
but they may think it will continue.
would like to hear rogers comments.
this is only my 2nd day ever of blogging quite enjoy reading others comments no
doubt will get bombed if i make a mistake.
Ken G.
Hi Ken G,
You won’t be ‘bombed’ here. You can feel sure about that. It is very
important that new value investors are not intimidated by any Value.able
graduate and all posters need to check their comments against that
measure.
Hi Ken,
We all appreciate your thoughts and efforts and no one gettings bombed
hear because as Buffet says ” Your are neither right nor wrong just because
people disagree with you”
Keep up the good work
Hi Ashley, I think it might have been Graham that said it first though.
Great stuff.
ROB WALKER said on OCTOBER 1, 2010 AT 3:10 PM:
Hi Austin,
Good shot I would be happy with that, I have
2010 $ 1.77
2011 $ 2.11
2012 $ 2.47
As at 1500 hrs today I have DWS trading at approx 25% discount to IV
but as Roger says get Advice.
Cheers
Rob Walker
Hi Austin,
I get 2011 at $2.19 so I am close to you
PETER said on OCTOBER 3, 2010 AT 11:37 AM:
Hi Austin,
Utilising an 11% RR, I get:
FY2010 = $1.80
FY2011 = $1.89
I get 1.85 I value as opposed to trading at 1.58 (14.5% Margin of safety)
for 2011 and it is a great company
Hi Austin
Just a quick look from Morning Star figures, previous 3 years EPS pre abnormals
is 3.30% a bit lower than forecast.13.3%
BRUCE PAYNE said on OCTOBER 1, 2010 AT 11:51 AM:
Hi Roger
Personally I haven’t had any problems finding the data through Commsec but have
noticed that in some cases there are discrepancies between that data and Annual Reports.
I guess it comes down to if you want run your numbers on data that is quick and easy or
go to the trouble of digesting and pulling data from the Annual reports.
I do notice for instance there is no Commsec forecast info for ORL so some further
digging on the web got me something.
I take your point that coming so far that we are confident to even be discussing this is a
big step, and it wouldn’t have been acheived for most of us without a) Your book and b)
The support you offer through this blog.
Many Thanks
Bruce
Thanks Bruce. Delighted to hear it!
MATT SMITH said on OCTOBER 1, 2010 AT 10:57 AM:
Roger,
So you do or don’t personally construct proforma financials when doing your analysis??
Also, because you are suggesting treating a business like a bond with recurring earnings if
we want say a 20% compound annual return we really should stick with companies that
consistently generate on average a 20%+ return on equity each year like say 1300Smiles
(ONT)??
Hi Matt,
Yes, to get a better understanding of how the cash flows through the business.
And sections for new floats. Not for every company though. Bonds all have
recurring earnings. We are aiming for a rising coupons. Extending the margin of
safety concept would suggest aiming for businesses that can generate returns
higher than your discount rate. I hope that helps.
Hi Matt,
For every single company I map all the variables that I believe are vital to analyse.
You can do that without rebuilding the proformas for every company.
Reconstructing proformas doesn’t help analysts for example to predict what
capital will be raised – note the line in their research that has a row of zeros for
capital raised in the cash flow statements for FY1 3. To understand how cash
flows through the business however its worth doing. Bonds all have recurring
earnings. We are aiming for a rising coupons. Extending the margin of safety
concept would suggest aiming for businesses that can generate returns higher
than your discount rate. I hope that helps.
NIC ARENA said on OCTOBER 1, 2010 AT 10:50 AM:
Hi Roger,
Most of my evaluations have been very close to your evaluations (with 56%) – As you
say even Warren and Charlie get different IVs. Although I’m not comparing myself to
Charlie. There is one stock that I am way off. I was wondering if you or someone else
could give me a hand as the business looks good and my IV is way above your IV and
share price. The company is FORGE GROUP LIMITED. You have the IV at $3.67, share
price is $3.90 (there abouts) and I have IV at $9.90. This worries me as I would probably
have been close to investing in this share if I hadn’t known your value. Company looks
good, debt $6m while profit is 29m (and rising), there’s more return earnings than
common stock, there’s good cash stocks to cover current debt and current assets are
almost double current liabilities. I have used 35% ROE and a RR of 10%(because I can’t
see much risk – although I did run RR at 13% and still got a value of 7.00) and payout
rate of 18%. Really need some advice on this one. Thanks.
