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

zac · 27 March 2011

Yeah ive read the book.
Thanks for that link and as I thought RR is a return youd be content/happy with.
For now as im new to it im happy with 10% as thats more than any bank.
Altho because IV isnt static it obviously affects the RR.
so my rule of thumb as such for now is 10% RR with a safety margin of 25%. Looking at charts etc, it seems to be relatively on par with historic prices and performance.

Also the spreadsheet I use to workout IV, i go back as far as 2002 if the data allows it, then I can see how IV has changed through the years.
I hate just looking at a 3 year snapshot as such, but of course with companies such as FGE and MCE its all you get due to their recent listing on the ASX.

isplicer · 27 March 2011

Hi all,

Using the spreadsheet from roguetrader, I get the following for FFF:

Code: FFF
Price: 0.06

INPUT:
............ EqPS .. Shares ... DPS ... EPS ... RR
2012 0.06 .. 761.08 ... 0.000 .. 0.011 .. 10
2011 0.05 .. 761.08 ... 0.000 .. 0.011 .. 10
2010 0.04 .. 761.08 ... 0.000 .. 0.008 .. 10
2009 0.01 .. 761.08

OUTPUT:
............. IV: .... ROE .. NPAT .. POR
2012 0.27 ... 21 .. 8.37 .. 0%
2011 0.27 ... 26 .. 8.37 .. 0%
2010 0.19 .... 25 .. 4.80 .. 0%

The IV of 27c seems really, really extravagant, unless of course I'm doing something dead wrong. Data from report:

Year end 30 June 2010 2011e 2012e 2013e
EBITDA (A$m) 9.1 16.3 18.1 20.4
NPAT (normalised) (A$m) 4.8 8.2 8.5 10.2
EPS (normalised) (cps) 0.8 1.1 1.1 1.3
EPS growth (%) 23% 40% 1% 20%
PER (x) 7.5 5.3 5.3 4.4
P/Book (x) 1.6 1.2 1.0 0.8
EV/EBITDA (x) 9.1 5.1 4.6 4.1
Dividend ( ¢ps) 0.0 0.0 0.0 0.0
Yield (%) 0% 0% 0% 0%
ROE (%) 18% 23% 19% 19%

Also, with the insane IV's of BHP doubling from 50 to 100+, does that mean we're likely to see a skyrocket this year? Sorry if my question sounds stupid, the figures are quite stunning and I'm just trying to straighten it all out.

Kindest Regards.

RogueTrader273 · 27 March 2011

Big oops, found some errors in my spreadsheet affecting the 2012 results, new improved version here: http://www.sendspace.com/file/9vd5bd

isplicer re FFF R.M. would probably use an RR of 14 (though it wouldn't come up in his scans because of that huge debt/equity ratio.)

isplicer · 27 March 2011

Interesting... according to my analyst's report RE FFF, the net debt in 2011 is forecast to be: 37.8M, with the shareholders equity being about 38M, equating to a debt/equity ratio of approximately 1:1 - isn't that acceptable, or am I calculating it completely and utterly wrong?

To add to my confusion, on my broker's page it says: Debt/Equity Ratio 153.80. Could someone kindly clear this up for me? That figure seems a tad alarming.

EDIT: Oh wait, the 153.8 seems to be a percentage figure, haha. Still, isn't that sort of an acceptable figure? And my calculations still say 1:1 or below, no idea where my broker got the 1.5:1 ratio

EDIT: thanks a lot for the updated spreadsheet roguetrader, your work is much appreciated. Also, could you please explain to me how you came to the conclusion that FFF should use an RR of 14%?

kermit345 · 28 March 2011

isplicer, certainly not acceptable, not in the value investing terms of RM.

I won't even look at companies with greater then 30% D/E. Not sure about Roger's parameters but i'm almost certain he would value a company with D/E of 100% at $0.

RogueTrader273 · 28 March 2011

Yes the word 'alarming' seems about right; which RR to use is moot as the debt level is off the charts.

isplicer · 28 March 2011

Roguetrader, could you please have a go at throwing down a valuation of SXY? I've had a go but am having trouble obtaining EPS forecasts. Please do let me know how you fare.

robusta · 28 March 2011

isplicer said:
Roguetrader, could you please have a go at throwing down a valuation of SXY? I've had a go but am having trouble obtaining EPS forecasts. Please do let me know how you fare.

To obtain a EPS forecast the analyst will have to work out; resources reserves, cost of extraction, value of takeover of Stuart, future prices of resources....

