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

[Bunter221]

Actually if you get Keegan88's worksheet (page 1 of this thread) he gets exactly the same result as me (after you change his value in B26 from 34.99 to 35, since he's omitted the ROUND function.) He also uses RM's formula, so maybe we need RM on here to speak up for his work :)

I went and downloaded the sheet so have the latest version B26 has his formulas within. Using the same numbers in both sheets current year RR 12 get $37.85 on yours and $30.92 on Keegan's. Please check numbers from the top on Keegan 12,10.19,2.62,1.021,5589.5.
Just to digress aquaity company such as BHP rates at worst RR 10% as the risk is lower, the quality is high.
Once again correct me if I have erred.

[Bunter221]

RT apologies - I missed the Debt/Equity way down the end. Now I find that entering the debt/equity makes no difference should it in your spreadsheet? I believe it should have an effect but I have never done a Roger manually.

[Bunter221]

Another query - Roger speaks highly of ARP yet it has an IV of $1.44 on IV website site and on Keegans worksheet $0.91.
Suncorp values it at $7.87, not the same process I know but we have large discrepancies in values here!
Roger wouldn't talk of having this stock in his SMSF with these calculated values surely!

[RogueTrader273]

From the following:

....... EqPS # Shares DPS ($) EPS ($) RR
Next Yr 13.58 5589.5 0.983 4.113 12
Curr Yr 10.45 5589.5 1.021 2.620 12
Prior Yr 8.85 5589.5

I get:

Intrinsic
Value
76.55 2011
36.61 Curr Yr

Actually I was putting the Current Yr data into Prior Yr before which would obviously upset the results: like I said I'm no finance expert
How does this look to you? Also RR 10 sounds fine, I wasn't worrying about that much before as I was only testing the calcs.

Re Debt/Equity yes that's only for record purposes.

[RogueTrader273]

Another query - Roger speaks highly of ARP yet it has an IV of $1.44 on IV website site and on Keegans worksheet $0.91.
Suncorp values it at $7.87, not the same process I know but we have large discrepancies in values here!
Roger wouldn't talk of having this stock in his SMSF with these calculated values surely!

I get the following for ARP:

Intrinsic
Value
9.34 Next Yr
1.01 Curr Yr


........... EqPS..# Shares...DPS($)...EPS($)...RR
Next Yr 1.82 ... 72.5 ... 0.210 ... 0.491 ... 10
Curr Yr 1.54 ... 72.5 ... 0.695 ... 0.463 ... 10
Prior Yr 1.38 ... 66.6


Hopefully I put the numbers in the right years....

[RogueTrader273]

Here's BHP - how do these figures look?

[kermit345]

Using my own equation i have a current IV of about $7.20 and a future target of $8.57 however this is assuming in both circumstances that they were to pay our 100% of EPS as dividends. As this is unlikely to be the case my IV and future target for ARP would increase as the dividend payout ratio reduces from 100%.

This is just a simple calculation i've done at work and doesn't take into account all aspects of the spreadsheet i've developed over the last 12 months.

If your interested in under-valued companies maybe take a look at MML as well. I have it as being well undervalued currently, particularly given recent falls. While not typically one of Roger's picks as it is simply a gold miner with no significant competitive advantage or barriers to entry. It does produce gold at a very low cost, has loads of cash, expansion potential and exploration potential.

[RogueTrader273]

Sorry about the pic - have to find out how to upload a normal size pic when I have time.
In the meantime hitting Ctrl-+ on your keyboard a few times should help.

Interesting result Kermit - are you using RM's equation as shown in his book? My calcs are based on that and his 'Homework' assignment (which I've tried to use exactly the same as he does), but since everyone is getting different results is that because people using different input data, or using other formulas?

[kermit345]

I use my own formula which is an adapted version of other share pricing equations which I learnt through university. They aren't very complex in nature (in the basic form) so I adapted it to be more earnings based, as it applies a discount to the DPS factor of a company, but allows for the full EPS side to shine through.

So essentially my equation is built into two parts, a DPS factor and an EPS factor. Typically companies that achieve a high IV through my equation are those with high growth/ROE, low debt and are reinvesting majority of earnings into the company rather then paying dividends, which is in essense what Roger targets as well. I use excel to compute my propper IV's as my equation has over time became slightly more complex and i just used the simplified version for those ARP IV's.

Should also note that for the current IV, i disregarded the fact that DPS was almost 1.5 times EPS and simply concluded that all of the EPS was paid as a dividend as I think you'll find it unlikely the trend of paying our more dividends then earnings for ARP will not continue. So maybe try doing a current valuation with the EPS at 0.463 and the DPS at 0.463 and see if its closer to the current SP.

[RogueTrader273]

Thanks kermit, I tried those numbers for ARP, does the following look plausible to you?

INPUT:
........... EqPS .. Shares .. DPS .. EPS .. RR
Next Yr . 1.82 .. 72.50 ... 0.21 .. 0.49 .. 10
Curr Yr .. 1.54 .. 72.50 ... 0.46 .. 0.46 .. 10
Prior Yr .. 1.38 .. 66.60

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 9.34 ... 29 .. 35.598 .. 42.77%
Curr Yr .. 5.08 .... 33 .. 33.568 .. 100.00%

[Bunter221]

Thanks kermit, I tried those numbers for ARP, does the following look plausible to you?

