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

[moreld]

NPAT= 0.294 x 69.964= $20.57 mill BUT the annual report's NPAT number is $18.15 mill.

Can anyone school me on why there is a diff?

The difference in this case is weighted average shares vs current shares at 2010 FYE (financial year end). The 0.294 is the diluted eps. That is calculated using a weighted average of shares over the financial period (year).

If you look at the annual report and the basic and diluted eps numbers they have a note number next to them. In this case number 29. Go to note 29 (pg68) and it shows the weighted shares 58.580M.

As to whether it is good value. No single number or calculated IV can tell you that. If investing was that easy then we'd all be rich...no wait we wouldn't cos everything would be priced correctly and there would be no bargains.

Is this a cyclical industry? How likely are they to hit earnings forecast? What are the growth drivers ... and so on.

Good luck, from my two minute look it appears worth investigating further.

PS Can anyone point me to Roger's formula or type it out, I thought I saw it on his blog, but can't find it now.

 

[MrBoJangles]

Hi gdbaker, and thank you,
Re the formula for Table 11.2, I can assure you that it sure ain't simple - it is *very* complex, and as I'd like to further develop the web app etc. I would prefer not share it for the present.

Kind regards,
Mr Bo

Mr Bo,

Love the demo site so far. Looking nice and easy. Takes away some of the mess that spreadsheets seem to create.

I would be willing to join when up and running.
I notice you have said your intrinsic values are more accurate than using rogers tables. Ive been trying to figure out the formula for table 11.2, 11.1 is quite straight forward, but trying to figure out 11.2 has got me stumped. I was trying to use the formula and set up a spreadsheet, pretty much like your website.

Would be appreciative of any help into the formula if you can spare it.
Thanks
gdbaker

 

[ubtheboss]

The difference in this case is weighted average shares vs current shares at 2010 FYE (financial year end). The 0.294 is the diluted eps. That is calculated using a weighted average of shares over the financial period (year).

If you look at the annual report and the basic and diluted eps numbers they have a note number next to them. In this case number 29. Go to note 29 (pg68) and it shows the weighted shares 58.580M.

As to whether it is good value. No single number or calculated IV can tell you that. If investing was that easy then we'd all be rich...no wait we wouldn't cos everything would be priced correctly and there would be no bargains.

Is this a cyclical industry? How likely are they to hit earnings forecast? What are the growth drivers ... and so on.

Good luck, from my two minute look it appears worth investigating further.

PS Can anyone point me to Roger's formula or type it out, I thought I saw it on his blog, but can't find it now.

Thanks moreld!

I had a sneaking suspicion it had to do with the # of shares because so many were issued during the year.

Thanks also for your list of 'other things to consider'. I'm trying to make a check list of those sorts of things to go along with my IV calculations. There's a definite learning curve.

In terms of checking out a company's competition to judge whether it has a competitive advantage- can you suggest a good source of information/ website? I can always try googling that sort of thing but the trick is streamlining your process in doing these company evaluations or you can spend limitless hours on each one

 

[hrundi999]

Hi All



I notice that some people have been asking for the formula for table 11.2. This bugged me also, but I think I've worked it out. I believe it's:



MULTIPLIER = (ROE / RR) power(1.8)



For instance if we require a RR of 10 and the companies ROE is 30:

ROE / RR = 30 / 10 = 3

Now calculate 3 to the power of 1.8 and we get 7.225, just as in table 11.2.

Regards.

 

[gt88]

Hi All



I notice that some people have been asking for the formula for table 11.2. This bugged me also, but I think I've worked it out. I believe it's:



MULTIPLIER = (ROE / RR) power(1.8)



For instance if we require a RR of 10 and the companies ROE is 30:

ROE / RR = 30 / 10 = 3

Now calculate 3 to the power of 1.8 and we get 7.225, just as in table 11.2.

Regards.

Good work mate. I was also trying to figure this out of curiosity but after an hour gave up.

Now it begs the question. Why would Roger choose 1.8? Has anyone read Richard Simmons book? Maybe it has something to do with the valuation method put forward in that book.

 

[MrBoJangles]

Hi,
Have you tested your formula for the full range of the x & y axis?

Regards,
Mr Bo

I notice that some people have been asking for the formula for table 11.2. This bugged me also, but I think I've worked it out. I believe it's:

MULTIPLIER = (ROE / RR) power(1.8)

For instance if we require a RR of 10 and the companies ROE is 30:

ROE / RR = 30 / 10 = 3

Now calculate 3 to the power of 1.8 and we get 7.225, just as in table 11.2.

