QAV 103 — Analysing BHP
Pub­li­ca­tion date: 2019-03-15
Source audio dura­tion: 0:37:59.419

Full machine-gen­er­at­ed tran­script using local whisper.cpp / large-v3-tur­bo. Time­stamps refer to the user-sup­plied MP3. Speak­er labels have not been assigned. The key health-scor­ing pas­sages were checked with a sep­a­rate focused tran­scrip­tion from the orig­i­nal audio. Oth­er word­ing, punc­tu­a­tion and prop­er names may con­tain tran­scrip­tion errors.

[00:00:00.100] Wel­come back to the QAV pod­cast. This is episode three. My name’s Cameron Riley. I’ll be bring­ing

[00:00:05.940] Tony in short­ly to get down and dirty on ana­lyz­ing a stock. But before we do that, I just want

[00:00:13.720] to remind you our stan­dard dis­claimer. You should not take any­thing that we say on this

[00:00:19.700] pod­cast as being spe­cif­ic finan­cial advice for you or your loved ones or a friend. Because

[00:00:27.040] lis­ten, we’re not finan­cial advi­sors. We don’t know your par­tic­u­lar finan­cial sit­u­a­tion. So

[00:00:31.880] before you make any invest­ment deci­sions, go out there and find your­self a good finan­cial

[00:00:37.060] advi­sor. Ask them what you should do. You can talk about the ideas you’ve heard on this show,

[00:00:42.040] sure. But don’t take any finan­cial advice from us. All right. So if this is your first time

[00:00:49.100] lis­ten­ing to the show, what are you doing? This is episode three. Go back and lis­ten to episode one,

[00:00:54.080] where I sort of intro­duced the idea of the series. We talked a lit­tle bit about Tony Kynas­ton’s

[00:01:00.460] back­ground, how he learned how to become a black belt investor, how he’s made a lot of mon­ey out of the

[00:01:08.280] stock mar­ket, and how he basi­cal­ly stud­ied what War­ren Buf­fett and some oth­er invest­ment gurus did and

[00:01:15.420] fig­ured out how to adapt that to his own sit­u­a­tion. Episode two, we talked about the method­ol­o­gy that he

[00:01:23.400] uses that we call QAV, qual­i­ty and val­ue, how to find good qual­i­ty stocks that you can buy at a

[00:01:31.080] rea­son­able val­ue. What rea­son­able means is deter­mined a lot by your sit­u­a­tion and what you want to achieve.

[00:01:37.940] This episode, we’re actu­al­ly going to take one par­tic­u­lar Aus­tralian com­pa­ny and ana­lyze its

[00:01:43.980] finan­cials to see how that sys­tem that Tony talked about in episode two actu­al­ly looks when you apply

[00:01:52.720] it in prac­tice with a real com­pa­ny. And the com­pa­ny we’re going to look at is…

[00:01:59.900] Well, we’re using BHP, which is close to being the biggest com­pa­ny on the Aus­tralian share mar­ket.

[00:02:04.940] I’ve nev­er heard of them before. Tony, what line of busi­ness is the BHP in?

[00:02:10.060] Well, BHP stands for Bro­ken Hill Prospect­ing.

[00:02:14.260] It’s actu­al­ly Bro­ken Hill Pro­pri­etary Com­pa­ny, Tony, but keep going.

[00:02:18.620] So yeah, they’re a min­er. They’re a min­er and an oil com­pa­ny.

[00:02:21.840] And they’re also one of our biggest exporters. I think the only thing Aus­tralia exports more of

[00:02:26.880] than iron ore and coal are Hol­ly­wood actors. So where do we start if we want to have a look at

[00:02:33.080] this BHP? Tony, do we go and down­load their annu­al report off their web­site?

[00:02:37.860] Yeah. So this is prob­a­bly a good time to talk about get­ting access to data. I went through these

[00:02:43.260] num­bers again on the week­end as part of the research for the show. And there’s a cou­ple of traps for

[00:02:49.160] young play­ers in this area of sourc­ing data. And it was new to me because I had­n’t gone the sort of

[00:02:57.200] man­u­al route for a long time. I’ve been using sub­scrip­tion ser­vices which pro­vide me the data.

[00:03:03.800] And so the fig­ures are just at my fin­ger­tips. But if you’re doing it man­u­al­ly, yeah, you need to go to

[00:03:08.540] the BHP web­site and go into their investor sec­tion and down­load, in this case, their half year­ly report

[00:03:15.860] because in Aus­tralia, com­pa­nies report twice a year and most com­pa­nies have just dropped their inter­im

[00:03:22.780] reports, which are for the six months to Decem­ber, usu­al­ly.

[00:03:28.040] Now, of course, depend­ing on when you’re lis­ten­ing to this, what Tony just said may or may not still

[00:03:32.920] be true. We’re record­ing this of March 2019. If you’re lis­ten­ing to this in the future and their full

[00:03:39.480] annu­al report is out, you can use those num­bers. But for the sake of this show, we’re going to have to

[00:03:43.660] use their most recent half year report that goes to Decem­ber. Then we’re going to have to pull the rest

[00:03:50.840] of that year’s num­bers out of their most recent annu­al report. So the last six months of the annu­al

[00:03:58.240] report and the most recent six months com­bined togeth­er to give us a full year. And if you want

[00:04:03.000] a quick way to get a link to the finan­cial sec­tion of the BHP web­site, just go up to our web­site,

[00:04:09.980] qavpodcast.com.au. Look for the show notes for episode three, and I’ll have a link to their web­site

[00:04:16.160] up there.

