Australian (ASX) Stock Market Forum

Students of Roger Montgomery's (Buffett's) intrinsic valuation method

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Thanks again kermit!
Yes I'm not considering buying this one either, as like RM I don't like the debt, just doing it as an exercise. I think I see what you're saying about the POR, it's certainly greatly reduced from the Current Yr in Next Year's data. My POR is calculated by using the forecast EPS and DPS data from Etrade, so in this case to get the POR for next year the same as Curr Yr I'd have to change Etrade's forecast DPS from 22.3c to 51c (or change the #Shares and EPS I suppose.) Would you tend to do that or something
else? Here's how it looks anyway:

Code: WSA .....Price: 5.80

INPUT:
............ EqPS .. Shares ... DPS ... EPS ... RR
Next Yr .. 1.14 .. 180.00 ... 0.510 .. 0.688 .. 14
Curr Yr ... 0.96 .. 179.70 ... 0.430 .. 0.580 .. 14
Prior Yr ... 0.77 .. 178.90

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 8.78 ... 66 .. 123.84 .. 0.74
Curr Yr ... 7.56 .... 67 .. 104.23 .. 0.74
 
I'd maintain everything the same as what Etrade provides you except maintain the payout ratio at the current ratio. So essentially everything remains the same except you apply last years POR of 74% against the forecast EPS and change the DPS figure. Everything else should remain as is forecasted.

That way if they pay out less in DPS your IV will surprise to the upside, IF they can re-invest the earnings and maintain a decent ROE. Of course the reverse is true if for some reason they decided to pay out all earnings.
 
Thanks kermit, are you saying then to always change the figures to make the POR about the same as the previous year? I can see the sense behind that, though this seems to be different to Roger's method where he simply plugs the analyst's DPS and EPS figures in.

Also btw I just had another look at Etrade and WSA figures are now:

.... Curr 2011 2012
EPS 8.0 68.8 65.8
DPS 6.0 22.3 24.8

If I simply plug those figures in I get the following, which really looks weird:

Code: WSA .....Price: 6.03

INPUT:
............ EqPS .. Shares ... DPS ... EPS ... RR
Next Yr .. 1.43 .. 180.00 ... 0.223 .. 0.688 .. 14
Curr Yr ... 0.96 .. 179.70 ... 0.060 .. 0.080 .. 14
Prior Yr ... 0.77 .. 178.90

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 14.35 ... 58 .. 123.84 .. 32%
Curr Yr ... 0.55 .... 9 .... 14.38 ... 75%
 
Hi all
I’m basically still a Value-able noob so I hope I can ask for some guidance on calculating IVs. When simply plugging in numbers in the formula, you need 5 components:
1. NPAT
2. Equity
3. Last year’s equity
4. No. of shares
5. Dividends (to calculate the POR)

I was quite happily calculating future IVs using these figures in the formula but then came across a comment on RM’s blog site that hadn’t previously considered. That is, if the company’s ‘implied growth rate’ (see p111-112 in Value-able) is too high (and therefore probably unsustainable), you need to increase the POR to a more ‘realistic’ level. Now because POR is a calculated value, not one of the 5 input values, this involves changing the dividends (per share) figure to a value which gives a more ‘realistic’ POR.

So it seems like it is not simply enough to plug in the forecast DPS figures as these analyst forecast figures do not take into consideration, that the ‘implied growth rate’ may be too high. Or do they?

Have I read this correctly? Is this what we should be doing? I understand that what one calls ‘realistic’ as I’ve used above is an exercise in judgement so it really sounds like calculating future IVs is more of an art than science.

If anyone can help, that would be most appreciated as I’m sure we all know, even a slight change in figures can significantly affect IVs. Cheers.
 
titus said:
Hi all
I’m basically still a Value-able noob so I hope I can ask for some guidance on calculating IVs. When simply plugging in numbers in the formula, you need 5 components:
1. NPAT
2. Equity
3. Last year’s equity
4. No. of shares
5. Dividends (to calculate the POR)

I was quite happily calculating future IVs using these figures in the formula but then came across a comment on RM’s blog site that hadn’t previously considered. That is, if the company’s ‘implied growth rate’ (see p111-112 in Value-able) is too high (and therefore probably unsustainable), you need to increase the POR to a more ‘realistic’ level. Now because POR is a calculated value, not one of the 5 input values, this involves changing the dividends (per share) figure to a value which gives a more ‘realistic’ POR.