The above IMO would contain too many variables and guestimates to value SXY without speculating.

RogueTrader273 · 28 March 2011

Yes to value spec explorers you'd want one of those crystal ball thingy's; RM wouldn't even look at it I'm afraid. Though I don't ignore spec's myself, I bought into AVQ a few weeks ago at 3.1c when they were awarded the rights to a PROVEN resource, and again at 4.1c when they pulled back from their highs. I also like MGO at the moment.

isplicer · 29 March 2011

RogueTrader273 said:
Yes to value spec explorers you'd want one of those crystal ball thingy's; RM wouldn't even look at it I'm afraid. T

I suspect the same applies to AUT?

Bunter221 · 31 March 2011

kermit345 said:
isplicer, certainly not acceptable, not in the value investing terms of RM.

I won't even look at companies with greater then 30% D/E. Not sure about Roger's parameters but i'm almost certain he would value a company with D/E of 100% at $0.

I am in Kermits camp avoid high debt - 30% is a good place to separate the goodies from the baddies.
FFF has 55% so you don't even bother to calculate IV there are lots of stocks with low debt!

Bunter221 · 31 March 2011

isplicer said:
Roguetrader, could you please have a go at throwing down a valuation of SXY? I've had a go but am having trouble obtaining EPS forecasts. Please do let me know how you fare.

Coming In -- SXY has an IV of 2 cents - just one look at the growth and ROE its hardly worth the effort. Debt less than 30% ROE better than 12% at least or look elsewhere!

Bunter221 · 31 March 2011

isplicer said:
I suspect the same applies to AUT?

AUT has no cash flow and no earnings haemorraging badly and a negative ROE. There are much better opportunities!

notabclearning · 31 March 2011

Hey guys I have just started a blog dedicated to value investing

http://valueinvest101.blogspot.com/

I will be discussing various stocks and market situations on it and I invite you to share your views about any company.

sultanmudo · 2 April 2011

RogueTrader273 said:
Big oops, found some errors in my spreadsheet affecting the 2012 results, new improved version here: http://www.sendspace.com/file/9vd5bd

isplicer re FFF R.M. would probably use an RR of 14 (though it wouldn't come up in his scans because of that huge debt/equity ratio.)

Thanks RogueTrader.
Why are most columns in your spreadsheet set to 13 decimal places. I presume it's because it makes the values more precise.

notabclearning · 2 April 2011

Hey Guys,

Just posted a new blog post. Its about the current IPO market and im sharing a company I think is at a large discount to IV.

http://valueinvest101.blogspot.com/2011/04/ipo-delight.html

I encourage all to subscribe to my blog and will love to hear comments and further discussions.

tothemax6 · 3 April 2011

Bunter221 said:
AUT has no cash flow and no earnings haemorraging badly and a negative ROE. There are much better opportunities!

Its a different kind of company to that which Montgomery invests in. He is looking for companies with high current ROE with high prospects of expansion, and at a good price based on the ROE. This cannot include companies which by their very nature, take a long period of initial development (ROE below 0%), but which if successful completed, will have a massive ROE upon completion. That doesn't mean they can't be good buys, so long as the project is completed successfully and the stock price is valued against the expected earnings.

RogueTrader273 · 3 April 2011

sultanmudo said:
Thanks RogueTrader.
Why are most columns in your spreadsheet set to 13 decimal places. I presume it's because it makes the values more precise.

I thought I'd formatted most columns to a max of 3 decimal places. Are you referring to the Formula Bar?

RogueTrader273 · 3 April 2011

New version of IV Calculator using cents instead of dollars for EPS and DPS to speed data entry.
Also used some AND and OR statements to check for missing or negative values:

http://www.sendspace.com/file/8fozkz

zac · 3 April 2011

Im surprised no one has incorporated an Excel sheet that can tabulate historic data also.
Ive just found as part of the analysis and for my requirements that the company IV should be on the rise, (atleast 70-80%) of the time.

For example yesterday I worked out VRL (Village) and altho its under its IV and appears to have low amounts of debt, im not happy with it, the way the IV has jumped around over the years.

2003 $2.72
2004 $3.17
2005 $0.85
2006 $2.83
2007 $3.47
2008 $4.64
2009 $5.31
2010 $0.69
2011 $10.58
2012 $11.44

Altho now that I look at it like this, there are only 2 bad years there 2005 & 2010. The rest are upward trends.
Still id need to further analyse the company. Now im intrigued.

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

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