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

Discussion in 'Medium/Long Term Investing' started by ubtheboss, Oct 18, 2010.

  1. ubtheboss

    ubtheboss Well-Known Member

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    Roger Montgomery's new book expounds and expands Warren Buffet's methods of calculating/ forecasting a share price based on the intrinsic value of a company.

    Roger has a blog but not an efficient forum where students can help each other. If you are a student of Montgomery/ Buffet and want to share or ask questions about your calculations/ methods post your thoughts here.

    All for one and one for all! :)
     
  2. So_Cynical

    So_Cynical The Contrarian Averager

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    Using the search function on this forum, i searched for the word "Roger" and found this thread where all Roger Montgomery related posting should probably occur.

    http://www.aussiestockforums.com/forums/showthread.php?t=20217
     
  3. ubtheboss

    ubtheboss Well-Known Member

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    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?
     
  4. robusta

    robusta Well-Known Member

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    Look like the numbers we are using are fairly different I get.
    EOY equity 1.10
    DPS 0.15
    EPS 0.375
    Payout Ratio 40%
    Average ROE 30%

    using a RR of 10% i get a IV of $5.89

    I have been more conservative than you with the ROE and payout ratio as I think FGE will have difficulty maintaining such a high ROE through organic growth only. Will be watching any aquisitions to see that they are positive for the ROE and not just "earnings accreditive".
     
  5. ubtheboss

    ubtheboss Well-Known Member

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    Hi robusta,

    Thanks for posting! Excellent way to start.

    As Roger has pointed out on his blog- with forecasting, different people will get different numbers depending on their inputs.

    However, what has me bamboozled is how am I getting such a high valuation when I'm using black and white numbers from an annual report, NOT forecast numbers from some broker?! When you're going off an annual report- and assuming the same RR- you should end up with the same IV. If not, the only logical answer is that I am NOT using the same RR as someone else.

    I thought a RR/ margin of safety of 12% was enough for a solid company like Forge but if my 2010 IV is $10.23 and Roger's 2011 is $4.80ish then he must be using a more conservative RR yeah?

    Anyway, Robusta looking at your numbers and looking at the annual report my first question is- is your $5.89 IV for 2010?

    Here is why I ask:

    - you quote an EOY equity figure of 1.1 and I'm not sure why. Page 25 of the annual report states it as 93.375

    - you quote the DPS as 0.15 and I'm not sure why. Page 46 states the div paid was $3,418,891 and the # of shares on issue at EOY were 78,759,014. Divide the former by the latter and you get a DPS of 0.043 (which is actually less than my DPS which was 0.07 based on Commsec)

    - you have an ROE of 30%. I tried to figure out where you got that from an could only come close if I divided the reported NPAT of 29.45 by the EOY equity. According to Roger we should use BOY equity or an average of the BOY and EOY equity in calculating ROE. If you use EOY then you are including the NPAT figure in the denominator by default which skews the result.... does that make sense?

    I just tried using my 2010 figures but with a margin of safety of 14% instead and I got an IV of $7.83. Much closer to the IV suggested by the guy on Your Money Your Call a couple of weeks ago. Hmmmm....
     
  6. Keegan88

    Keegan88 New Member

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    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.
     

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  7. ubtheboss

    ubtheboss Well-Known Member

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    Hi Keegan,

    Sharing your spreadsheet is very much in the right spirit of this thread. Well done mate. Thanks for your willingness to share.

    To test your spreadsheet I ran numbers from Telstra's 2009 annual report (random, I know). With a RR of 10%: on paper I got $3.97 and with your spreadsheet I got $3.77. That's pretty close. The difference could be in rounding numbers. Not sure...

    I don't know anything about Excel and spreadsheets but I have a couple of notes on your inputs:

    - in cell #8 you have 'starting EqPS' and then in cell #14 you have 'calculated forecast EqPS'. Why do you have two EqPS numbers in the 2010 column?

    - same question for 'forecast earnings per share'...?

    Cheers!
     
  8. Keegan88

    Keegan88 New Member

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    Ubtheboss,

    It is good to see that there is a bit of accuracy in it.

    The starting EqPS is the equity value at the present time. Now since I am using the forecast EPS and DPS to value the company if it achieves these estimates, I need to calculate what the equity will be in the future, (what I refer to as Forecast EqPS) in order to more accurately determine the ROE in the future. EqPS(Forecast)=EqPS(starting)+EPS-DPS.

    You previously noted to use the average of the BOY Equity (what I call current Equity) and EOY Equity (what I call forecast Equity).

    The two values of forecast EPS is one is to calculate the pay out ratio, while the other I use to calculate the forecast NPAT, NPAT=EPS(forcast)x#Shares. Both these values are the same though.

    Hope that explains it.

    Keegan
     
  9. awg

    awg Well-Known Member

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    Hi,

    Just got a free invite to a seminar he is holding, will be attending

    Is he associated with Clime Capital and Stockval in any way?
     
  10. ubtheboss

    ubtheboss Well-Known Member

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    Ok I see where you are going.