So it seems like it is not simply enough to plug in the forecast DPS figures as these analyst forecast figures do not take into consideration, that the ‘implied growth rate’ may be too high. Or do they?

Have I read this correctly? Is this what we should be doing? I understand that what one calls ‘realistic’ as I’ve used above is an exercise in judgement so it really sounds like calculating future IVs is more of an art than science.

If anyone can help, that would be most appreciated as I’m sure we all know, even a slight change in figures can significantly affect IVs. Cheers.
Click to expand...

It’s not an exact science but POR inputs when incorrect give a big variation in the IV.

Most financial pages give the information you need without too much recalculation. Equity use Book Value, they give POR (that when I check are the same as you calculate), shares outstanding, Earnings per share and dividend per share, future years can be forecast ahead using calculation but be realistic look at most shares growth in any aspect will be basically linear and follow past trends unless something major occurs. NPAT is listed there as well, no need to reinvent the wheel.

ORL is a good example forecasts would have shown continued increases in all aspects and then the company gives a report that doesn’t align with forecasts so bit of confidence is lost in the stock.

Low debt and high ROE enable the setting of a lower RR as there is less risk involved in owning that stock. Hope that helps!
 
Titus/RT,

As Bunter has commented, its probably not best to simply rely on the consensus forecasts of brokers etc. For instance in the case of WSA you have to grasp an understand of WHY the EPS is going to change to dramatically that it causes such an increase in IV or WHY the EPS was so bad last year and what caused this drop when it is usually x or y.

If you simply grab the figures off of a website, plug them in and hope your valuation problems are solved forever your going to be bitterly disapointed. For instance RogueTrader in the case of WSA you need to understand, even if its a little, about why the EPS and DPS would change so dramatically. Is this due to ompimistic forecasts of what they may achieve this year? Are they recovering from what was an awful year last year?

I haven't looked at WSA myself so I can't answer these for you. However on the face of it there does look to be something there that needs further explanation (i.e. they are ramping up which means a large EPS increase, or last year was an extremely bad year). Look at the POR of the previous 3-5 years if possible and make an assumption for the purposes of your forecast POR based on this. If they have not been paying dividends for this long, then you take the view of being more conservative with your IV so use a higher POR (i.e. the 74% of curent year instead of the 32% forecasted). Adjust your DPS accordingly and then at least your mind can be put at ease knowing you've calculated a forecast IV which is more on the conservative side with potential for upside.

I'm not saying this is 100% the correct way to go about it, but rather the path I would take to ensure that you don't have large discrepencies in IV such as you've calculated for WSA RT. I hope this makes sense as we've kinda covered this POR stuff for a few posts now.

My 2 main thoughts would be, think of the WHY behind large changes in EPS/DPS and ensure that any IV calcs are possibly adjusted for the more conservative outlook on a company rather the optimistic, PARTICULARLY companies with volatility and/or higher debt.

Hope that helps.
 
Hi

Thanks for your replies. Calculating future IVs certainly is the most challenging for me as you need to understand why these consensus forecasts are what they are. Next time I'll certainly question the analysts' forecast EPS and DPS. Cheers
 
An anylsts forecasts may well be in line with the companies growth pattern in earnings over a number of years, or it may be in line with other companies within the sectors earnings growth for a forecasted basis.

It's not necessarily that the analysts or consensus is wrong, they get paid to make those forecasts. However its about knowing yourself in your own mind that those forecasts or figures you use will accurately represent where to company is heading or potentially heading.

Satisfy yourself rather then trusting the bloodsucking analysts haha. happy valuing!

p.s. would be interested to see what IV's you come up with in regards to FGE and MML, two of my favourites.
 
Some good points kermit, though aren't analysts supposed to get paid to visit companies and talk to management, something us amateurs can't really do? Of course I know they don't always, so maybe you have to assess the quality of the analyst? No wonder so many people give up and turn to charts... :banghead:

MML looks interesting, what do you think of my results? (Etrade give 12.3c for the 2011 DPS, but I changed it to 7.4c to keep a similar POR) :

Code: MML .....Price: 7.24

INPUT:
............ EqPS .. Shares ... DPS ... EPS ... RR
Next Yr .. 1.58 .. 187.50 ... 0.074 .. 0.554 .. 14
Curr Yr ... 1.10 .. 187.50 ... 0.059 .. 0.442 .. 14
Prior Yr ... 0.71 .. 185.60

