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Buffet also doesn't get on his blog and start talking about how is buying a stock in a certain industry and all will be revealed in due course.
Students of Roger Montgomery's (Buffett's) intrinsic valuation method
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Buffet also doesn't get on his blog and start talking about how is buying a stock in a certain industry and all will be revealed in due course.
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Re: Roger Montgomery's Crazy intrinsic valuation method
Hi Craft,
My point is that it all depends on where earnings are headed. If you get that right and can invest with a good margin of safety, then you are on a winner.
I think it depends on the application. With DCF you are assuming that future cash flows will be XYZ. With the application of a formula based on current earnings, you have not taken in to consideration what lies in the future and I agree with you here. I've heard many comments about not using analyst forecast earnings and that current earnings are all the matter. IMO current earnings are meaningless, it is future earnings that count. Therefore you either use consensus earnings as a guide or you think that they are wrong and use your own.
The problem is with the application of the formula, not the formula itself. I've made certain alterations etc to suit my style, but my view is that it is a static value based on earnings power. Therefore you need to understand what the future earnings power will be. This is the same as DCF in that it all depends on the future.
I can tell you that with the way I use it as a representation of current versus future earnings power, it makes a lot of sense. I have not found any situations so far where I cannot find a suitable application. I first looked at DCF 10 years ago, but it never made a lot of sense to me because I don't believe anyone can map out the future sufficiently. I think viewing it as current earnings power and future earnings power make a lot more sense as it is simple and requires fewer assumptions which are inevitably wrong.
In my view the priorities are:
1. Macro environment and implications on the company, trends etc
2. Earnings and outlook
3. Using a valuation yardstick to determine value growth/decline and margin of safety
Hi Craft,
My point is that it all depends on where earnings are headed. If you get that right and can invest with a good margin of safety, then you are on a winner.
I think it depends on the application. With DCF you are assuming that future cash flows will be XYZ. With the application of a formula based on current earnings, you have not taken in to consideration what lies in the future and I agree with you here. I've heard many comments about not using analyst forecast earnings and that current earnings are all the matter. IMO current earnings are meaningless, it is future earnings that count. Therefore you either use consensus earnings as a guide or you think that they are wrong and use your own.
The problem is with the application of the formula, not the formula itself. I've made certain alterations etc to suit my style, but my view is that it is a static value based on earnings power. Therefore you need to understand what the future earnings power will be. This is the same as DCF in that it all depends on the future.
I can tell you that with the way I use it as a representation of current versus future earnings power, it makes a lot of sense. I have not found any situations so far where I cannot find a suitable application. I first looked at DCF 10 years ago, but it never made a lot of sense to me because I don't believe anyone can map out the future sufficiently. I think viewing it as current earnings power and future earnings power make a lot more sense as it is simple and requires fewer assumptions which are inevitably wrong.
In my view the priorities are:
1. Macro environment and implications on the company, trends etc
2. Earnings and outlook
3. Using a valuation yardstick to determine value growth/decline and margin of safety
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Re: Roger Montgomery's Crazy intrinsic valuation method
His valuation service would be a waste of time. The whole A1 system is a joke. MCE is still an interesting situation. I had a good ride up on MCE but was able to sell close to the top. Regardless of what valuation approach you use, if it is based on earnings and earnings stop, then you have a problem. Again, this comes down to more of an economic risk situation and that is why I sold out.
What do you mean about NVT?
This is what i get out of it. I haven't had an in-depth look at it doesn't suit my investment criteria.
Issues that I see with NVT:
- priced to perfection with a low margin for error
- significant debt finance
- reducing cash flows from operations (rapid decline)
- bad economic environment - high $A - declining demand for their services
My conclusion would be that it is currently a high risk business and is probably suffering tremendously due to the strong exchange rate. Will probably have to raise capital to stay afloat unless the $A takes a big hit soon.
His valuation service would be a waste of time. The whole A1 system is a joke. MCE is still an interesting situation. I had a good ride up on MCE but was able to sell close to the top. Regardless of what valuation approach you use, if it is based on earnings and earnings stop, then you have a problem. Again, this comes down to more of an economic risk situation and that is why I sold out.
What do you mean about NVT?
This is what i get out of it. I haven't had an in-depth look at it doesn't suit my investment criteria.
Issues that I see with NVT:
- priced to perfection with a low margin for error
- significant debt finance
- reducing cash flows from operations (rapid decline)
- bad economic environment - high $A - declining demand for their services
My conclusion would be that it is currently a high risk business and is probably suffering tremendously due to the strong exchange rate. Will probably have to raise capital to stay afloat unless the $A takes a big hit soon.
