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

[ubtheboss]

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

Hi Andrew,

It sounds like the EOY equity number you are getting from that spreadsheet is the 'forecast' number for 2011. If you look at the EqPS equation I just posted, do that for 2011 and then multply that by the current # of shares that will give you a forecast for EOFY 2011 equity. My forecast so far is 76.871 (options were exercised recently) but it's a running total as more oppies could be exercised in the future (or capital raised but that's unlikely).

Hope that helps.

[GaryS]

Hi Guys

I purchased Roger's book a couple of months back. I wish I had read his book years ago, would not have wasted money on some ***** companies.


I have a spreadsheet that I made up myself, that I use with the view of trying to estimate the future IV of companies using broker reports etc.

Most companies that I have worked out future IV for roughly align with what others state on Roger's blog or better still are close to Roger's

I have two companies that I get embarrassingly high future IV. Could a couple of you guys see what you come up with for AGO (Atlas Iron) and AUT (Aurora Oil and Gas)

I used the research reports found on each companies website.

By the way I remember when Roger first disclosed that he had purschased shares in MCE. I mistakely watched the run up so stayed out. Roger has just posted on his blog that MCE still has a margin of safety of 46.3%

I personally like JBH and will jump in if the SP drops towards $17

[ubtheboss]

Most companies that I have worked out future IV for roughly align with what others state on Roger's blog or better still are close to Roger's

I have two companies that I get embarrassingly high future IV. Could a couple of you guys see what you come up with for AGO (Atlas Iron) and AUT (Aurora Oil and Gas)

I used the research reports found on each companies website.

By the way I remember when Roger first disclosed that he had purschased shares in MCE. I mistakely watched the run up so stayed out. Roger has just posted on his blog that MCE still has a margin of safety of 46.3%

I personally like JBH and will jump in if the SP drops towards $17

Hi GaryS,

I had a quick look at the Atlas 2010 annual report and it's past numbers on Commsec. Based on what I see:

- Roger would say it is worth $0. It has never made any money. The net equity it does have is from issuing more shares not from making a profit. This puts it in the speculative arena rather than the 'investing' arena and thus a true intrinsic valuation is impossible.
- having said that, the negatives are getting less negative. I don't know anything about the company but it's revenue is growing and it's losses are shrinking. The Commsec EPS forecasts have it growing by 100% by 2013 so they must be headed in the right direction.

GaryS, if you are getting most of your valuations roughly close to Roger's than you are doing well. He hasn't revealed his entire method for valuing to us which is why just using his calculations from his book will not get you the same IVs that he gets. Did you modify or add anything to what Roger gave us in his book to get your IVs?

Speaking of modifying, since I posted my last IV of MCE I have changed the way I calculate EqPS (see my post a couple of posts back). Based on this, my current 2011 forecast is now at $8.89 (with 14% RR).

As you mentioned Roger has posted on his blog that he considers MCE about 46% undervalued. Considering the EPS forecasts are for a near 50% increase in profit I'm not surprised. With a current price of $5.00 a 46% increase gets you a 2011 IV forecast of $7.32.

That puts my valuation about 20% off of his. Not sure why but there are many variables so who knows. For any Roger student interested here are the current numbers I am using for 2011:

BOYE: 59.893 m
EOYE: 76.871 m
# of shares: 72.964 m
DPS (f): 0.114 c
EPS (f): 0.486 c
RR: 14%
NPAT: 34.15 m
EqPS: $1.066
POR: 24.36%
ROE: 49.62%
RR: 14%
Step 1: 3.570
Step 2: 9.888

2011 IV = $8.896

My EPS/ DPS forecast numbers are from Comsec.

If anyone got closer to Roger's IV it would be great if you could compare and contrast your variables and methods to help others... and me

[Julia]

I have two companies that I get embarrassingly high future IV. Could a couple of you guys see what you come up with for AGO (Atlas Iron) and AUT (Aurora Oil and Gas)

I know nothing about either of these, but AUT is in a healthy uptrend. Looks good, as long as the fundamentals support the rise in the SP. Has it already run too hard?
What is the medium term fundamental outlook for this?

[ParleVouFrancois]

RE: Julia, long term AUT seems to be ticking all the boxes to be a compounding machine. All AUT does is drill oil/condensate wells in the Eagle Ford Shale, the acres they have are incredibly profitable, with complete paybacks on each well varying from 12 to 24 months. This is an annual return of say 50% (on the 24 months figure), all the capital is being recycled into the business to drill more productive wells, etc etc.