[00:04:17.160] So if we start off, the first thing we’re going to look at is the oper­at­ing cash flow. So if you go

[00:04:21.780] into the report and Google oper­at­ing cash flow, you’ll find that BHP, I guess, received about $7.2

[00:04:31.180] bil­lion for the six months in oper­at­ing cash flow. Now, the oth­er trap for young play­ers is these

[00:04:37.080] dol­lars are in US dol­lars. And for us in Aus­tralia, look­ing at the share price on the ASX, that’s an

[00:04:42.820] Aus­tralian dol­lar. So we have to con­vert the $7.2 bil­lion. I’ll use the con­ver­sion rate to Aus­tralian

[00:04:48.320] dol­lars of 0.7. So you need to divide that num­ber by 0.7 and you’ll get about $10.3 or $10.4 bil­lion

[00:04:56.480] Aus­tralian dol­lars.

[00:04:58.200] But of course, as I said ear­li­er, this is just a six-month fig­ure Tony’s talk­ing about. So if you

[00:05:04.140] aren’t able to use the most recent annu­al report to get a full 12-month fig­ure, you need to go get the

[00:05:10.480] most recent annu­al report, pull the last six months out of that, do the same con­ver­sion, add it to this

[00:05:16.340] fig­ure, that gives you a full 12-month fig­ure. And I came up with $26.39 bil­lion. So it is worth if

[00:05:25.660] peo­ple are seri­ous about invest­ing that they do sign up for a sub­scrip­tion ser­vice that pro­vides them

[00:05:31.300] this data in a much eas­i­er for­mat. I use a com­pa­ny called Stock Doc­tor, which is one ser­vice.

[00:05:38.140] And I use a com­pa­ny called Share Analy­sis, which is anoth­er ser­vice. And as I was noodling around the

[00:05:46.540] inter­net on the week­end, I also found that the Aus­tralian Finan­cial Review’s web­site has these

[00:05:52.460] fig­ures in a much eas­i­er to use for­mat. But I think you might need to sub­scribe to the AFR to get access

[00:05:57.940] to that sec­tion of the web­site.

[00:05:59.180] Now, I’d like to point out at this junc­ture that we are not mak­ing any mon­ey. We are not being spon­sored

[00:06:03.940] by any of these ser­vices. We’re not mak­ing any mon­ey out of Tony name-drop­ping these ser­vices. How­ev­er,

[00:06:10.020] if these ser­vices would like to pay us mon­ey for that name drop, feel free. Shoot me an email,

[00:06:15.360] Cameron­Ri­ley at gmail.com. I’d be more than hap­py to take your call.

[00:06:19.780] Yeah. I mean, I’d rec­om­mend read­ing the Finan­cial Review any­way. So a sub­scrip­tion, you know, it’s not going

[00:06:26.340] to cost you a whole heap. I think it’s about $400 or $500 a year. And you get access to the news­pa­pers

[00:06:30.300] as well as to this kind of infor­ma­tion in a much eas­i­er to use for­mat and quick­er for­mat. And all

[00:06:35.700] these sub­scrip­tion ser­vices buy their data from peo­ple like Thom­son Reuters and Bloomberg,

[00:06:40.500] which are the sort of whole­sale raw data providers. And they put their front ends onto it.

[00:06:46.580] Right.

[00:06:46.940] Yeah. So yeah, I’d seri­ous­ly con­sid­er using a ser­vice like that if you’re going to be an investor.

[00:06:53.160] You won’t need to go through all this kind of almost deduc­ing, you know, on the BHP web­site to get

[00:07:00.180] their fig­ures every time you need to ana­lyze some­thing.

[00:07:02.620] What are these ser­vices that you sub­scribe to tend to cost?

[00:07:07.160] Yeah. So like I said, the AFR one, I think is about $400 or $500 a year. Plus you get the

[00:07:13.780] sub­scrip­tion to the news­pa­per. Stock doc­tor and share analy­sis around the sort of $700 to $1,500 a year,

[00:07:24.980] depend­ing on how much of their ser­vices you buy.

[00:07:27.920] Right.

[00:07:28.400] Yeah. And they also pro­vide oth­er things that I use. When we get to scor­ing the com­pa­nies a bit

[00:07:35.180] lat­er, they pro­vide finan­cial health rat­ings for these com­pa­nies. Again, it saves me from going into

[00:07:39.880] their bal­ance sheets and com­par­ing their debt to equi­ty ratios and look­ing at their out­stand­ing

[00:07:45.640] payables and all that kind of stuff you need to do to work out if the com­pa­ny’s healthy or not.

[00:07:49.440] Back to BHP. Full year, $26.39 bil­lion in terms of oper­at­ing cash flow.

[00:07:56.920] That’s right. So the next thing we do is we take the num­ber of shares on issue, which is 5057

[00:08:03.040] mil­lion shares. And again, I took that from the BHP results pre­sen­ta­tion.

[00:08:09.280] Okay. Now the next step, once we have these two fig­ures, so we have how much cash they made for

[00:08:14.540] the most recent 12 months. We have the num­ber of shares on issue. So what we want to do is take

[00:08:22.460] that first num­ber, how much cash they’ve gen­er­at­ed, divide it by the num­ber of shares. So in BHP’s case,

[00:08:29.840] we’re tak­ing $26.391 bil­lion and we’re divid­ing it by 5.058 bil­lion shares. And that gives us the cash

[00:08:43.580] that they’ve been gen­er­at­ing per share, which is $5.22. Now we need to get their most recent share

[00:08:51.520] price. Tony said that his fig­ures have that as $36.88 Aus­tralian from the week­end, just before we

[00:08:59.700] record­ed this, which again is ear­ly March, mid-March 2019. Then once we have that num­ber,

[00:09:07.260] we want to fig­ure out what the price per share divid­ed by the cash per share ratio is. So to do that,

[00:09:16.880] we take the share price, $36.88 in this case, and divide it by the cash per share, $5.22. And that

[00:09:25.700] gives us a fig­ure of 7.07. Okay. So if you recall from episode two, we want less than 10. And if we can,

[00:09:37.380] less than six. So. And some­what sur­pris­ing­ly, BHP com­ing in at sev­en is in that range. Yeah, it’s

[00:09:47.320] pret­ty good. It’s pret­ty good. It is a bit of a sur­prise. I would think the rea­son for that is that BHP

[00:09:54.500] is a very cycli­cal stock and it’s throw­ing off lots of cash now. The iron ore price is up.