A bit off topic but looks like one of our favourties keeps knocking on the breakout door Macros. Would be interested on where MML can go if it makes a sustained break through the $8.40 mark.
By the way, I think were all essentially saying the same thing just in different ways. We all understand future earnings are estimates which are meaningless unless based on reasonable and appropriate assumptions. It sounds like we all understand earnings is what eventually drives share price action, whether it be pro-active or re-active depending on the situation.
Valuation models/equations are essentially a way of manipulating the earnings past, present and forecasted into what some deem a meaningful comparison the current and historical share prices.
I also think we all agree that Roger's method/equation has some flaws which we don't agree with.
@ Macros
Agree with you regarding PTM and the economic landscape presently. I work in the financial services industry and have quite a lot to do with PTM's managed funds, particularly their flagship Platinum International Fund. I agree that their price could go lower, but this is on the back of a poor 12-18 months particularly by their standards. Typically they take contrarian positions and their longer-term performance is absolutely exceptional.
You have to also remember that uniquely in Australia with our superannuation system, while people may not be actively investing personal funds, their superannuation still invests for the long-term. A lot of people will have money flowing into Platinum funds without even realising it through superannuation and that will allow FUM and their revenue generation to continue to grow or at the very least remain flat IMO.
Always interested in the thoughts of others but I just think that as PTM continues to decline, at the first sign of life in markets and/or their performance turns around back towards long-term performance then it will be a perfect opportunity to get in. All my opinion of course and DYOR, also happy to read opposing views.
By the way, I think were all essentially saying the same thing just in different ways. We all understand future earnings are estimates which are meaningless unless based on reasonable and appropriate assumptions. It sounds like we all understand earnings is what eventually drives share price action, whether it be pro-active or re-active depending on the situation.
Valuation models/equations are essentially a way of manipulating the earnings past, present and forecasted into what some deem a meaningful comparison the current and historical share prices.
I also think we all agree that Roger's method/equation has some flaws which we don't agree with.
@ Macros
Agree with you regarding PTM and the economic landscape presently. I work in the financial services industry and have quite a lot to do with PTM's managed funds, particularly their flagship Platinum International Fund. I agree that their price could go lower, but this is on the back of a poor 12-18 months particularly by their standards. Typically they take contrarian positions and their longer-term performance is absolutely exceptional.
You have to also remember that uniquely in Australia with our superannuation system, while people may not be actively investing personal funds, their superannuation still invests for the long-term. A lot of people will have money flowing into Platinum funds without even realising it through superannuation and that will allow FUM and their revenue generation to continue to grow or at the very least remain flat IMO.
Always interested in the thoughts of others but I just think that as PTM continues to decline, at the first sign of life in markets and/or their performance turns around back towards long-term performance then it will be a perfect opportunity to get in. All my opinion of course and DYOR, also happy to read opposing views.
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Kermit,
Agreed - what I was trying to convey is that the detail doesn't matter too much. It is the application and quality of decisions made. There are a many ways to skin a cat, so to speak.
What you say about PTM is true. However, a lot of hedge funds have been having a very difficult time of this environment. My opposing view to your assumption is that things aren't going to bounce back. If volatility continues then confidence erodes and it isn't good for their model. I am aware of their funds and I think that they aren't doing well in this environment (happy to be corrected). I think they have haven't made the right currency calls and they like financials way too much.
If the markets bounce back, they would be worth $5 no problem. If they don't they are $3 (IMO) and negative outlook. Therefore the value depends on what you think is going to happen. My view is that things are going to be difficult for longer than most people expect.
Agreed - what I was trying to convey is that the detail doesn't matter too much. It is the application and quality of decisions made. There are a many ways to skin a cat, so to speak.
What you say about PTM is true. However, a lot of hedge funds have been having a very difficult time of this environment. My opposing view to your assumption is that things aren't going to bounce back. If volatility continues then confidence erodes and it isn't good for their model. I am aware of their funds and I think that they aren't doing well in this environment (happy to be corrected). I think they have haven't made the right currency calls and they like financials way too much.
If the markets bounce back, they would be worth $5 no problem. If they don't they are $3 (IMO) and negative outlook. Therefore the value depends on what you think is going to happen. My view is that things are going to be difficult for longer than most people expect.