INPUT:
........... EqPS .. Shares .. DPS .. EPS .. RR
Next Yr . 1.82 .. 72.50 ... 0.21 .. 0.49 .. 10
Curr Yr .. 1.54 .. 72.50 ... 0.46 .. 0.46 .. 10
Prior Yr .. 1.38 .. 66.60

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 9.34 ... 29 .. 35.598 .. 42.77%
Curr Yr .. 5.08 .... 33 .. 33.568 .. 100.00%

Hi RT one of the biggest factors in the calc going wrong in some of these programs is the POR when you give a low guess POR you get a high IV such is the case with the IV site. Inputs for ARP (I left a note there) I used the POR direct from Suncorp and its is 150 I checked using RM's process and its is 150 someone has used 42.7 and it gives great IV but its wrong. The result with the correct numbers is also wrong it must be more than $1.16!
I usually cut and paste from the balance sheets to get % growth ROE BV DPS etc then adjust to be realistic. BHP to go from $50 to $90 is unlikely but many of us would be happy if it did. eg the average/year increases over 9 years for ARP is ROE 2.8% BVPS 15.27% Revenues 14.52% so we should expect changes much outside these parameters. I think most companies follow a pattern that you can calculate then adjust to be close to the last years performance. This is my opinion but I did buy BHP today hoping you are correct! I thinks its IV is $44.14 say $56.39 next year.

[RogueTrader273]

Yes Bunter it certainly seems you've got to get all your numbers right else the results can vary markedly.
For instance one stock strongly recommended tonight on YMYC was WSA, for which I get the following result :

Code: WSA .....Price: 6.01

INPUT:
........... EqPS .. Shares ... DPS ... EPS ... RR
Next Yr . 1.42 .. 180.00 ... 0.223 .. 0.687 .. 10
Curr Yr .. 0.96 .. 179.70 ... 0.060 .. 0.080 .. 10
Prior Yr .. 0.77 .. 178.90

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 25.44 ... 58 .. 123.66 .. 0.32
Curr Yr ... 0.85 .... 9 .. 14.38 .. 0.75

... so I'm not quite sure what's happening there.

They also loved Cockatoo Coal (CKO) which gives (just guessing #Shares Next Yr):

Code: COK .....Price: 0.48

INPUT:
........... EqPS .. Shares ... DPS ... EPS ... RR
Next Yr . 0.17 .. 810.00 ... 0.000 .. 0.005 .. 11
Curr Yr .. 0.16 .. 702.80 ... 0.000 .. 0.001 .. 11
Prior Yr .. 0.12 .. 553.70

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 0.02 ... 3 .. 4.05 .. 0.00
Curr Yr ... 0.00 .... 1 .. 0.70 .. 0.00

[RogueTrader273]

Latest version btw lets you copy and paste results like the above to forums, since normally everything gets bunched up with no formatting:

http://www.sendspace.com/file/30kib7

[Bunter221]

Yes Bunter it certainly seems you've got to get all your numbers right else the results can vary markedly.
For instance one stock strongly recommended tonight on YMYC was WSA, for which I get the following result :

Code: WSA .....Price: 6.01

INPUT:
........... EqPS .. Shares ... DPS ... EPS ... RR
Next Yr . 1.42 .. 180.00 ... 0.223 .. 0.687 .. 10
Curr Yr .. 0.96 .. 179.70 ... 0.060 .. 0.080 .. 10
Prior Yr .. 0.77 .. 178.90

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 25.44 ... 58 .. 123.66 .. 0.32
Curr Yr ... 0.85 .... 9 .. 14.38 .. 0.75

... so I'm not quite sure what's happening there.

They also loved Cockatoo Coal (CKO) which gives (just guessing #Shares Next Yr):

Code: COK .....Price: 0.48

INPUT:
........... EqPS .. Shares ... DPS ... EPS ... RR
Next Yr . 0.17 .. 810.00 ... 0.000 .. 0.005 .. 11
Curr Yr .. 0.16 .. 702.80 ... 0.000 .. 0.001 .. 11
Prior Yr .. 0.12 .. 553.70

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 0.02 ... 3 .. 4.05 .. 0.00
Curr Yr ... 0.00 .... 1 .. 0.70 .. 0.00

A quick look at financials tells me not to bother WSA debt 63% ROE 8.3% to wade into this one put RR at 20+ thats the sort of return you need to justify the risk - with stats like this I wouldnt buy it - there are plenty of sound well managed stocks with the runs on the board.
As COK it has potential but no performance figures as RM says if you can't really value it etc! ROE 0.8% but no debt watch it for a couple years it may lock in improved performances.
Basically you need good ROE low debt and a record of improving performance before you bother.
MAP is a share I purchased before I got started on this routine - I would never buy it now but I hung on until I got a profit at $3.11 and jumped ship. I'd rather have cash than be in this company right now as an example - may come good over time but there better businesses.

