Bristlemouth - A Value Investing Blog


A Value Investing Blog

Posted on 18 Feb 2017 by Gareth Brown

Demographics for Dummies (and the RBA)

Demographics for Dummies (and the RBA)


There’s a prevalent assumption that Australia is far more urbanised (or should I say suburbanised) than the rest of the world. It’s is being spread by, among others, high-ranking staff of the Reserve Bank of Australia. Those staff have suggested urbanisation is a partial explanation for the gaping difference in dwelling price-to-income ratios between Australia and the US.

According to the RBA’s numbers, the average Australian dwelling sells for almost 5-times average household disposable income versus less than 2-times in the US.

But there’s a slight problem with the assumption about Australian urbanisation being far greater than in the US. While it’s both plausible and widely-believed, it’s also wrong. Last year, I attempted to prove as much—see Statistical Buggery: RBA Urbanisation. Continue reading “Demographics for Dummies (and the RBA)”

Posted on 15 Feb 2017 by Gareth Brown

Europe Takes Off

Europe Takes Off


There is a strong correlation between general economic health and the number of people taking to the skies. It’s held across most individual markets for more than 50 years. Specifically, commercial passenger numbers have grown around 1.5-times real (after inflation) GDP over the long term.

Short term data is noisier. It’s knocked about by factors like oil prices, terrorism fears, pandemics and the health of airline balance sheets. So short term passenger number growth might not be a particularly accurate economic thermometer. With those caveats in mind, we might be seeing early evidence of a ruddy recovery in Europe.

I track a lot of airport data. The below table highlights passenger growth over the past year at large European airports. Each entry shows the percentage change in passenger numbers from the same corresponding month a year earlier.


Growth seems evident, once you understand a few important exceptions. Paris-Charles De Gaulle and London Heathrow are both butting up against capacity constraints, which is why you see little growth in the busier (northern) summer months, but some growth in the off-peak months. Both did well considering their constraints. I’ve added the numbers for secondary London airports Gatwick and Stansted as a counterpoint to Heathrow.

Brussels had a tough year. The terrorist attack at its airport in late March 2016 hit hard. Frankfurt was another underperformer. Lufthansa pilots went on strike later in 2016, but that didn’t coincide with the main weakness in the middle of 2016. The company’s second quarter financial report cites terrorism fears and weather events – but those excuses don’t stack up versus other European airports. The more likely cause is shrinking capacity at Lufthansa. The German national carrier provides about 60% of the airport’s traffic and is burdened by particularly large unfunded pension obligations.

Europe Takes Off

Exceptions aside, passenger growth across most European airports was strong over 2016. An acceleration is evident over the past 2-4 months at most locations. Where more detail has been provided by airports, intra-European growth has generally been higher than growth to or from the rest of the world. And ‘periphery’ countries like Spain and Ireland are growing faster than ‘core’ EU countries, although the core is clearly also doing well.

Even Athens is killing it, though that’s probably more about inbound tourists than in- or outbound business people. Any sunny European spot perceived as safe has been growing recently at the expense of Turkey, Egypt and Tunisia.

I wouldn’t go basing any large macro bets off this (or any other) data. But it’s a good sign for Europe. Economies that are in the doldrums don’t tend to grow passenger numbers at an annual rate of 5-10% or even more, not for long anyway. It’s worth keeping a sharp eye on European passenger numbers over the next few months.

Posted on 09 Feb 2017 by Steve Johnson

GTN and Webjet Don’t Compare Well

GTN and Webjet Don’t Compare Well


The FT Alphachat Podcasts serve two purposes on our holiday travels. They let me catch up on some engaging content. And they put my mildly insomnolent wife into a deep sleep.

Hence I found myself listening to an interview with Michael Mauboussin on a recent slow, end-of-a-long-weekend drive from the NSW South Coast to Sydney. Mauboussin was speaking with the FT’s Cardiff Garcia about the implications of his experience writing his recent paper titled 30 Years: Reflections on the Ten Attributes of Great Investors.

Continue reading “GTN and Webjet Don’t Compare Well”

Posted on 01 Feb 2017 by Daniel Mueller

Be Alert to Directors’ Interests

Be Alert to Directors' Interests


There are many rules of thumb an investor learns early in their journey. One of these is that directors buying stock ought to be positive for the share price and directors selling stock is a red flag.

The theory goes that directors are insiders and should have a better feel for how a company is travelling than us outside investors.

Sure, there could be valid reasons for directors selling stock. But after years of hearing these reasons, they tend to become repetitive and sound more like excuses. “I have a big tax bill this year,” “I’m buying a property,” and “I’m going through a divorce” come to mind.

If a company’s prospects are as bright as many annual reports would lead us to believe, surely these directors could borrow money to hold on to their shares. There seems to be no shortage of money around when directors purchase stock. I’ve never heard one say “I wanted to buy stock but couldn’t cough up the cash.”

With that said, let’s test the theory with some examples from 2016.

Continue reading “Be Alert to Directors’ Interests”

Posted on 30 Jan 2017 by Steve Johnson

CIMIC Bid Underwrites Value for Macmahon Shareholders

CIMIC Bid Underwrites Value for Macmahon Shareholders


It has been expected for a long time. If the AFR is to be believed, it isn’t the first bid CIMIC Group has lobbed on the table. But CIMIC’s early 2017 bid for the 80% of Macmahon it doesn’t already own is the first serious attempt to relieve minority shareholders of their holdings.