[00:10:00.120] Com­mod­i­ty prices in gen­er­al are up. Yeah. So throw­ing off lots of cash.

[00:10:05.300] Now, I stopped Tony at this point and asked him what throw­ing off lots of cash means in case it was

[00:10:11.740] some sort of secret investor code, rich white guy code. He basi­cal­ly said, look, it’s mak­ing a lot of

[00:10:18.920] mon­ey right now because com­mod­i­ty prices are high. And if you look at the BHP share price over a 10-year

[00:10:29.420] peri­od, you can see that it’s had some big peaks and troughs. And this is one of the peaks because

[00:10:36.720] com­mod­i­ty prices are high now. So it’s mak­ing a lot of mon­ey, which is why that fig­ure we just came up

[00:10:42.060] with SEBs pret­ty rea­son­able. So that’s piqued our inter­est a bit. The next thing we want to do is

[00:10:48.260] to go through the check­list we talked about in the last episode. The first thing I’ve got list­ed here

[00:10:52.940] is you’re look­ing at sen­ti­ment. Yeah. And as you just said, the share price has been going rel­a­tive­ly

[00:10:59.860] con­sis­tent­ly up since Decem­ber 2015 on this chart that I have in front of me. So sen­ti­ment good?

[00:11:07.300] Sen­ti­men­t’s good. Yeah. Right.

[00:11:09.320] Yeah. And so just before we leave the share chart, I know we’re not giv­ing any sort of advice or

[00:11:16.320] rec­om­men­da­tions on this pod­cast. But if you look at when the share price start­ed to tick up, that’s

[00:11:23.180] real­ly around the time you might want to have a look at buy­ing BHP back in maybe around Decem­ber

[00:11:29.980] 2016. It’s com­ing off its lows. Yeah. So like I said, I’ll watch these reports every six months and

[00:11:37.820] the first thing you do is check the share graph. And if you do see that kind of hock­ey stick form­ing

[00:11:42.380] where it’s bounc­ing off a low, that’s a great time to start buy­ing a share.

[00:11:46.640] Right. And so where it’s at now, if I look at the 10-year graph on the ASX, it’s near­ly up to its

[00:11:52.940] 10-year high, which was just over 40. So you’re say­ing it’s cycli­cal. We should assume that it might

[00:12:01.100] be peak­ing? Yeah. I real­ly could­n’t say. It’s pos­si­ble. But all I’m look­ing at at the moment is

[00:12:08.600] is that the share price is going up, which it is. So it gets a tick on the check­list.

[00:12:13.600] Right. Okay.

[00:12:14.640] Yeah. Okay.

[00:12:16.220] One of the things I like about Tony’s method so far is that we don’t need to pre­dict or fore­cast

[00:12:24.100] where an indus­try is going or how a com­pa­ny is going to per­form with­in its sec­tor. We’re just

[00:12:31.900] look­ing at num­bers. Now, that’s a lit­tle bit dry and bor­ing, par­tic­u­lar­ly from a pod­cast per­spec­tive.

[00:12:36.980] But I like the fact that at least at this lev­el, I don’t need to go and spend a whole bunch of time

[00:12:45.080] study­ing a par­tic­u­lar indus­try or study­ing the inter­nals of a par­tic­u­lar com­pa­ny. What we’re

[00:12:51.500] going to do is just look at some key num­bers, look at some oth­er key met­rics that are in black and

[00:12:57.320] white on a doc­u­ment. A lit­tle bit hard to get unless you have one of these expen­sive sub­scrip­tion

[00:13:02.880] ser­vices that Tony has. But they’re there. They’re pub­lished. We’re look­ing at the num­bers and then

[00:13:08.200] going through his check­list and the check­list will do a lot of the think­ing for us, basi­cal­ly. It will

[00:13:17.120] at least weed out the ones that don’t look good. And then we can drill down a lit­tle bit fur­ther on

[00:13:24.880] the hand­ful that are left, accord­ing to the the­o­ry that he explained to me in episode num­ber two,

[00:13:31.880] that look like they might be a rea­son­able invest­ment.

[00:13:36.700] Next thing on the check­list is the yield, the div­i­dend yield. I can see I’m using the Stock Doc­tor screen

[00:13:42.520] here. I can see it’s around 4.5%. And if you just Google BHP space ASX, you’ll imme­di­ate­ly get a chart up on

[00:13:52.380] Google, which will show you things like the div­i­dend yield. And I can see again in Stock Doc­tor that it’s

[00:13:59.080] been around sort of 4.5 lev­el now for a cou­ple of years. So it’s con­sis­tent as well. Right. Yeah. So

[00:14:05.880] that gets a tick on the check­list. Right. Okay. The next thing we look on the check­list is the PE,

[00:14:12.100] PE ratio. I’ve got a PE ratio of 14.85. 14.85. Yeah. And if I, the thing I’m look­ing at here though,

[00:14:21.540] is I want to go back over the last six halves. Remem­ber, this is because he wants to see the

[00:14:27.600] trend in the PE ratio over time. And I can see that it’s at the low end of the range, but not the

[00:14:35.060] low­est of PEs. Okay. Yeah. So again, I’m using Stock Doc­tor to do that. So it does­n’t get us,

[00:14:42.000] it does­n’t get a score on the check­list because it’s not the low­est price to earn­ings ratio in the last

[00:14:46.540] six halves. Right. Okay. So the next thing on the check­list is to look at the equi­ty per share,

[00:14:51.400] which we’re call­ing the book val­ue. And I’m get­ting an equi­ty per share of $15.50.