Regards.

 

[moreld]

In terms of checking out a company's competition to judge whether it has a competitive advantage- can you suggest a good source of information/ website? I can always try googling that sort of thing but the trick is streamlining your process in doing these company evaluations or you can spend limitless hours on each one

You're welcome ubtheboss.
Formulas/metrics are a good way of filtering for stocks to investigate further, but then it is time to get down and dirty.

A few thoughts:
Stick to your knitting/wheelhouse/what you know. That way you use your expertise in what ever area. If you're an engineer then MCE would be a good company for you to check in and you'd competitors. If you're in IT, then concentrate on tech companies and so on.

If you find a good cheap company, then there may be other ones in that industry, so start looking at their competitors. Build up a picture of the industry and competitors.

Over the years you'll get to know / be vaguely familiar with a lot of companies and will develop a checklist for different industries.

Yes this does take a lot of time, which is probably why technical analysis is so popular!

Sorry I can't point you to an easy solution.

 

[hrundi999]

Hi

gt88: As you know, at the bottom of table 11.2 Roger states that the numbers he uses is based on Simmon's formula. I bought a cheap copy from Amazon.com. Using Simmon's book is how I worked out what I think Roger is doing. Simmons expresses it differently but the multiplier he would use is:
(ROE/RR) power 2
I presume that to make it more conservative Roger uses 'power of 1.8' instead of 'power of 2'.

Mr Bo: I have tested it against many ranges of x and y axis. It all looked good. I also created a spread sheet simmilar to the format of table 11.2 with the formula. It looks good. Corrections are welcomed of course.

Regards.

 

[MrBoJangles]

That sounds logical. Roger did say he had 'detuned' it a bit for safety.

Regards,
Mr Bo

Hi

gt88: As you know, at the bottom of table 11.2 Roger states that the numbers he uses is based on Simmon's formula. I bought a cheap copy from Amazon.com. Using Simmon's book is how I worked out what I think Roger is doing. Simmons expresses it differently but the multiplier he would use is:
(ROE/RR) power 2
I presume that to make it more conservative Roger uses 'power of 1.8' instead of 'power of 2'.

Mr Bo: I have tested it against many ranges of x and y axis. It all looked good. I also created a spread sheet simmilar to the format of table 11.2 with the formula. It looks good. Corrections are welcomed of course.

Regards.

 

[ubtheboss]

PS Can anyone point me to Roger's formula or type it out, I thought I saw it on his blog, but can't find it now.

Thanks again moreld!

Which of Roger's forumla are you after? The whole IV method is a multi-step process.

 

[ubtheboss]

Mate looks like you have found a good one, I have also done the calculations on this, for 2011 IV=$7.90 and 2012 IV=$10.72 at RR=12%. My calculations were done from comsec though.

Hey 88,

Like others I'm trying to create a spreadsheet to run these numbers. In calculating ROE I was using BOY equity instead of an avg of EOY and BOY. When I fixed that it brought my 2010 IV down to $6.79 which seems much more reasonable

Having said that, I noticed in Roger's Valueline portfolio (that he includes with each article in the Eureka Report) that his 2011 IV as of Aug. 31st this year is $6.02. A more conservative forecast.

I still like the company.

Having said THAT, I'm not in it. I decided to take up the MACA IPO instead.

Plus I'm in Forge (FGE) already. Can't go overweight in mining services.

 

[Gixxer]

Thanks for that SC. I've made 'specific topic' posts in that forum but it is really more for general comments on Roger's book.

In this thread I'm encouraging people who are students of his method to post if they are looking for help or able to help one another. Being the 'long term investment strategy' section of ASF it seems appropriate.

To start things off....


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

Anyone else?

Hello everyone. I'm new to the forum and am pleased to have found it. Great idea and way to exchange information so thanks for setting it up and for the opportunity to contribute/participate.

I think Roger has an IV around $6.40 for FGE and some reservations regarding the sustainability of their current ROE.

Utilising an RR of 14% and an ROE of 41%, I have a 2010 IV of $7.33 for FGE.

Looking ahead, I've got a 2011 IV of $7.27 based on a 25% YoY increase in NPAT, an ROE of 35% and an RR of 14%.

Hope this info is of some assistance.

 

[ubtheboss]

Hello everyone. I'm new to the forum and am pleased to have found it. Great idea and way to exchange information so thanks for setting it up and for the opportunity to contribute/participate.

I think Roger has an IV around $6.40 for FGE and some reservations regarding the sustainability of their current ROE.