AUT hasn't shown any income on their quarterly as of yet because the initial costs of their wells were carried by Hilcorp, who get their payback before AUT gets any revenue (payback should be finishing soon, the revenue and consistent cashflows will be hitting AUT's bottom line).

That all being said, imo about 50 to 70% of the upside has been priced into the share, so any bad news could cause an overly large tumble in share price (would be a sign to top up again). However the one of the big reasons I'm a fan of AUT is the capital raising of 70 million dollars, this money is going to be earning a very large return if deployed even half as good as the predictions state.

With rising/high oil prices and improving fraccing techniques, all the stars are aligning for AUT to be a long term winner.

[stumacd]

Hi,

I have a value stock screener that calculates the IV (for RR 10-16) and allows you to filter by the 3 critical factors (ROE, Safety Margin, LT Debt) allowing you to weed out unwanted stocks.(eg. where debt/equity > 20%)

asxvaluescreener.heroku.com/records (paste it in your browser)

I get two standout performers, but I'm not sure if they make any sense.

REF - gets a massive safety margin even using a RR of 16 - but something doesn't seem quite right but I can't figure it out.
RHG - in a similar position but without the amazing ROE.

They both get 5/5 long term from buysellsignals, but it seems a little bit too good to be true, and we all know how the saying goes.

Let me know if there's anything I can add to the screener and I'll do what I can.

Cheers,
Stu

[Julia]

RE: Julia, long term AUT seems to be ticking all the boxes to be a compounding machine..........

Thank you, PVF. I appreciate your trouble.

[ParleVouFrancois]

The Intelligent Investor did a write up many years ago when RAMS home loans was taken over by Westpac, the remaining loan book spun off heaps of cashflow for the shell company which was only holding that asset. NTA was calculated as something on the order of $1.20 - $1.70 per share, so it seems obvious that the best step is to return money to long-suffering shareholders but I doubt that is what will happen.

Management signed a non-compete with Westpac which I think expires sometime early next year. I think management will restart the home loans business, under a different name (Westpac bought the distribution system and company name).

The uncertainty over the companies direction (previously management indicated that all the money would be returned to shareholders, but this is yet to happen), is probably the primary reason for the discount being applied by the market on RHG.

PVF.

[stumacd]

That sounds logical, thanks for the insight ParleVouFrancois

[ubtheboss]

regarding the IV for MCE...

One of the hardest things to get your hands on (as a non-professional) when doing IV calculations is raw data, i.e. forecasts for things like DPS, EPS, etc.

Through a friend of a friend I did mange to get my hands on a broker's report for MCE. It was revealing.

While Commsec (my original source) had these figures:

DPS (f): 0.114 c
EPS (f): 0.486 c

The broker's report had these:

DPS (f): 0.148 c
EPS (f): 0.434 c

I shouldn't be surprised. If I remember correctly Commsec's numbers are an average of several that they collect. On their 'forecasts' page they even give you the high and low estimates from the brokers they asked.

For some reason seeing another source outside of Commsec really underlined the fact that different brokers/ people (most brokers are people) will have different opinions on the same subject.

Using these new numbers for the DPS and EPS forecasts in my IV calculations my intrinsic value changed:

Previously it was high $8 low $9. Now it becomes:

14% RR- $7.08 FOR 2011 FY which is closer to Roger's $7.31


Now that I have my head around this a little better I can look closely at the company and see if it ticks the other boxes of a 'good investment' before I plunge in.

This stuff is probably obvious to a lot of people with more experience but maybe my thinking out loud will help other new students of IV investing.

[stumacd]

I think it's still the best information out there.

Perhaps using the previous years payout ratio and growth would give a more concrete number, but it doesn't take into account any factors that the analysts factor in, so taking the mean of all their guesses might be best. If you're worried about overvaluing a stock just take the minimum estimates.

If you wanted to get serious about it, you could look at how far off previous estimates have been and adjust for that.

We have to remember that Roger has given us an easy equation, he undoubtedly adds in a few more factors that he's found useful.

[ubtheboss]

We have to remember that Roger has given us an easy equation, he undoubtedly adds in a few more factors that he's found useful.

True stu. I might have the same EPS and DPS numbers as Roger and still get a diff IV. He does have a couple of other factors in his calculations. One look at a screenshot of his Stockval system (his former company) and you get an idea.

He's got some cheek in showing us 'his way' and then saying 'that's not necessarily the way I do it.' Still, it's a 'leg up'... as he says.