[00:14:57.600] So just if you don’t have one of these reports in front of you, the way you work this out as a

[00:15:02.440] reminder, to cal­cu­late the net equi­ty of the busi­ness, you’re doing assets minus lia­bil­i­ties,

[00:15:08.160] pret­ty straight­for­ward. You’ll find that in the annu­al report. Then to cal­cu­late the net equi­ty per share,

[00:15:14.020] you want to take that net equi­ty num­ber divid­ed by the num­ber of shares that are on issue. That’ll give

[00:15:20.580] you your net equi­ty per share, your NEPs. Then to cal­cu­late the price to book ratio, we’re tak­ing

[00:15:28.560] the share price and divid­ing it by the net equi­ty per share fig­ure, the NEPs. And that gives us the

[00:15:37.100] price to book ratio. So I’m get­ting equi­ty per share of $15.50. And giv­en the share price is some­where

[00:15:44.660] up around $35, it’s say­ing BHP isn’t cheap on a book val­ue ratio. And so it does­n’t get a tick on the

[00:15:52.500] check­list for that par­tic­u­lar item. So basi­cal­ly the share price is more than dou­ble the equi­ty per

[00:15:57.120] share. Right. And we’re look­ing for com­pa­nies where the share price is no more than 30% above the

[00:16:02.700] equi­ty per share. Right. Yeah. So we’re say­ing BHP isn’t cheap on a share­hold­er equi­ty basis.

[00:16:08.700] And would you nor­mal­ly stop there con­sid­er­ing that we’re look­ing for val­ue?

[00:16:12.460] Oh, giv­en that the price to cash flow was sev­en, I’d prob­a­bly keep going and get the whole score.

[00:16:17.720] Right.

[00:16:18.420] This is only, remem­ber each of these items are only get­ting scores of one or two on the check­list.

[00:16:22.640] It’s the over­all score that’s impor­tant to us.

[00:16:24.780] Right.

[00:16:25.860] Yeah. So there’s lots of dif­fer­ent ways to val­ue your com­pa­ny. The oper­at­ing cash to share is one and

[00:16:31.880] the book val­ue is anoth­er.

[00:16:33.640] Yeah.

[00:16:34.380] Yeah. And then we’re about to also do anoth­er one, which is the, what we call, what I’m call­ing the

[00:16:41.000] intrin­sic val­ue. So that’s the earn­ings per share over the hur­dle rate. And that gives us anoth­er

[00:16:45.360] mea­sure. So there’s all dif­fer­ent ways of valu­ing it. That’s why I’m using a check­list, which has

[00:16:49.560] lots of dif­fer­ent scores in it, not just the one.

[00:16:51.460] Yeah. Right. Okay.

[00:16:52.840] So if we keep going, we get the next one to look at is the earn­ings per share, which I’ve

[00:16:58.400] got as $2.46. The next thing I want to look at is the future earn­ings per share. Now I’ve

[00:17:04.280] got $2.63 from Stock Doc­tor.

[00:17:07.600] Right. So future earn­ings per share, this is just guess­es, edu­cat­ed guess­es. And what did you

[00:17:17.180] have from Stock Doc­tor? $2.63. So that’s the con­sen­sus fore­cast.

[00:17:22.300] Right.

[00:17:22.500] It would be the aver­age of all the stock­bro­kers who are look­ing at it.

[00:17:25.420] Right. So it’s cur­rent­ly earn­ing $2.46 for the last peri­od, but the con­sen­sus esti­mate is that

[00:17:32.780] it will rise to $2.63. Is that for the next half year or full year?

[00:17:37.060] That would be the full year num­ber.

[00:17:39.680] Right.

[00:17:39.900] Because we’ve just got the half year num­ber at the moment. Yeah.

[00:17:42.660] Okay.

[00:17:43.680] Okay. So we’ve got the future and what we’re see­ing, the impor­tant thing is if we take the

[00:17:48.620] cur­rent away from the future, we’re not see­ing a whole heap of growth there.

[00:17:53.140] Okay.

[00:17:54.360] Right. So we’re see­ing $2.46 now, $2.63 fore­cast.

[00:17:58.280] Yeah.

[00:17:58.760] And the met­ric we were going to use is growth over the PE ratio. The PE ratio was 15, I think,

[00:18:06.660] from mem­o­ry when we did that before.

[00:18:09.120] Yeah.

[00:18:09.840] Yeah. So I’m get­ting a growth to PE of 0.45 and we want 1.5 before we’re see­ing some­thing

[00:18:16.980] which is grow­ing strong­ly enough to tick­le our fan­cy.

[00:18:21.060] Now, before you get too dis­tract­ed and hot and both­ered imag­in­ing all the ways that Tony

[00:18:26.100] likes to have his fan­cy tick­led, let’s start by get­ting into the mag­ic of Tony’s method.

[00:18:32.680] As I said before, the thing I like about this is he pulls togeth­er all of this data out of

[00:18:38.580] the finan­cials. And then he just starts to go down his check­list that he’s spent decades build­ing and

[00:18:44.540] refin­ing and giv­ing them a point score. And I can do that. I can go, well, does it meet this

[00:18:50.320] met­ric? Yes or no. That’s basi­cal­ly the rest of the process and then total­ing up that score.

[00:18:56.140] So the first ques­tion on the check­list, as we talked about on episode two is, does it meet the finan­cial

[00:19:03.700] health cri­te­ria on the sub­scrip­tion ser­vices like Stock Doc­tor? How do they rate it, in oth­er words?

[00:19:10.360] The Stock Doc­tor web­site has BHP as what they call a bor­der­line stocks, bor­der­line star stock.

[00:19:18.180] So it’s okay, but not their best, their high­est rat­ing. So I’ll give BHP a score of 0.5 on my check­list

[00:19:26.220] for that. Okay. Is the share price beneath their intrin­sic val­ue?