Hi Nic Arena,
If I use the analyst forecasts I get $8.71 so don’t worry too much. The lower
valuation is a function of a really conservative version of extrapolated historical
performance – see and take personal professional advice. Its important that you
understand the way the company charges on its contracts and how it integrates
itself in the projects rather than in the businesses of its customers.
Nic,
You don’t say whether you are talking about 2010 or 2011, but I presume it’s
2011. I get $6.63 using 12% RR & 27.5% ROE.
Regards, Ken
Nic
I seem to be able to get more than anyone. With average equity of (93+48)/2 =
$70.5M, 37.6c/sh for 78M shares I have a ROE of 41.6% and a Equity/sh of
$1.19. For 10% return and PR of 19% this $0.94 for first table and $12.57 for
the second, or and IV of $13.57. If earnings and PR retained for the next year
ROE is 31.5%, Equ/sh $1.50 and the resulting IV $10.48. I find it easier to use
exact answers for the data and calculations and incorporate margins for decision
makings once only at the end. Does anybody agree with the above?
Roger,
The first figure I differ on is the dividend payout. The dividends paid were
$3.4 against a NPAT of $29.45, which is a POR of 11.6%, not 19%. I also
calculate the ROE using this year’s equity when the difference between the
two years is so great. That gives me an ROE of 31.5% compared to your
41.6%. I then would not use 10% RR for a mining services company as I
believe the risk warrants 12%, but that’s just personal choice. Having said
all that and allowing for a 20% increase in NPAT next year, I get a 2010
valuation of $6.67 and a 2011 valuation of $6.63.
Hope this helps.
Regards, Ken
BEN said on OCTOBER 5, 2010 AT 8:21 AM:
Roger,
I also get a high intrinsic value for FGE as well. IV of $12.58 for the 2010
FY. I too arrived at an ROE of 41.6%, however i have used a selected ROE
of 40% and a RR of 10% as I like my estimates to be on the conservative
side.
Regards
Ben
Hi Ben,
Great to hear from you again. Being conservative may mean using a
higher RR than 10% of a very big (circa 50% margin of safety)
Ken
I hate accountants! At first I was convinced that you were right on the
POR. Sure enough FGE show $3.4M divs 09/10, but reading note 7 and
looking on the Commsec site then 7 cents/share are the divs that are
attributed to the 09/10 earnings which is what gives the 19% POR. I read
the $3.4M paid or provided for in the accounts as the amount paid in the
financial year (covering the final 08/09 payment and the first 09/10
payment) rather than the amount that relates to the income for the year.
Perhaps Roger will comment. If I’m wrong, and I don’t rate my
interpretation as better than 50/50, then it could make a big difference to
the way many of us are using the figures off the Commsec site.
Roger
Hi Everyone,
Regarding Roger G’s question about payout ratios; If Commsec is
different to the annual report – go with the annual report.
I’m not sure there is a conflict. The following is from Commsec
for FGE and the question is should 5 cents or 7 cents be used
to calculate the current payout ratio?
Payout Ratio
The percentage of net profit paid out as dividends. It is
calculated by dividing the total dividend payout during the
year by net profit before abnormals.
Ordinary Dividends
Dividend Type Cents Per ShareFranked % ExDividend
DatePay Date
Final 5.00 100 06 Sep, 10 24 Sep, 10
Interim 2.00 100 15 Mar, 10 31 Mar, 10
Final 3.00 100 07 Sep, 09 25 Sep, 09
Company Historicals
PER SHARE STATISTICS
6/07 6/08 6/09 6/10
Sales($) 40.65 1.90 2.22 3.15
Cash Flow(cents) 242. 7.5 34.3 39.9
Earnings(cents) 147.0 8.8 20.5 37.6
Dividends(cents) 3.0 7.0
6/07 6/08 6/09 6/10
Return on equity(%) 17.9 18.6 31.9 31.5
Payout ratio(%) – – 15 19
Thankyou Roger for the really good piece on QR National.