[kermit345]

As Bunter has said RT, you need to be wary of a companies debt/equity and their forecasted EPS as well as the required return that your using. For example the reason for such a large jump in IV for your WSA calcs is that you have EPS increasing a very large about, and have your RR at just 10%.

If you take the conservative view and reduce the forecasted EPS by say 10-15% and then also increase your RR due to the high debt to something like 13-14% i'd imagine you will see that IV reduce quite a bit. Even more so if you maintain a 75% Payout Ratio. Try changing the following figures and see what you come up with as the forecasted IV:

EPS - 0.58
RR - 13.5
DPS - 0.43

At least this will give you a more conservative IV and then if it surprises to the upside, they will be in a better position then you thought/calculated.

Not sure if either of you have read my previous posts on ASF but as a rule of thumb for my own value investment calcs. I don't generally look at something unless it has ROE > 15%, D/E < 30% and a market cap about $100 mill. I actually filter on Etrade using these factors to identify companies ill research first, and typically a lot of them are high ranking companies through Roger's MQR system. Most of his A1's are there.

[RogueTrader273]

Actually one miner I do like from a risk/reward situation is AVQ, a $40 million co'y which recently gained 80% rights to a $60 billion resource. The speculation factor has been largely reduced since it's been known for many years that the resource actually exists. It being a miner though I doubt Roger would consider it.

Re my previous post I'm just plugging in random companies I hear about now that I've done Roger's A1's (not seriously considering the ones I mentioned) - am I missing any from this list? :

A1's:
Monadelphous MND
Forge Group FGE
Carsales CRZ
DWS Advanced DWS
SMS Management SMX
Navitas NVT
JB Hi Fi JBH
Cochlear COH
Matrix C & E MCE
Ross Human Directions RHD
Lycopodium LYL
REA Group REA
Fleewtood FWD
Blackmores BKL
Thorn Group TGA
Webjet WEB
Fiducian Portfolio Services FPS

A2's
CSL CSL
The Reject Shop TRS
Dominos Pizza DMP
Credit Corp CCP
Slater & Gordon SGH
Commonwealth Bank CBA
Oakton OKN
ITX Group ITX
News Corp NWS
West Australian Newspapers WAN
Computershare CPU

[Odeon]

Hi All

First time poster here.

I was putting together a quick spreadsheet to do Roger's IV calculation and stumbled upon this thread whilst looking for the underlying formula to table 11.2.

Since I then found that you guys have posted a spreadsheet to do the same thing, I downloaded it to take a peek. One thing I noticed in the discussion and the spreadsheet that doesn't appear to have been picked up is the change in the formula used by Roger to calculate table 11.2.

whilst he does seem to use ROE/RR^1.8 for most values, for low values of ROE, he appears to actually use ROE/RR^2.2. Whilst this wouldn't affect most companies adhering to Roger's criteria (with high ROE) it does affect a couple of examples I noticed in the most recent version of the spreadsheet posted above by RogueTrader (for example STO with a ROE of 5%).

I have attached an image (i hope) which shows the values in the table for which the different power applies.

My apologies if this has been addressed elsewhere in the thread, I have only had the time to skim through the posts.

Table 11.2.jpg

[RogueTrader273]

Well spotted Odeon! Good to see someone's checking my figures. Here's the new improved version:

http://www.sendspace.com/file/w4yswx

[RogueTrader273]

Thanks Kermit, with those figures I now show:

Code: WSA .....Price: 5.80

INPUT:
........... EqPS .. Shares ... DPS ... EPS ... RR
Next Yr . 1.43 .. 180.00 ... 0.223 .. 0.688 .. 13
Curr Yr .. 0.96 .. 179.70 ... 0.430 .. 0.580 .. 13
Prior Yr .. 0.77 .. 178.90

OUTPUT:
............. IV: .... ROE .. NPAT .... POR
Next Yr .. 16.28 ... 58 .. 123.84 .. 0.32
Curr Yr ... 8.42 .... 67 .. 104.23 .. 0.74

and with an RR of 14:

Code: WSA .....Price: 5.80

INPUT:
........... EqPS .. Shares ... DPS ... EPS ... RR
Next Yr . 1.43 .. 180.00 ... 0.223 .. 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 .. 14.35 ... 58 .. 123.84 .. 0.32
Curr Yr ... 7.56 .... 67 .. 104.23 .. 0.74

Is that anything close to what you get?

[kermit345]

I haven't calculated the IV myself and don't use Roger's formula anyway. However I suggest you maintain the same payout ratio in the forecasted year as well, unless there is significant evidence to suggest it will be reduced for some reason?

Essentially what you've placed in your most recent set of calculations as the 'Current Year' is what i'd suggest to be a conservative view of the 'Forecasted Year' however after looking at the results using a RR of 13, i'd suggest using an RR of 14 or 15 given the D/E ratio of the company, 13 was previously a guess but to be more conservative stick with 14 or 15 for this situation I think.

I can't really provide my IV in relation to this company as my valuation model isn't suited to companies with a D/E ratio above 30%. If your looking down the value investing route i'd suggest looking at companies with less debt and more sustained cash flows & ROE.