[00:19:33.240] Yep. So again, I’m using Stock Doc­tor and Share Analy­sis. And they’re both say­ing that their esti­ma­tion of

[00:19:45.520] intrin­sic val­ue is above, sor­ry, is below the cur­rent share price. So the share price is above their

[00:19:51.160] val­ue. And now what we need to do is to work out what, you know, cal­cu­late what we think the intrin­sic

[00:19:56.300] val­ue is as well. And we do that by divid­ing the earn­ings per share, the cur­rent earn­ings per share,

[00:20:01.780] over the hur­dle rate. Now, I think we should stop and just review what this hur­dle rate busi­ness is,

[00:20:08.040] because I think it’s pret­ty impor­tant to under­stand. And I had to go back and just check a cou­ple of

[00:20:13.200] things with Tony while I was edit­ing this episode. The hur­dle rate is the kind of return that you want

[00:20:21.660] to get from an invest­ment in a stock. Now, as we know, Tony’s hur­dle rate, the sort of return,

[00:20:29.580] annu­al return that he’s try­ing to achieve is about 19.5%. Quite high, might be high­er than what you want

[00:20:37.720] to achieve, but that’s what he wants to achieve. So that’s the first hur­dle rate he’s going to

[00:20:41.740] cal­cu­late with. Then he does the cal­cu­la­tion again using a low­er hur­dle rate of 7.5%. And I had to say,

[00:20:50.160] I had to ask him, so why? Why do you have that sec­ond hur­dle rate? What’s the point? And he said,

[00:20:54.460] well, that’s just to find out, is it under­val­ued accord­ing to where the mar­ket would val­ue it?

[00:21:01.740] So what the 7.5% hur­dle rate is what he thinks the mar­ket would want out of a growth of that stock.

[00:21:10.300] Now, why 7.5%? And I had to get Tony to explain this to me a few times. This is a com­bi­na­tion of

[00:21:16.700] what’s called the cash rate, about 6%, and a risk pre­mi­um on top of that. Now, the cash rate is what

[00:21:24.260] the gov­ern­ment pays for things like gov­ern­ment bonds. So if you want­ed to put your mon­ey some­where

[00:21:30.740] absolute­ly secure and safe, you could get about 6%. The 1.5% is what the mar­ket has decid­ed over time

[00:21:38.960] is a fair kind of rate to expect for tak­ing a risk on some­thing like the share mar­ket. So put those two

[00:21:46.420] togeth­er. That’s your 7.5%. And also, Tony said to point out that he’s using the future earn­ings per

[00:21:53.360] share for this cal­cu­la­tion, which is what most ana­lysts do. So two rates, 19.5%, that’s the rate

[00:22:01.680] you want to be get­ting out of a good invest­ment, or at least Tony wants to be get­ting. And 7.5% is what

[00:22:09.080] he thinks the mar­ket would want to get. And then it gets a rat­ing on both of those. Does it meet

[00:22:13.820] Tony’s per­for­mance stan­dards? And the sec­ond rat­ing is, does it meet the mar­ket’s per­for­mance

[00:22:18.940] stan­dards? So the first intrin­sic val­ue I do is EPS over 19%. So $2.46 over 19%. And I’m get­ting a

[00:22:30.300] share price that I’d want to pay for BHP of $12.90. And the share price is cur­rent­ly $36.88.

[00:22:38.260] Yeah. So it’s over my val­ue. But the 19% hur­dle rates are pret­ty high hur­dle rate. So I also do

[00:22:45.560] anoth­er one. I use 7.5 this time, and I use the future earn­ings per share esti­mate. So if I do

[00:22:54.300] $2.63 over 7.5, then I’m get­ting a num­ber of $35. So it’s pret­ty close to what the mar­ket’s valu­ing

[00:23:02.880] BHP at. So on the check­list, I’d give them both zeros.

[00:23:08.760] Zero.

[00:23:09.760] Yeah. Because both of those intrin­sic val­ues are below what the share price is.

[00:23:14.400] Right.

[00:23:15.200] Yeah. You could give it 0.5, I guess, for the sec­ond one. But it’s still tech­ni­cal­ly below

[00:23:21.720] the share price.

[00:23:23.080] Right.

[00:23:24.000] Yep.

[00:23:24.720] Okay. Now, price to book, is the share price less than 30% below the net tan­gi­ble assets

[00:23:30.920] of the share is what I have next on my check­list.

[00:23:33.700] Yep. And we got that fig­ure before. Equi­ty per share was $15.50. And we worked out, I think

[00:23:39.200] from mem­o­ry, it was 246%. The share price was 246% times the equi­ty per share.

[00:23:46.400] Yes. So def­i­nite­ly a zero.

[00:23:48.660] Def­i­nite­ly a zero. Yep.

[00:23:50.840] Does the share price have a pos­i­tive trend?

[00:23:53.700] Yep.

[00:23:54.180] So you give it a one?

[00:23:55.800] I’ll give it a two, actu­al­ly. I found over time the pos­i­tive trend is a fair­ly impor­tant

[00:24:01.000] thing to have, so I’ll give it a two.

[00:24:03.000] Okay. Because it’s been going up fair­ly con­sis­tent­ly for about four years?

[00:24:08.120] Yeah.

[00:24:08.340] Yeah. Cor­rect. Yep.

[00:24:09.260] Okay. Is it the low­est PE in the last three years?

[00:24:14.960] And we saw that it was­n’t.

[00:24:16.320] So is that a zero?

[00:24:17.560] Cor­rect. Yep.

[00:24:18.780] Okay. Growth of the earn­ings per share, which is the cur­rent EPS ver­sus the fore­cast EPS,

[00:24:26.240] is it equiv­a­lent to 1.5?

[00:24:29.040] Well, if you take the growth and divide it by the PE, is it greater than 1.5?

[00:24:33.840] And it was­n’t.

[00:24:34.660] It was not.

[00:24:35.580] It’s a zero.

[00:24:36.420] Yeah.

[00:24:36.840] It was 0.45 was the num­ber that we got when we did that cal­cu­la­tion.

[00:24:39.940] Does the com­pa­ny have con­sis­tent­ly increas­ing equi­ty?