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Kermit,
Regarding MML, I'm thinking $12-$14. Production increases are substantial, however would be nice if they could come sooner
Regarding MML, I'm thinking $12-$14. Production increases are substantial, however would be nice if they could come sooner
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No he doesn't. However sometimes he hints at things in lectures he gives to students and in the odd interview.
Agreed the upside to production can't come soon enough. Even at current gold prices and their low costs the expected 20,000 ounce increase in the near term adds approx $30 mill to the bottom line.
If $8.40 can be broken i'd be surprised if they didn't go to at least $9, possibly further.
If $8.40 can be broken i'd be surprised if they didn't go to at least $9, possibly further.
Re: Roger Montgomery's Crazy intrinsic valuation method
View attachment 44578
What drives your dotted lines? I asume it is not the RM formula.
What does the RM formula value it at? Anybody care to provide worked example.
View attachment 44578
What drives your dotted lines? I asume it is not the RM formula.
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Re: Roger Montgomery's Crazy intrinsic valuation method
The dotted lines are driven by my interpretation of the formula.
The dotted lines are driven by my interpretation of the formula.
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The RR is an ROE - the one I require, at a minimum, to make it worthwhile me investing in that company.
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Re: Roger Montgomery's crazy intrinsic valuation method
Yes, but all methodologies/formulae have unrealistic assumptions for some situations. That's why Buffett, for example, doesn't try to value high technology companies in the same way he values Coke or most of his other buys. The method Roger is espousing in his book should work quite well if you pre-screen the companies well to get ones with realistically predictable earnings and ROE
Yes, but all methodologies/formulae have unrealistic assumptions for some situations. That's why Buffett, for example, doesn't try to value high technology companies in the same way he values Coke or most of his other buys. The method Roger is espousing in his book should work quite well if you pre-screen the companies well to get ones with realistically predictable earnings and ROE
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Re: Roger Montgomery's crazy intrinsic valuation method
Bufett does not value many tech companies because they are outside his circle of competence.
He has always said he sticks to what he knows and that in investing is doesn't matter how big your circle of competence is but rather how well you know it's boundaries
Bufett does not value many tech companies because they are outside his circle of competence.
He has always said he sticks to what he knows and that in investing is doesn't matter how big your circle of competence is but rather how well you know it's boundaries
Re: Roger Montgomery's crazy intrinsic valuation method
Not sure that I would go as far as 'quite well' but I would accept ‘less worse'.
The circle of competence idea is hugely important because it is only within that circle that you have any chance of making reasonable assumptions.
Not sure that I would go as far as 'quite well' but I would accept ‘less worse'.
Re: Roger Montgomery's Crazy intrinsic valuation method
That's enlightening. Have you borrowed his approach to transparency as well?
That's enlightening. Have you borrowed his approach to transparency as well?
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Re: Roger Montgomery's Crazy intrinsic valuation method
What is that supposed to mean? Have I written a book?
What is that supposed to mean? Have I written a book?
Re: Roger Montgomery's Crazy intrinsic valuation method
Since 2006 NVT has had earnings of 82.4 cents and paid out dividends of 83.6 cents.
The RM logic is that if nothing is retained then no growth is included in the valuation. The fact that earnings have grown from 8.9 cps in 2006 to 21.7 cents in 2011 defies his growth logic.
Applying the formula produce increasing valuations as it captures the EPS growth AFTER THE FACT – and so the valuation rises but always below fair value because it is not factoring in future EPS growth. (This is one of the reasons the formula results jump around like a Jack Russel on steroids)
No takers on the RM valuation - so here goes, correct me if I am wrong.
Forecast Earnings (Morningstar) for 2012-2014 are 23.5; 26.6; 31.2
Corresponding forecast Dividends are 23.2; 26.6; 31.1.
Putting aside the validly of the forecasts.
Using a required rate of 12% (putting aside the validity of this assumption)
Using RM Method.
23.2/23.5 = 98.7% is paid out. It is valued at ROE / required return * equity.
Now if I understand it right he gets ROE as being 23.5 cents divided by 64 cents of book value = 36% (Ignoring the multiple problems with GAAP distortion of book value.)