Utilising an RR of 14% and an ROE of 41%, I have a 2010 IV of $7.33 for FGE.

Looking ahead, I've got a 2011 IV of $7.27 based on a 25% YoY increase in NPAT, an ROE of 35% and an RR of 14%.

Hope this info is of some assistance.

Hey Gixxer and welcome!

I found on Roger's blog a copy of an article he did for Money magazine in which he gives an IV for FGE and two others.

http://blog.rogermontgomery.com/wp-...e.able-Stocks-Money-Magazine-October-2010.pdf

His IV for FGE is $4.45 as of Oct. He really is doing some calculations above and beyond what he gives us in his book in order to get that kind of number. It bugs me a bit.

Adjusting the original figures I listed in my first post on FGE:

for a 2010 IV

changing RR to 14%
changing EPS to 0.417 (basic)
changing # of shares to 70.699 (weighted average)

I still get an IV of $8.78

Mark Moreland (...from Team Invest?) values it somewhere in the mid to upper $7 range.

Gixxer- would you like to share the variables you inputed into the IV formula to get your value in order to compare and contrast for everyone?

Seems if you put 6 people in a room you will still get 6 different valuations but it's worth comparing notes. Getting an IV is just a starting point anyway.

Cheers!

 

[Gixxer]

Hey Gixxer and welcome!

I found on Roger's blog a copy of an article he did for Money magazine in which he gives an IV for FGE and two others.

http://blog.rogermontgomery.com/wp-...e.able-Stocks-Money-Magazine-October-2010.pdf

His IV for FGE is $4.45 as of Oct. He really is doing some calculations above and beyond what he gives us in his book in order to get that kind of number. It bugs me a bit.

Adjusting the original figures I listed in my first post on FGE:

for a 2010 IV

changing RR to 14%
changing EPS to 0.417 (basic)
changing # of shares to 70.699 (weighted average)

I still get an IV of $8.78

Mark Moreland (...from Team Invest?) values it somewhere in the mid to upper $7 range.

Gixxer- would you like to share the variables you inputed into the IV formula to get your value in order to compare and contrast for everyone?

Seems if you put 6 people in a room you will still get 6 different valuations but it's worth comparing notes. Getting an IV is just a starting point anyway.

Cheers!

Sure. Here are the variables I've used to calculate the 2010 IV.

Ending Equity = $93.376m
No of Shares = 78.759m
Equity per Share = $1.19
NPAT = $29.450m
Beginining Equity = $71.079m (used average 2009/10 total equity due to substantial increase in 2010 total equity)
ROE = 41.43%
Dividend = $3.419m
POR = 11.61%
RR = 14%
IV = $7.33

Cheers

 

[ubtheboss]

The difference in this case is weighted average shares vs current shares at 2010 FYE (financial year end). The 0.294 is the diluted eps. That is calculated using a weighted average of shares over the financial period (year).

If you look at the annual report and the basic and diluted eps numbers they have a note number next to them. In this case number 29. Go to note 29 (pg68) and it shows the weighted shares 58.580M.

I'm wondering about this while looking at the 2010 annual report:

NPAT = basic EPS x weighted avg. # shares

EqPS = end equity / # of shares on issue

Should the # of shares in the EqPS calculation also be the weighted avg or should it be the total number of shares on issue at the end of the year?

 

[kermit345]

Hey guys,

I haven't checked these forums recently but was lucky enough to notice the personal message from ubtheboss to come check out this thread. Very interesting stuff you guys are looking at. While I haven't read Roger's book nor have I 'adopted' his methodology of valuation, the 'idea' of value investing intrigues me and I think it has great merit.

As I mentioned within a thread I created some time ago, i've over time developed my own screening method, and valuation technique for stock valuation. Unfortunately in recent times i've been extremely busy with other commitments and haven't been able to put as much time into my valuation technique as i'd like.

I've been developing a website that will contain information in relation to value investing, and my goal is to eventually offer some form of a cheap subscription service that will cover value investing (With some stock tips and a value portfolio much like Roger's for people to follow).

Anyway enough about that. I'm at work at the moment so can't actually divulge much detail as all my spreadsheets etc are at home. What I can do is give some form of a background to my process.