[00:24:43.680] I’m sourc­ing that from Stock Doc­tor.

[00:24:45.440] I’ll have to find some­where else for free to source it for peo­ple, but I can see in Stock

[00:24:50.200] Doc­tor that no, it does­n’t.

[00:24:51.560] No. Okay. So it’s a zero.

[00:24:53.700] I spoke about it before. The June 18 annu­al equi­ty num­ber was $82 bil­lion, and the Decem­ber

[00:25:00.620] 18 half year­ly num­ber was $78.3.

[00:25:05.060] Right.

[00:25:05.460] So it’s gone down.

[00:25:07.340] Right.

[00:25:07.800] That’s a zero.

[00:25:08.800] Okay.

[00:25:10.120] The next one I’ve got on our check­list is, is the PE less than the yield?

[00:25:16.660] Right. Yep.

[00:25:17.820] So the PE I’ve got is 14.85.

[00:25:22.340] Mm-hmm.

[00:25:23.140] The yield is 4.5.

[00:25:26.620] Yeah. So it’s not. It’s a zero.

[00:25:29.000] Right.

[00:25:30.080] Is the div­i­dend yield high­er than the mort­gage rate? This is if you’re bor­row­ing against your

[00:25:35.400] home to invest.

[00:25:36.760] Cor­rect. Yep.

[00:25:37.560] Right.

[00:25:38.340] So mort­gage rates are around 5% now, and the BHP yields 4. So I’d say no. I’ll give it

[00:25:43.820] a zero.

[00:25:44.120] Is the finan­cial health from the sub­scrip­tion ser­vices steadi­ly increas­ing? You’ll have to

[00:25:48.740] tell us.

[00:25:50.120] Yeah. So Stock Doc­tor is the one I’m using, and the finan­cial health has been con­sis­tent­ly

[00:25:59.580] strong for BHP. So that’s a tick. That’s a one.

[00:26:03.120] That’s a one. Okay.

[00:26:04.520] Mm-hmm.

[00:26:05.060] Is my fore­cast intrin­sic val­ue more than two times the cur­rent share price?

[00:26:11.380] Mm-hmm.

[00:26:12.220] Intrin­sic val­ue you’ve got at $12.95.

[00:26:15.820] That’s the cur­rent one.

[00:26:16.960] Oh, that’s the cur­rent.

[00:26:17.260] The oth­er one we use.

[00:26:18.280] Yep.

[00:26:19.060] The oth­er one we use was a 7.5% hur­dle rate on the future earn­ings per share at $35.

[00:26:23.940] Oh, right. $35.

[00:26:25.180] Yeah.

[00:26:25.480] The share price is $36.88.

[00:26:29.080] So def­i­nite­ly a zero.

[00:26:30.780] Zero. Yeah.

[00:26:33.300] Is it one of the most under­val­ued of the top 10 ASX stocks?

[00:26:38.440] Yeah. So this is a top 10 ASX stock, but we can see it’s not under­val­ued, so it’s a zero.

[00:26:43.440] Zero.

[00:26:44.400] I’d be look­ing for some­thing with a much high­er share price on that 7.5% IV on the future earn­ings

[00:26:52.120] per share.

[00:26:53.720] Right.

[00:26:54.480] Yeah.

[00:26:54.940] So I’ll cut to the chase and say that there is a stock which is much high­er than BHP on

[00:27:02.200] that kind of met­ric.

[00:27:02.860] Is the cash flow per share less than or equal to six?

[00:27:07.640] No.

[00:27:08.200] I’ve got 7.07.

[00:27:09.940] So that’s zero.

[00:27:11.520] Yeah.

[00:27:12.740] Is the founder, is the CEO and own­er or founder?

[00:27:17.760] Wow.

[00:27:18.260] No.

[00:27:19.120] Who was the founder of BHP, Tony?

[00:27:21.820] I used to know this.

[00:27:23.600] Ander­son.

[00:27:24.600] Mr. BHP?

[00:27:26.320] There was one and he got forced out years ago.

[00:27:30.340] Real­ly?

[00:27:31.320] Yeah.

[00:27:32.180] Let me see.

[00:27:32.980] Wikipedia says.

[00:27:35.260] All right.

[00:27:35.740] This is where I come into my fore because this is his­to­ry, right?

[00:27:39.840] This is what I do.

[00:27:41.360] Wikipedia actu­al­ly does­n’t say much about the founder, Charles Rasp.

[00:27:46.140] I had to go to the Aus­tralian Dic­tio­nary of Biog­ra­phy.

[00:27:51.000] Charles Rasp was born in 1846 in Stuttgart, the Dukie of Würt­tem­berg, where appar­ent­ly his

[00:28:01.420] birth name was Jeron­imus Sal­va­tore Lopez von Pereira.

[00:28:07.420] Go stick that in your pipe and smoke it.

[00:28:10.120] He migrat­ed to Aus­tralia for health rea­sons in 1869, did a bunch of jobs, got some work

[00:28:19.020] sort of prun­ing vines on agri­cul­tur­al prop­er­ties.

[00:28:22.200] Then he tried his luck in the Vic­to­ri­an gold­fields, but that did­n’t go any­where.

[00:28:26.580] He end­ed up becom­ing a bound­ary rid­er on cat­tle sta­tions in New South Wales, which even­tu­al­ly

[00:28:32.300] led him to the area that was known as Bro­ken Hill.

[00:28:37.320] And he thought he found some traces of tin, so he pegged out a stake there, sent sam­ples away

[00:28:45.980] to an analy­sis com­pa­ny in Ade­laide.

[00:28:49.500] They came back and said, sor­ry, no tin.

[00:28:52.640] But then even­tu­al­ly he found sil­ver on the mine.

[00:28:58.160] 1885, he first pegged his stake in 1883.

[00:29:03.340] Two years lat­er, found rich sil­ver ore on the block.

[00:29:07.540] And he got pret­ty rich out of that.