So paid out portion is valued at 98.7% * 36%/12% * 64 cents = $1.90
The growth part of the calculation is 1.3% * (36%/12%)^1.8 * equity = $.06
Total of $1.96
For 2013 the payout ratio is 100% . The 26.6 cent is earned on 64.3 cents of equity so the ROE is 41% and the valuation would be 100% * 41%/12% * 64.3 cents = $2.19
For 2014 the payout ratio is 99.7%. The 31.2 cents is earned on 64.3 cents of equity so the ROE is 48% and the valuation would be 99.7% * 48%/12% * 64.3 cents = $2.56 plus a couple of cents for the growth part of the equation on the .03% retained. So $2.58
Not sure what he would say about 2011with a payout of 20.8 cents and earnings of 20.3cents – probably conclude that the payout is not sustainable and value it as 100% payout. So 100% *32%/12%* 64 cents = $1.70.
So in summary valuation from 2011 -2014 = $1.70, $1.96, $2.19 & $2.58.
If the valuations were right and you could buy at valuation then you would buy at $1.70 and sell three years later at $2.58 whilst collecting 80.9 cents in dividends. This would actually give you a return of 29% yet you were only factoring in a required return of 12%?????
Why is this so – because the model is only picking up ROE growth after the fact and hence undervalues future increase in ROE. The reverse is also true – It overvalues companies with a forecast ROE decline. (example FGE?)
NVT is a very low capital business and its growth is largely funded by growing course prepayments. So is its recent acquisition SAE which has distorted the BV and hence ROE figures. I largely disagree with most of Macros thoughts on the company but that is a discussion for another day and shouldn’t be relevant to what I am trying to point out about how the RM formula mis-values in many circumstances.
Since 2006 NVT has had earnings of 82.4 cents and paid out dividends of 83.6 cents.
The RM logic is that if nothing is retained then no growth is included in the valuation. The fact that earnings have grown from 8.9 cps in 2006 to 21.7 cents in 2011 defies his growth logic.
Applying the formula produce increasing valuations as it captures the EPS growth AFTER THE FACT – and so the valuation rises but always below fair value because it is not factoring in future EPS growth. (This is one of the reasons the formula results jump around like a Jack Russel on steroids)
No takers on the RM valuation - so here goes, correct me if I am wrong.
Forecast Earnings (Morningstar) for 2012-2014 are 23.5; 26.6; 31.2
Corresponding forecast Dividends are 23.2; 26.6; 31.1.
Putting aside the validly of the forecasts.
Using a required rate of 12% (putting aside the validity of this assumption)
Using RM Method.
23.2/23.5 = 98.7% is paid out. It is valued at ROE / required return * equity.
Now if I understand it right he gets ROE as being 23.5 cents divided by 64 cents of book value = 36% (Ignoring the multiple problems with GAAP distortion of book value.)
So paid out portion is valued at 98.7% * 36%/12% * 64 cents = $1.90
The growth part of the calculation is 1.3% * (36%/12%)^1.8 * equity = $.06
Total of $1.96
For 2013 the payout ratio is 100% . The 26.6 cent is earned on 64.3 cents of equity so the ROE is 41% and the valuation would be 100% * 41%/12% * 64.3 cents = $2.19
For 2014 the payout ratio is 99.7%. The 31.2 cents is earned on 64.3 cents of equity so the ROE is 48% and the valuation would be 99.7% * 48%/12% * 64.3 cents = $2.56 plus a couple of cents for the growth part of the equation on the .03% retained. So $2.58
Not sure what he would say about 2011with a payout of 20.8 cents and earnings of 20.3cents – probably conclude that the payout is not sustainable and value it as 100% payout. So 100% *32%/12%* 64 cents = $1.70.
So in summary valuation from 2011 -2014 = $1.70, $1.96, $2.19 & $2.58.
If the valuations were right and you could buy at valuation then you would buy at $1.70 and sell three years later at $2.58 whilst collecting 80.9 cents in dividends. This would actually give you a return of 29% yet you were only factoring in a required return of 12%?????
Why is this so – because the model is only picking up ROE growth after the fact and hence undervalues future increase in ROE. The reverse is also true – It overvalues companies with a forecast ROE decline. (example FGE?)
NVT is a very low capital business and its growth is largely funded by growing course prepayments. So is its recent acquisition SAE which has distorted the BV and hence ROE figures. I largely disagree with most of Macros thoughts on the company but that is a discussion for another day and shouldn’t be relevant to what I am trying to point out about how the RM formula mis-values in many circumstances.
Slightly off-topic craft, but you mentioned broker / analyst forecasts. How much value do you put on these when making assumptions to plug into your own valuation formula? Or is it stating the obvious to say that this depends on how this reflects your own structural & competitive analysis of the company?
I also find it curious that RM (as an investor who has criteria that favours companies who make high returns off limited working capital) uses a valuation formula that disadvantages such businesses.
