when i fell out of love with centro

The exact moment was about two weeks ago when I was arguing with (Makattack?) on this forum about the growth of the retail sector and I discovered I made a small but significant miscalculation. That miscalculation was the fact that I had not taken into account inflation when looking at the Australian retail sector growth.

But it began after I picked up a wonderful book titled The Buffettology Workbook by Mary Buffet and David Clark. Without boring you all on the contents of the book I will say that the significant point that the book makes (besides a great introduction to mathematically determining the true value of companies – something that is great for a newbie like me) is that consumer monopolies exist all around us and in times of market downturns these are the sectors you should be looking at.

Now the real question that I am beginning to ask myself when looking at companies is; in real terms what has been the history of returns from a particular company that I am looking at investing in, since I cannot predict the future.

Looking at Centro in the two (arguably most important PI’s) – EPS and Return on Equity I find this.
1998/06 1999/06 2000/06 2001/06 2002/06 2003/06 2004/06 2005/06 2006/06 2007/06
Earnings (cents) 44.0 41.4 33.4 35.0 30.2 33.9 36.2 28.2 84.6 57.8
Return on equity (%) 10.1 12.1 7.7 9.9 8.7 10.6 9.0 5.5 20.3 15.8
Average ROE: 10.97

These figures are not great and definitely not reflective of solid sustained growth. Now some will argue just as I did that the question is not so much previous earnings or returns but rather the current undervaluation of this company. Now I will agree that is true, the company VERY LIKELY is currently undervalued in terms of shareprice but the further point I would make is that so are some of the most viable, profitable and successful companies in Australia.

Let me just point out three examples:

Coca-Cola Amatil Limited (CCL)
1998/12 1999/12 2000/12 2001/12 2002/12 2003/12 2004/12 2005/12 2006/12 2007/12
Return on Equity: 4.9 4.4 4.6 6.7 6.4 8.2 9.0 22.5 21.3 17.6
EPS: 22.1 18.6 19.7 24.8 29.6 34.1 39.3 43.1 41.8 33.7
Merrill Lynch: Buy, Medium Risk $9.00 28.0%
Credit Suisse: Upgrade to Neutral from Underperform $9.05 28.7%
Citi: Buy, Medium Risk $9.20 30.9%
ABN Amro: Buy, Medium Risk $9.20 30.9%
UBS: Neutral $7.72 9.8%
Aspect Huntley: Upgrade to Buy from Accumulate
Deutsche Bank: Buy $10.40 47.9%
Macquarie: Outperform $9.31 32.4%
JP Morgan: Neutral $8.90 26.6%
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Crown Limited (CWN)
2007/06
EPS: 285.9
Return on equity (%) 33.4
Citi 03/07/2008 1 Buy, Medium Risk $13.80 53.0%
Credit Suisse 24/06/2008 1 Outperform $12.65 40.2%
JP Morgan 17/06/2008 1 Overweight $13.75 52.4%
Aspect Huntley 12/06/2008 1 Upgrade to Buy from Accumulate - -
Merrill Lynch 28/04/2008 1 Buy, Medium Risk $12.55 39.1%
UBS 17/04/2008 1 Buy $15.00 66.3%
ABN Amro 21/02/2008 3 Hold $12.30 36.4%
Macquarie 21/02/2008 1 Outperform $14.96 65.9%
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ASX Limited (ASX)
1998/06 1999/06 2000/06 2001/06 2002/06 2003/06 2004/06 2005/06 2006/06 2007/06
EPS: 20.9 35.1 57.2 51.9 57.7 61.1 80.3 105.0 132.9 188.6
Return on equity (%):11.8 20.0 38.8 33.4 29.9 29.6 37.6 37.8 38.5 11.5
ABN Amro 04/07/2008 3 Hold $32.00 4.1%
Macquarie 04/07/2008 1 Outperform $45.55 48.1%
Merrill Lynch 04/07/2008 3 Neutral, Medium Risk $36.40 18.4%
UBS 04/07/2008 1 Buy $40.00 30.1%
Credit Suisse 04/07/2008 3 Neutral $38.50 25.2%
Citi 03/07/2008 1 Upgrade to Buy, Medium Risk, from Hold $34.97 13.7%
Deutsche Bank 05/06/2008 3 Upgrade to Hold from Sell $33.00 7.3%
JP Morgan 05/06/2008 1 Overweight $43.25 40.7%
Aspect Huntley 16/05/2008 2 Downgrade to Accumulate from Buy - -
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Yes these companies technically don’t have the upside of 100-200%+ over maybe 2 or so years but these companies have 50% + upsides over likely a years time AND most importantly without the MASSIVE risk that Centro is, infact these companies (and surely there are heaps more like them on the ASX at this point) have close to 0 downside at these prices.
Anyways just as I have always said on either side of the argument, maybe I am wrong maybe not but I just felt like sharing my opinion – or change of it to be more exact. I continue to hold stock in CNP in the belief that they will likely jump as rumours begin to spread again but as soon as that happens I am out and straight into something like the above mentioned stocks.