[00:29:09.720] He formed the Bro­ken Hill pro­pri­etary com­pa­ny with a cap­i­tal of 16,020 pound shares, 14,000

[00:29:18.600] of which went to him and a cou­ple of part­ners.

[00:29:21.640] With­in about five years, he was very, very rich, moved to Ade­laide, got mar­ried and died in

[00:29:27.980] 1907 of a heart attack.

[00:29:30.460] Age 61 had no chil­dren.

[00:29:32.660] His wid­ow remar­ried and she mar­ried Count von Zed­witz.

[00:29:40.420] So there you go.

[00:29:41.840] She final­ly died in 1936.

[00:29:44.800] So that’s the Charles Rasp sto­ry, or should I say, Hierony­mus Sal­va­tore Lopez von Pereira.

[00:29:52.700] But he’s not alive and isn’t run­ning the com­pa­ny.

[00:29:56.100] So now he gets a zero.

[00:29:58.120] We don’t have an own­er founder.

[00:29:59.340] So I think I sent you a, just as a tan­gent, I sent you an AFR arti­cle.

[00:30:05.260] Some­one ran some num­bers recent­ly on rich lis­ters who were still run­ning a list­ed share com­pa­ny.

[00:30:12.280] And those com­pa­nies beat the mar­ket over the last 12 months.

[00:30:17.080] Their com­pa­nies aver­aged a 6% return and the share mar­ket aver­aged minus 0.8% over the

[00:30:22.440] last rolling 12 months.

[00:30:23.720] Right.

[00:30:24.740] So those num­bers again?

[00:30:25.680] 6% for com­pa­nies that were being run by rich lis­ters and neg­a­tive 0.8% for the mar­ket.

[00:30:31.640] Wow.

[00:30:32.680] Wow.

[00:30:33.540] Okay.

[00:30:34.180] The next check­list ques­tion I’ve got is anoth­er sub­scrip­tion ser­vice.

[00:30:37.660] Intrin­sic val­ue going up in the future.

[00:30:40.080] Yeah.

[00:30:40.500] So this is the share analy­sis web­site and it’s not.

[00:30:44.720] So it goes up and bounces up and down for BHP.

[00:30:47.760] Right.

[00:30:48.720] Yeah.

[00:30:49.160] So this is, I mean, that’s just their val­u­a­tion.

[00:30:52.560] So it’s a point on that, it’s a, it’s a, a one or a zero on our check­list, but it’s not

[00:30:57.060] the be all and end all.

[00:30:58.260] It’s a future, it’s a future guess of what things we’ll do.

[00:31:01.040] Well, that’s all I’ve got on the check­list.

[00:31:02.600] Have I missed any­thing?

[00:31:03.940] No, that’s what I had too.

[00:31:05.000] So let’s just stop for a moment and look at how much time that’s tak­en us.

[00:31:09.460] Now, yes, I edit­ed a lot out of this pod­cast because Tony and I were fart­ing around in the

[00:31:14.860] orig­i­nal record­ing, try­ing to find free sources of a lot of this infor­ma­tion.

[00:31:19.360] We were look­ing at ASX and the AFR and Google Finance and Yahoo, et cetera, et cetera.

[00:31:24.880] But with Tony’s stock doc­tor tools and oth­er ser­vices like that, it would lit­er­al­ly take

[00:31:31.440] as long to col­late this data as it did on the pod­cast because he has it right there in front

[00:31:37.520] of him.

[00:31:38.260] And I think look­ing back at the time codes, we spent about 15 min­utes pulling togeth­er

[00:31:43.440] the data and then about anoth­er 10 to 15 min­utes going through the check­list and giv­ing them

[00:31:50.080] a one or a zero.

[00:31:51.440] So half an hour to ana­lyze the stock.

[00:31:54.520] We’re going to tal­ly up those scores and get a total score.

[00:31:57.540] Now, I think when we did episode two, I prob­a­bly got this bit wrong.

[00:32:01.620] I had to check with Tony again when we record­ed this week.

[00:32:04.720] The process now is to add up all of the pos­i­tive scores, all of the ones, and then divide it

[00:32:13.480] by the total num­ber of check­list items, the total pos­si­ble score, which is 17.

[00:32:20.860] So we’re going to take the total score, divide it by 17, and that will give us the per­cent­age.

[00:32:28.880] I’m just going to add up all the scores.

[00:32:32.080] So let’s see what we get here.

[00:32:36.720] I prob­a­bly don’t need to use Excel to do this, but I will any­way because I’m lazy.

[00:32:45.660] 3.5.

[00:32:47.800] Yep.

[00:32:48.820] And how many check­list items do we have?

[00:32:52.480] 17.

[00:32:53.480] Yeah.

[00:32:54.420] So 3.5 over 17 gives you the score for BHP.

[00:32:58.180] So 3.5 over 17.

[00:33:01.880] Mm-hmm.

[00:33:02.680] 0.2.

[00:33:04.580] So 20%.

[00:33:05.560] 20%.

[00:33:06.840] Yep.

[00:33:07.560] And we’re look­ing for some­thing that’s 75% or high­er.

[00:33:11.460] You would be look­ing for that usu­al­ly.

[00:33:13.000] Yeah.

[00:33:13.480] So, yeah.

[00:33:14.660] And what I do next is to take that com­pa­ny’s score of 20% and divide it by that price to

[00:33:21.380] cash flow num­ber, which was 7.07.

[00:33:24.840] And that gives me the final score, which mar­ries in, you know, the val­ue plus the check­list.

[00:33:31.840] And I’m look­ing for that score to be 0.1, and it’s much low­er than that for BHP.

[00:33:36.940] Hold on a sec­ond.

[00:33:39.900] I’m catch­ing up.

[00:33:41.360] Okay.

[00:33:41.540] Say that again.

[00:33:43.400] Yeah.