    What throws me looking at your spreadsheet is that you have the first column labelled as 2010 but you're calculating a 'forecast EqPS' number.

    You don't need to 'forecast' EqPS for EOFY 2010- you get that from the annual report numbers (EqPS = EOY Equity/ # of shares). Your method does apply for the next column (2011) of course.

    In calculating 'forecast EqPS' don't forget to have an input variable for 'new capital raised' and 'buy backs' as per the equation:

    EqPS(Forecast)= EqPS(starting) + EPS - DPS + NC - BB
     
  11. ubtheboss

    ubtheboss Well-Known Member

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    I did a google to see if I could find out. He was once the chairman of Clime Capital. I think he sold the company though. They never refer to RM on Sky Business as being still associated with CC. Just my guess.
     
  12. ubtheboss

    ubtheboss Well-Known Member

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    How do you calculate IV when the pay out ratios is '0'?

    Roger answered someone on his blog this way...

    When the payout ratio is zero the first component is zero and since the process adds the two components together, the remaining value will be equal to the value of the only the second component.

    But I don't understand that.... POR = DPS/EPS not DPS+EPS.

    What is Roger talking about?
     
  13. MrBoJangles

    MrBoJangles Member

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    Hi all,
    Here is something for you Roger fans to play with.

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

    You can login for a play with:
    LoginName: demo and Password: demo

    Inspired by Roger, I have only changed one thing, and that is the A1-C5 rating business, and simplified it to just a 0-5 rating system. I could be convinced to go the A1-C5, but not sure it's really a plus.

    There will be a web site up shortly re this web application, and your comments on the app re amendments, improvements will be very welcome(or send me a Private Message).
    Private subscriptions will be available for the app - maybe just asking for a donation or something..

    Regards,

    Mr Bo
     
  14. gt88

    gt88 Member

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    What I think he is saying is that given table 11.1 gives you the multipler when a company pays out 100% of its earnings, steps 1, 3 and 4 which make refenece to table 11.1 are ignored, thus the 'first component is zero'. The 'first component' is the figure that results from table 11.1 calculatons and the second component is the figure that results from table 11.2 calculations.
     
  15. Keegan88

    Keegan88 New Member

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    Bo,

    I like what you have started to put together. I have done something very similar in excel for the stocks that I hold and those that are recommended from a newsletter I subscribe to.

    I see that you have the intrinsic value but what require return is this calculated from? I think that multiple columns are required for the IV for say 8%, 9%, 10% etc. required return. Then this can be used to determine whether of not the stock is over valued depending on the type of company that you are considering investing in.

    Secondly, I also consider the following year's IV. If the current year's IV is more than the share price, it suggest that the company is undervalued and is worth buying. However if the IV decreases in the following year this would suggest that the share price may no longer represents good value. Therefore to include the following years IV would also be very handy.

    Finally, how do your quality ratings work?

    Keegan
     
  16. MrBoJangles

    MrBoJangles Member

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    Hi Keegan,
    thanks for your comments.
    'Required Return' is one of the fields that you enter your choice % into, and the IV is then calculated, taking this into account.
    The results for Intrinsic Value will be as for Roger's tables - but more accurate because for those of you that have used Roger's tables, it is somewhat difficult for % values that fall in between what are on the table axes.

    Hope that helps,

    Mr Bo
     
  17. ubtheboss

    ubtheboss Well-Known Member

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    I see. So the multiplier you get in Step 1 is '0' and you end up just using the second multplier in the subsequent equations. Cool. Thanks so much gt88!!
     
  18. ubtheboss

    ubtheboss Well-Known Member

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    I was just crunching some IV numbers on Matrix (MCE). Has anyone else had a go at that?

    It's a quite a challenge since it is such a new company.

    In figuring out forecasts for EOY equity and NPAT we need to make a judgement call on (amongst other things) what 'new share capital' in $$ terms might be and how many new shares might be issued. Tough with a new company.

    I started with an IV for 2010 based on the annual report.

    EOY equity- 59.893
    DPS- 0.04
    EPS- 0.294
    # shares on issue- 69.964

    With my RR of 12% I got an IV of.... $10.14

    It's currently at $4.70! Hmmmm....no wonder it has gone up 400% since its IPO.

    Since NPAT= EPS x SHARES ON ISSUE

    based on the annual reports numbers

    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?

    Cheers
     
  19. gdbaker

    gdbaker New Member

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    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
     
  20. Keegan88

    Keegan88 New Member

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    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.

    The question is do we buy or not??

    Their Debt/Equity ratio is not bad either at 13.5%.

    According to comsec's glossary Earnings per Share (EPS) is the "Earnings attributable to each common share, adjusted for capital reconstructions (such as stock splits) and dividends. Measured by net income after preference dividend, divided by the weighted number of ordinary shares outstanding during the year. The earnings exclude non-recurring items such as abnormals and extraordinary items."

    So as you can see there are a few extra things include in the EPS formula. I'm just not sure what they mean.

    Hope that helps
     
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