You’re welcome Roger G.
ANDREW said on OCTOBER 1, 2010 AT 10:49 AM:
This is the one area i am having trouble with and i think it stems from the figures i am
using which i am getting from Commsec.
One thing i am having trouble with is coming up with the per share amount for capital
raisings and buybacks.
Can anyone who has run a forecast figure for WOW let me know what they used for the
buyback input and how they came to it? I was reading the booklet they sent out and saw
i think $3.08 mentioned. I know i have not worked something out correctly here as i
ended up with an intrinsic value of $20.00 which is a big decline (i have a 10% RR on
WOW)
Also, in the case of ORL. Comsec has nothing in forecast information, where is a good
place to get this, would something like Investsmart or another site have similar forecasts?
Also, i believe alot of the Comsec figures for Dividends are far higher then they should be.
Anyone else have any thoughts on this? I have looked at WTF and they have the forecast
payout being about 80% (i got this by dividing the DPS by EPS).
Hi Andrew
The $3odd numbers represents the capital return and the rest is paid as a fully
franked dividend. So you wouldn’t use the $3’ish number. If the DPS figures may
vary based on whether they are calculated using declared dividends or actual
dividends paid. Consistency is more important than precision. Investsmart gets
their EPS and DPS forecast information from Aegis so perhaps they will have some
consensus information for ORL – they certainly do for other companies.
BRUCE PAYNE said on OCTOBER 1, 2010 AT 1:00 PM:
Hi Andrew
The data I pulled off the web for ORL forecast profit was 2011 $25.2 M and 2012
$27.72 M, hope this helps.
Regards
Bruce
Hi Andrew,
The WOW are spending 700m on the buyback and they have 1.233b share on
issue so equity per share falls 56.7 cents
Hope this helps
MIKE KING said on OCTOBER 1, 2010 AT 10:42 AM:
Hi Roger,
That’s all well and good for companies covered by several analysts, but what do you do
about companies that aren’t covered by analysts, or covered by 1 or maybe 2? 1 analyst’s
forecasts doesn’t make a consensus, and who knows if thats a reasonable forecast?
Cheers
Mike
Hi Mike,
I run two valuations and one is based on an adjusted extrapolation of historical
performance continuing. Of course speaking with the company can work, because
companies not covered by analysts are often very keen to see investors interested
in their stories. Of course they cannot reveal anything to you without having
disclosed the information publicly. What they may however tell you is what their
revenues are expected to do and balance sheet items like changes in working
capital (inventory, receivables and payables) and margins. Form this you can
engineer a forecast EBITDA or EBIT number and then with a few more simple
calcs derive an NPAT forecast.
JOHNC said on OCTOBER 1, 2010 AT 10:26 AM:
Thanks Roger, I have to say that your book reminded me of some pretty basic investing
fundamentals I got distracted away from awhile back. The tables were particularly useful
because it helped understand what multipliers I should been arriving at when calculating
appropriate BUY price ceilings.
Looking forward to your next edition.
Thanks for the feedback JohnC. I am delighted you took the time to let me know.
PAUL said on OCTOBER 1, 2010 AT 9:48 AM:
Reading this post reminded me (along with alot of research) of how much I like MCE with
the forecast eps and dps.
DAVID said on OCTOBER 1, 2010 AT 8:46 AM:
Wow! Thanks for this post Roger. I have just finished reading Value.able and am looking
forward to have a go crunching some numbers! I am at the start of my investing life, and
am finding all your writing ‘inValue.able’.
Great to hear David. Glad you like the post too.
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16/5/2016 How do Value.able graduates calculate forecast valuations?

HOW DO VALUE.ABLE GRADUATES CALCULATE FORECAST VALUATIONS?

POSTED IN COMPANY VALUATION, INSIGHTFUL INSIGHTS, VALUE INVESTING, VALUE.ABLE.

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