[00:33:43.680] So we’re tak­ing the check­list score of 20% and we’re divid­ing it by the price to cash flow

[00:33:49.680] num­ber, which was 7.07.

[00:33:52.340] Okay.

[00:33:52.700] Right.

[00:33:53.100] So I’m get­ting a score of around 0.03 when I do that cal­cu­la­tion.

[00:33:57.720] And I per­son­al­ly won’t buy some­thing that’s below 0.1.

[00:34:01.560] It has to be above that.

[00:34:02.880] Cor­rect.

[00:34:03.280] Yeah.

[00:34:03.780] Oh, okay.

[00:34:05.000] Right.

[00:34:05.600] Yeah.

[00:34:06.140] And so the rea­son for that last cal­cu­la­tion is that some­times you get com­pa­nies with high

[00:34:10.180] com­pa­ny scores and the price to cash flow is a lit­tle bit high.

[00:34:12.860] And some­times you get com­pa­nies with good cash flow scores like BHP has, but their check­list

[00:34:17.380] isn’t that great.

[00:34:18.260] And so this is kind of like the final arbiter of mar­ry­ing those two things togeth­er.

[00:34:22.900] Okay.

[00:34:23.380] Great.

[00:34:24.080] Yeah.

[00:34:24.560] All right.

[00:34:24.820] Lis­ten, I know you need to go, so let’s just quick­ly wrap it up.

[00:34:27.740] Thank you.

[00:34:28.160] Yeah.

[00:34:28.480] All right.

[00:34:28.860] Well, thanks, Tony.

[00:34:30.300] I think that was con­fus­ing, but no, no, it was good to work through.

[00:34:38.220] Like, you know, again, I think I’m going to have to do it a 10, 20, 30 times before it

[00:34:44.060] becomes com­fort­able at least.

[00:34:45.540] Yeah.

[00:34:46.080] Yeah.

[00:34:46.420] And I think it was prob­a­bly not a bad com­pa­ny to pick, giv­en that we had all those prob­lems

[00:34:51.520] with US dol­lars and dif­fer­ent share list­ings and all that kind of thing to work through

[00:34:55.320] as well.

[00:34:56.260] Now, dear lis­ten­er, I edit­ed all of that con­fu­sion out of the show.

[00:35:01.600] Just know that in BHP’s case, it is list­ed both on the Aus­tralian Stock Exchange as well

[00:35:08.740] as on the New York Stock Exchange.

[00:35:11.040] And so some of the reports I was look­ing at were in US dol­lars just for cer­tain amounts

[00:35:17.480] of shares.

[00:35:18.560] And it was all very con­fus­ing, which is why I edit­ed it out of the show.

[00:35:23.220] And we just went with the reports that Tony had in Stock Doc­tor.

[00:35:27.040] But that is one thing to be care­ful of.

[00:35:29.060] Make sure when you’re look­ing at these reports, you’re get­ting Aus­tralian num­bers for the Aus­tralian

[00:35:33.640] Stock Exchange and Aus­tralian prices as well.

[00:35:37.360] All right.

[00:35:37.780] Well, thanks, mate.

[00:35:38.980] I’ll talk to you next week.

[00:35:40.080] Yep.

[00:35:40.340] And just, I guess, the last dis­claimer is we’re not rec­om­mend­ing peo­ple buy or sell BHP.

[00:35:44.920] We’re just doing some fac­tu­al analy­sis.

[00:35:47.460] I will.

[00:35:48.060] I will repeat that at the end of the episode as well.

[00:35:50.980] Yeah, good.

[00:35:51.600] Okay.

[00:35:52.360] Thanks, mate.

[00:35:53.220] Yeah, so I hope you man­aged to get your head around that.

[00:35:59.580] Great thing about it being a pod­cast is you can lis­ten to it two, three, as many times

[00:36:04.600] as you want.

[00:36:05.520] Sit down with a pen and paper or a lit­tle spread­sheet and, yeah, try and put it all togeth­er so you

[00:36:12.080] get your head around it.

[00:36:13.360] You know, I was going to put a spread­sheet up on our web­site where you could work along,

[00:36:16.820] but I think it’s actu­al­ly bet­ter if you build it your­self because you learn bet­ter by hav­ing

[00:36:23.420] to fig­ure out the cal­cu­la­tions in the cells, I think.

[00:36:27.400] Any­way, this is just the first of many of these that we’re going to do, so don’t wor­ry about

[00:36:31.840] it right now.

[00:36:32.460] We’ll walk you through more exam­ples in the future.

[00:36:35.400] As Tony said at the end, though, and we can’t stress this enough, we’re not licensed finan­cial

[00:36:40.740] advi­sors.

[00:36:41.940] Don’t lis­ten to any­thing that we say and make your invest­ment deci­sions based on that.

[00:36:46.800] This show is just demon­strat­ing Tony’s method, that there is a method­ol­o­gy of look­ing at cer­tain

[00:36:54.220] num­bers and mak­ing some judg­ments on the val­ue and qual­i­ty of a par­tic­u­lar stock based on

[00:37:03.960] look­ing at a bunch of finan­cial met­rics.

[00:37:06.280] It’s worked for him for decades.

[00:37:08.800] We’re just try­ing to teach you one of the ways of going about ana­lyz­ing these stocks for

[00:37:15.160] qual­i­ty.

[00:37:15.540] But if you’re going to go and invest mon­ey, make sure you talk to a finan­cial advi­sor first.

[00:37:21.600] Thanks for lis­ten­ing.

[00:37:22.560] Don’t for­get, you can sub­scribe on iTunes, Spo­ti­fy, Google Pod­casts, shoot us an email.

[00:37:28.780] You’ll find my email on the web­site.

[00:37:30.440] Go up to qavpodcast.com.au if you want to get in con­tact with us, or if you want to sug­gest

[00:37:35.360] top­ics for future episodes or com­pa­nies to look at, let us know and be good to each oth­er.

[00:37:45.540] Thank you.

[00:37:46.180] Bye.