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 10.09 ... 41 .. 103.88 .. 13%
Curr Yr ... 9.60 .... 49 .. 82.88 .. 13%


And FGE had a 2011 DPS of 9c, I changed it to 8c (what's a good RR here?):

Code: FGE .....Price: 6.50

INPUT:
............ EqPS .. Shares ... DPS ... EPS ... RR
Next Yr .. 1.57 .. 78.80 ... 0.080 .. 0.456 .. 12
Curr Yr ... 1.19 .. 78.80 ... 0.070 .. 0.397 .. 12
Prior Yr ... 0.71 .. 68.30

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 8.73 ... 33 ... 35.93 .. 18%
Curr Yr ... 10.93 .. 44 .. 31.28 .. 18%
 
RogueTrader I probably should have explained myself a little better in terms of the POR and dividends. Remember that a higher POR or dividend will provide a lower IV and hence a more conservative estimation. POR's in general will be around the 50-75% range for most company's as they head towards maturity as a POR of 10-30% cannot be maintained as the company will simply accumulate cash with no other ways of growing the business at previous Returns on Equity.

So in terms of both the cases below it is probably best to retain the brokers/analysts dividend forecasts, sorry if this adds to the confusion. Just remember to review your inputs on a case by case basis and remember the effect these inputs have on your IV's.

In terms of MML your IV's are reasonably close to mine I believe (not at home currently so can't confirm) and show the effect their low cost high margin mining has on earnings. With expansions planned and costs unlikely to move higher coupled with what seems a rising gold price, gives a good indication that the SP has potential to head north. One thing to note is that this is almost like betting on gold to retain current price or head further north, so take that risk into consideration.

Your IV's for FGE are interesting and from memory a little different to mine. Particularly that you see IV declining after the current year. I think this is due to the large change you have in EQps. If I get the chance tonight i'll provide my IV's for both of these companies.
 
My IVs for FGE for 2010 and 2011 are pretty much close to RT's IV. I've used the Commsec 2011 forecast EPS and DPS as per below (for the 2011 IV):
EPS = 45.6c
DPS = 9c

which give the same NPAT and POR figures as RT.
 
Was the IV for CCV Cash Converters?

today EZCROP (32.8% CCV shareholder) offered 91 cent per share.


News article:

http://www.wabusinessnews.com.au/en-...=article_click

Cash Converters enters US alliance
22-March-11 by AAP


Pawn broker Cash Converters International will sell majority ownership in the company as part of a strategic relationship to be formed with US-based EZCORP.

The strategic alliance is to develop and introduce a suite of financial services products under the Cash Converters brand globally, Perth-based Cash Converters said in a statement.

As part of the alliance, EZCORP will buy 30 per cent of Cash Converters shares it doesn't already own, taking its stake in the Australian company to a controlling 53 per cent.

EZCORP is offering 91 cents cash per share, which is a 9.6 per cent premium to Cash Converters' last closing price of 83 cents per share.

EZCORP's offer is worth a total $70 million and will be completed through a scheme of arrangement..

Cash Converters said it had formed an independent board committee, excluding the EZCORP nominees of the board, to consider the offer.

The independent committee unanimously supports the proposed offer, in the absence of a superior proposal.

Cash Converters chief executive Peter Cumins said EZCORP had already been a good partner and the alliance would enhance the relationship.

"By giving us access to EZCORP's financial resources, management expertise and systems, this strategic alliance both expands and accellerates our strategic growth plan, opening up many new opportunities for Cash Converters," he said.

EZCORP CEO Paul Rothamel said Cash Converters had a great business model and brand.

"Having it recognised in 21 countries accellerates our long-term strategic goal of being a global provider of integrated financial solutions to our customer demographic," he said.
 
kermit345 said:
RogueTrader I probably should have explained myself a little better in terms of the POR and dividends. Remember that a higher POR or dividend will provide a lower IV and hence a more conservative estimation. POR's in general will be around the 50-75% range for most company's as they head towards maturity as a POR of 10-30% cannot be maintained as the company will simply accumulate cash with no other ways of growing the business at previous Returns on Equity.

So in terms of both the cases below it is probably best to retain the brokers/analysts dividend forecasts, sorry if this adds to the confusion. Just remember to review your inputs on a case by case basis and remember the effect these inputs have on your IV's.