I also find it curious that RM (as an investor who has criteria that favours companies who make high returns off limited working capital) uses a valuation formula that disadvantages such businesses.
Re: Roger Montgomery's Crazy intrinsic valuation method
Interesting. NVT has suffered recently in Australia but is now a global company. They floated at $1 in about 2004. Pretty much every report has surpassed the previous one and dividends have consistently increased.
To my knowledge their debt level is minimal.
The SP during the GFC held up beautifully but they have suffered in Australia with the exchange rate.
Asian parents who can afford it put great importance on the education of their children and will often put money into this, even as an extended family, as a major priority.
The NVT SP recently seems to be looking for direction. IMO their success, or otherwise, in entering into major educational centres in the USA [such as Boston] is critical.
I have held NVT in the past but do not presently. However I do "watch" them carefully.
Interesting. NVT has suffered recently in Australia but is now a global company. They floated at $1 in about 2004. Pretty much every report has surpassed the previous one and dividends have consistently increased.
To my knowledge their debt level is minimal.
The SP during the GFC held up beautifully but they have suffered in Australia with the exchange rate.
Asian parents who can afford it put great importance on the education of their children and will often put money into this, even as an extended family, as a major priority.
The NVT SP recently seems to be looking for direction. IMO their success, or otherwise, in entering into major educational centres in the USA [such as Boston] is critical.
I have held NVT in the past but do not presently. However I do "watch" them carefully.
Re: Roger Montgomery's Crazy intrinsic valuation method
You don't understand NVT enough, do some more research
I have NVT for a long time now, I probably know more than the average person..
Most of your fear is justified if you don't know enough about NVT but if you do it's not a problem at all ....apart maybe valuation but valuation is a subjective unless
earning doesn't keep up or the business model is weak.
I can help allay your fears on other area.
NVT is debt free until they bought sae, the debt is not an issue for NVT they can easily fund it and I wrote to their management sometimes ago, they will pay down this debt from cash flow, not long before it knock it off....
If you know how NVT model works, you get between year with reduce cash flow because they need to open new school and require capital funding, once it's up and running it takes a very short period of time before it generate incredible earning for NVT.
Bad economy and High $A is not an issue for Asian and majority of NVT students are Asian, Immigration policy matter more to NVT than High Aussie dollar, if
the immigration policy is easy to get student into Australia, High $A dollar affect little...
Asian place very high emphasis on education, to them whatever it takes to educate their kids ..... High dollars mean they just cut back on other things rather than forgo education.... what sort of business get this sort of treatment? not many
You can even see it here in Australia, lot of Asian migrants, their parents works in
factories and low paying jobs and their kids go to private school and get top class tutor ...it's in their DNA....
what else NVT got other business doesn't? pre-paid fees
Fees are paid up front, from that NVT use to fund their teachers, equipment etc..
it's like you walk into HVN you give them and say here have $2000 of mine...
go pay your staff, your rents and give me my TV in 6 months time
Happy investing, my post is just for information not a buy call, it's your call
You don't understand NVT enough, do some more research
I have NVT for a long time now, I probably know more than the average person..
Most of your fear is justified if you don't know enough about NVT but if you do it's not a problem at all ....apart maybe valuation but valuation is a subjective unless
earning doesn't keep up or the business model is weak.
I can help allay your fears on other area.
NVT is debt free until they bought sae, the debt is not an issue for NVT they can easily fund it and I wrote to their management sometimes ago, they will pay down this debt from cash flow, not long before it knock it off....
If you know how NVT model works, you get between year with reduce cash flow because they need to open new school and require capital funding, once it's up and running it takes a very short period of time before it generate incredible earning for NVT.
Bad economy and High $A is not an issue for Asian and majority of NVT students are Asian, Immigration policy matter more to NVT than High Aussie dollar, if
the immigration policy is easy to get student into Australia, High $A dollar affect little...
Asian place very high emphasis on education, to them whatever it takes to educate their kids ..... High dollars mean they just cut back on other things rather than forgo education.... what sort of business get this sort of treatment? not many
You can even see it here in Australia, lot of Asian migrants, their parents works in
factories and low paying jobs and their kids go to private school and get top class tutor ...it's in their DNA....
what else NVT got other business doesn't? pre-paid fees
Fees are paid up front, from that NVT use to fund their teachers, equipment etc..
it's like you walk into HVN you give them and say here have $2000 of mine...
go pay your staff, your rents and give me my TV in 6 months time
Happy investing, my post is just for information not a buy call, it's your call