Firstly I use a simple screen to identify 'potential' value investments, using ROE and D/E to identify these potential stocks (A good example is I run the screen every sunday, this way as any annual reports/guidance is updated weekly my screen picks up all new opportunities on a weekly basis, hopefully to get in before the trend kicks in - as mentioned, a good example of this is my screen picking up ACR after its maiden profit annual report on 24 Aug, as I was busy still developing website, could have bought in at approx $2.00, stock price is now approx $3.00)

Secondly, I run the stocks my screen picks up in greater detail through a spreadsheet i've developed which provide an intrinsic value and 12 month valuation based on my inputs. Its taken me quite a while to refine and develop these calculations but I think i've got it pretty close to where I want it now. I also apply percentage variations to the intrinsic values based on my perceptions of industry trends/cycles and management competency (I guess this adds some bias to the intrinsic value - but its my view).

Lastly I've put together a scoring system which compares all stocks i've valued so far and attributes points depending on a number of inputs (i.e. ROE, D/E, Buffer to IV and a couple of others). This just serves as an added guide and simply adds a point system valuation and comparison tool to other stocks i've identified.

Thats about all I can think of from the top of my head at the moment, look forward to everyones comments and will definately be checking back to see how everyone is doing with their techniques.

Food for thought, some of the stocks my screen has initially picked up as value investments (and are pretty typical value investments in the market as well) - PTM, ACR, WTF, NVT, CRZ.

There's some to start off with .

 

[Cakeman]

Hello all,

Since you are all working out the intrinsic value of stocks, and coming up with different values, either through different methods or different inputs, I have been trying to put together an excel spreadsheet that will do this all for me rather than doing it by hand. The problem is I am not 100% sure that it is correct. I just changed the ROE so it was calculated from the average of the BOY Equity and the EOY Equity so thanks for that point ubtheboss.

If any one is interest by all means take a look, run your numbers though to see what you get, any suggestions will also be appreciated.

Thanks a lot for this Keegan, just a quick question... i have run the numbers through your spreadsheet for the example UBTHEBOSS has used for MCE. With those input numbers and those from commsec the EOY equity im getting from your file is 76.86 however he use 59.893 and on Commsec is is 59...

I really like the spreadsheet and am wondering have i made a mistake somewhere aling the line or is it Cell Error?

Cheers

Andrew

 

[awg]

Hi,

I did attend a free talk with Rog as the guest by RBS Morgans, as it was 5 minutes from my place.

He is a student of Graham and Buffet, nearly all the over 200 attendees were 65+ ( he made cracks about investing in retirement and funeral homes)

ROE and low Debt were his themes, as well as purchasing at a discount to Intrinsic value.

I asked a question how he felt about coys with high ROE but debt and high ROI

He replied he avoids, as their profitability can be battered in volatile times

I was in a bit of a rush to go elswhere so I didnt line up for the last of the signed hard copy of his book, but I probably will order the 2nd edition, maybe in softcover it will be cheaper and therefore represent better intinsic value:

I did have a quick flick thru it on the way in, and It seemed good, have read something previously by McNiven ( I think) which is called StockVal

Montgomerys methods seem similar, but perhaps more accesible to the layman

 

[hrundi999]

I'm wondering about this while looking at the 2010 annual report:

NPAT = basic EPS x weighted avg. # shares

EqPS = end equity / # of shares on issue

Should the # of shares in the EqPS calculation also be the weighted avg or should it be the total number of shares on issue at the end of the year?

Hi Ubtheboss

When calculating the EqPS, use the total number of shares on issue at the end of the year. Also, going by Roger's examples, EqPS uses either the beginning equity or the average of beginning equity and end equity. In your example above you had 'end equity' in your EqPS equation.

Regards.

 

[ubtheboss]

Hi Ubtheboss

When calculating the EqPS, use the total number of shares on issue at the end of the year. Also, going by Roger's examples, EqPS uses either the beginning equity or the average of beginning equity and end equity. In your example above you had 'end equity' in your EqPS equation.

Regards.

Thanks for that 999.

I posted the same question on Roger's blog and he answered that it didn't matter if you used the EOFY # of shares or the weighted avg # of shares as long as you were consistant with which one you used.

This is a more conservative approach but this is what I am doing now to calculate 'equity per share' (EqPS):

for my base year 2010 (i.e. the FY I have actual numbers for)-

EqPS = average of BOFY and EOFY equity / weighted average # of shares

then going forward my 'forecast EqPS' calculation is-

2011 EqPS= 2010 EqPS + 2011 EPS (f)- 2011 DPS (f) + 2011 new share capital (per share)* - 2011 buy backs (per share)*

* new share capital and buy backs are fairly uncommon for a rock steady company but directors do exercise options so I keep a variable input in my spreadsheet for these and update it as App 3Bs are announced. If the company has a track record of option exercising you can always estimate that going forward and put it in your equation from the start.

Thoughts on that anyone?