In terms of MML your IV's are reasonably close to mine I believe (not at home currently so can't confirm) and show the effect their low cost high margin mining has on earnings. With expansions planned and costs unlikely to move higher coupled with what seems a rising gold price, gives a good indication that the SP has potential to head north. One thing to note is that this is almost like betting on gold to retain current price or head further north, so take that risk into consideration.

Your IV's for FGE are interesting and from memory a little different to mine. Particularly that you see IV declining after the current year. I think this is due to the large change you have in EQps. If I get the chance tonight i'll provide my IV's for both of these companies.
Click to expand...

Hi kermit, yes I'm starting to get more of a feel for which numbers can be tweaked or investigated further, up until lately I was mainly a technical trader. How many years into the future do you forecast on your spreadsheet? I'm planning to add at least one extra year once I'm sure mine is giving reasonably correct results.
 
kermit345 said:
RogueTrader I probably should have explained myself a little better in terms of the POR and dividends. Remember that a higher POR or dividend will provide a lower IV and hence a more conservative estimation. POR's in general will be around the 50-75% range for most company's as they head towards maturity as a POR of 10-30% cannot be maintained as the company will simply accumulate cash with no other ways of growing the business at previous Returns on Equity.

So in terms of both the cases below it is probably best to retain the brokers/analysts dividend forecasts, sorry if this adds to the confusion. Just remember to review your inputs on a case by case basis and remember the effect these inputs have on your IV's.

In terms of MML your IV's are reasonably close to mine I believe (not at home currently so can't confirm) and show the effect their low cost high margin mining has on earnings. With expansions planned and costs unlikely to move higher coupled with what seems a rising gold price, gives a good indication that the SP has potential to head north. One thing to note is that this is almost like betting on gold to retain current price or head further north, so take that risk into consideration.

Your IV's for FGE are interesting and from memory a little different to mine. Particularly that you see IV declining after the current year. I think this is due to the large change you have in EQps. If I get the chance tonight i'll provide my IV's for both of these companies.
Click to expand...

Not sure how RT derived his future IV, but that looks a little off for me. Did you add the change in EQPS over the time period calculate given the lower ROE? Looks like you used the same EQPS from a quick glance.
 
Only just remembered to check my spreadsheet before bed to post figures here. At the moment my spreadsheet only looks 1 year forward. 2 years could be implemented however i think it provides more noise then guidance as a lot can change within 3 months rather then 2 years.

My FGE valuations:

Current Year - $7.40
Forecast - $9.80

My MML valuations:

Current Year - $9.19
Forecast - $13.02

My MML ones probably need some adjustments. I rate MML very highly and think their earnings will continue to expand both via current mine expansion and exploration. I think the EPS and DPS figures I use are same as you RT as we both get them from etrade. However I used the DPS of 12c from etrade for MML.
 
RogueTrader273 said:
Some good points kermit, though aren't analysts supposed to get paid to visit companies and talk to management, something us amateurs can't really do? Of course I know they don't always, so maybe you have to assess the quality of the analyst? No wonder so many people give up and turn to charts... :banghead:

MML looks interesting, what do you think of my results? (Etrade give 12.3c for the 2011 DPS, but I changed it to 7.4c to keep a similar POR) :

Code: MML .....Price: 7.24

INPUT:




............ EqPS .. Shares ... DPS ... EPS ... RR
Next Yr .. 1.58 .. 187.50 ... 0.074 .. 0.554 .. 14
Curr Yr ... 1.10 .. 187.50 ... 0.059 .. 0.442 .. 14
Prior Yr ... 0.71 .. 185.60

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 10.09 ... 41 .. 103.88 .. 13%
Curr Yr ... 9.60 .... 49 .. 82.88 .. 13%


And FGE had a 2011 DPS of 9c, I changed it to 8c (what's a good RR here?):

Code: FGE .....Price: 6.50

INPUT:
............ EqPS .. Shares ... DPS ... EPS ... RR
Next Yr .. 1.57 .. 78.80 ... 0.080 .. 0.456 .. 12
Curr Yr ... 1.19 .. 78.80 ... 0.070 .. 0.397 .. 12
Prior Yr ... 0.71 .. 68.30

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 8.73 ... 33 ... 35.93 .. 18%
Curr Yr ... 10.93 .. 44 .. 31.28 .. 18%
Click to expand...

I think your figures are a little optimistic for FGE.

I am not sure how you calcualted your ROE but my ROE is around 30 for this year.

What figure are you using for average equity?

With a RR of 11 I get 7.21 for FGE this year.
 

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