[stumacd]

I've seen that stockval screenshot, but I'm not sure many of the numbers mean anything significant. I mean the graphs don't really tell you all that much (just how the earnings are distributed, if I remember correctly.)

I only real value of any meaning to us on that page is the IV (and the cash flow too), which might be a few percent different from ours using the basic formula.

I tried to make some more useful graphs for each stock:

http://asxvaluescreener.heroku.com/records?search=LYL
and click on the link in the Record column.

At the moment it's a bar graph, but I'll make it a line ASAP. It tries to give a better IV between the two estimated IVs.

I don't know what Roger's evaluation is for LYL, but I'll use my data.
(RR =10)
Cur Price = 4.24
2010 IV = 7.27
2011 IV = 7.89
Today's Date: 2010-11-08
Day's after 2010 Fin Year: 131
Today's better IV 7.49

It might be a little simple, but I feel that this way I can adjust the IVs the further we progress towards 2011 without having to work out how far away I am from either of the estimates.

[ubtheboss]

Has anyone looked at SWL- Seymour Whyte Ltd?

Just saw it mentioned on YMYC last night. Looking at past ARs now. Pretty impressive numbers so far. I wonder who their main competitors would be?

[awg]

Hi again,

following my attendance at Rogers talk

He strongly favored ORL ( Oroton)

This company has consistently ranked very highly in every fundamental scan I have done.

I regret not owning it, but it wasnt a coy within my area of understanding or really fit my portfolio.

However, I believe I may have found the correct share to pique my wifes interest in the share market ( she has shares, but i bought them all, she couldnt care less, but is starting to think about retirement now)

Would anyone care to run an Intrinsic Value calc over ORL?

A further question for those who have read his material..

How does he treat stocks with -EPS ( such as many small cap resources/explorers)?

I presume he excludes them from consideration

I will be obtaining his book

[robusta]

Has anyone looked at SWL- Seymour Whyte Ltd?

Just saw it mentioned on YMYC last night. Looking at past ARs now. Pretty impressive numbers so far. I wonder who their main competitors would be?

Interesting company, definately one to add to my watch list. Just did a quick back of the envelope valuation and I get about $2.23 value should rise quickly if they can maintain 40% + ROE and 50% payout ratio. Like you I now want to know about major competitors and do SWL have any competitive advantages. Also want to look at cash flow, slightly less this year but CFO points to project timing as the reason. Good find ubtheboss

[ubtheboss]

Interesting company, definately one to add to my watch list. Just did a quick back of the envelope valuation and I get about $2.23 value should rise quickly if they can maintain 40% + ROE and 50% payout ratio. Like you I now want to know about major competitors and do SWL have any competitive advantages. Also want to look at cash flow, slightly less this year but CFO points to project timing as the reason. Good find ubtheboss

Thanks robusta!

With a D/E ration of only 4.6% I used a margin of safety of 12% and got an IV of $2.57. A little bit more but I agree we need to know more about who else is out there. I found this link which may or may not uncover some info:

http://www.infrastructureaustralia.g...ine/index.aspx

You know in Google Finance how it gives you a list of companies that are related to the one you in your portfolio? That would be GREAT... if only the list they give you were Oz companies and not US ones. Ah, oh well...

[stumacd]

awg:
http://asxvaluescreener.heroku.com/records?search=ORL click on the stock code for some graphs.

Also Roger's got a Youtube video of him talking with the CEO of Oriton:
http://www.youtube.com/watch?v=eWLMRmVAgpw

ubtheboss & robusta:
Nice find - looks good. The 2010 report seems quite appealing. AGM in 2 weeks might give a little more insight.

Looks like RHG is finished - their business model has been scraped from the GFC and subsequent legislation. A nice last hurrah payout though, +37% today.

[nator]

Can someone explain to me what Margin of Safety is and how it is calculated? As I see some big margin of safeties posted here.

I thought initially that the RR already incorporates safety issues, where smaller/volatile companies should be assigned a higher RR.

[MrBoJangles]

Nator,
I think RR's Margin of Safety is simply a % expression of IV to Current Price and is:
(IV-Current Price)/IV * 100

By the way, I have made available for anyone (for free) to set up their own private area to make use of my web app based on RR's system:

tdserver2.com/cgi-bin/start.cgi/apps/bourse/login1.htm

initial Login is 'demo'
Password is 'demo'

There is a Menu button to take you to the area to request a private folder.

Let me know of any enhancements you would all like and we might be able to incorporate.