The Australian quotes us this morning as being “angry” at CIMIC for the bid. Quite the contrary, the bid is excellent news and we are happy it has finally arrived. Continue reading “CIMIC Bid Underwrites Value for Macmahon Shareholders”

Posted on 19 Jan 2017 by Alvise Peggion

Cardno Back into Shape

Cardno Back into Shape


Over the past few months the Forager Australian Shares Fund has been buying shares in Cardno (CDD), an engineering consultancy company. Gerry Cardno and Harold Davies started the business in Brisbane in 1945. The company thrived during the post-war boom years through to the 1970s, designing bridges, sewage systems, dams and roads throughout Queensland.

After listing on the ASX in 2004, Cardno expanded across Australia and internationally. A buoyant mining sector and 44 acquisitions saw revenue rise from $94m to $1.3bn over the period to 2014. By then it was valued at nearly $1.2bn, up from $35m when it floated.

Then commodity prices slumped. Mining and oil related investment evaporated and there weren’t enough infrastructure projects to pick up the slack. Engineering firms competed fiercely for what work there was and the industry’s profitability crumbled. Cardno’s EBIT margin, a measure of its operating profitability as a percentage of net revenue, fell from around 15% in the boom years to less than 5% now.

Continue reading “Cardno Back into Shape”

Posted on 18 Jan 2017 by Daniel Mueller

Value Traps, the Media Sector and the Fund’s Newest Investment, NZME

Value Traps, the Media Sector and the Fund's Newest Investment, NZME


The Australian media sector has wrecked the careers of many fund managers over the past decade. First were the growth investors — those prepared to pay high multiples for a business they think can grow. A decade ago high earnings multiples (around 20 times profit) were supposedly justified as deregulation was meant to lead to a wave of consolidation. Media moguls like the Packers, Stokeses and Murdochs were supposed to mop up the sector at premium prices. Fairfax (FXJ) was the most prized target, and APN News and Media (APN) wasn’t far behind.

Continue reading “Value Traps, the Media Sector and the Fund’s Newest Investment, NZME”

Posted on 12 Jan 2017 by Forager

Forager’s Top 5 Not-Dick-Smith blogs of 2016

Forager's Top 5 Not-Dick-Smith blogs of 2016


Welcome to our “Top 5 Non-Dick-Smith Blogs of 2016”. Those of you new to Bristlemouth may wonder why we are doing this, while those who have been with us during 2016 will likely have a wry smile. The Dick Smith articles garnered a lot of attention and whipped up some controversy, so you are likely aware of these articles and our thoughts on them. Hence we’ve decided to present you ‘the best of the rest’ to showcase our 2016 blogging highlights. These are the five most read posts of 2016. Continue reading “Forager’s Top 5 Not-Dick-Smith blogs of 2016”

Posted on 10 Jan 2017 by Steve Johnson

Why Value Investors Welcome Uncertainty

Why Value Investors Welcome Uncertainty


Dilma Rousseff. Putin. Filipino Hard Man.
Brexit. Trump’s in. Usain Bolt wins again.

If Billy Joel rewrites his 1989 classic We Didn’t Start the Fire, 2016 will surely get its own verse. From January’s China meltdown worries through to a US president elect pursuing government policy via Twitter, hardly a month went past without something extraordinary happening.

Truth be told, we didn’t predict any of it. We didn’t know who was going to win what and we didn’t place any huge bets on the outcomes of elections, referendums or currency movements. And yet 2016 was one of our best ever years of relative performance. Despite some disappointing developments in the last three months of the year, the Australian Fund added 16% of performance for the year, 4% ahead of the All Ordinaries Accumulation Index. Despite being down 5% in the first month of the year, the International Fund finished up 24%, versus 9% for its MSCI global index. Continue reading “Why Value Investors Welcome Uncertainty”

Posted on 22 Dec 2016 by Gareth Brown

Forager’s Summer Book List

Forager’s Summer Book List


Books for the Summer Holidays was a post outlining my favourite reads of 2015. We’ve decided to expand the book list this year by getting contributions from everyone in the office. There should be something for everybody on this list. Merry Christmas and enjoy your summer break.

Forager’s Summer Book List  Gareth Brown

The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone

In the same length as my own fulltime working life—22 years—Jeff Bezos has built juggernaut Amazon from scratch. It’s a place where lightning has struck numerous time—Marketplace, Amazon Prime, Amazon Websites Services, Kindle and, perhaps, Amazon Echo.

Steve Jobs and Bill Gates are masterful monopolisers of high margin businesses. In contrast, Bezos actively seeks to monopolise low margin business. Through the book, you can almost see his eyes light up as he explores ideas that are prospectively so low margin that nobody else will want them. He then throws resources, blinding insight and frugality at the problem until it’s sorted, prepared to incur years, perhaps many, of losses in those formative years. Fellow Seattleite Bill Gates once said that most people overestimate what they can do in one year and underestimate what they can do in ten years. Bezos isn’t like most people. Continue reading “Forager’s Summer Book List”

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