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Packer paid too much

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by Peter Switzer

Anyone who made money after reading my take on James Packer’s raid on the Ten Network on Tuesday should be warned that my favourite company assessor thinks Ten’s intrinsic value is only 65 cents! That’s a long way from the closing price yesterday of $1.57.

And this contradiction tells us a lot about making money on the stock market.

Last night on my program I asked Roger Montgomery to run his usual test — the intrinsic value of a company — over the Ten Network. On Wednesday morning when I wrote my piece about the value of following a big investor into a takeover or raid, I suspected there would be a market bounce in favour of Ten. The share price went up close to 10 per cent on Wednesday from the $1.41 price when Mr Packer offered $1.50.

The Montgomery view

In that article, I promised readers I would ask Montgomery what he thought of Mr Packer’s prize and wasn’t surprised to see him give the company the thumbs down.

In fact, he rates all Aussie listed companies from A to C and he reckons Ten is a C5 company! What you have to understand is, as you would expect, a C1 company is better than a C5 and an A1 company is miles better than a C1 outfit.

Predictably, I asked Montgomery why Packer could have paid so much more than the intrinsic value of the company and he said that media moguls have made mistakes in the past. But he also said Packer could have a plan to make changes that would change the intrinsic value of the company.

Now Montgomery, like me, has been influenced by investors such as Warren Buffett, and it means you don’t invest in companies where you are flying blind. If you stick with Ten, and I suspect the share price will go up with the market, you have to understand you’re punting on Mr Packer’s judgement and that of the company’s management as well.

So, if you don’t mind investing that way, well Ten might be for you.

Youth market

I have to say the network has some nice figures such as being number one for 18 to 39 year olds with 37 per cent or so of the market and also for 18 to 49 year olds with around 34 per cent of the market but it’s success will hinge on programming and some smart cost-reduction plays, which Mr Packer might come up with.

In conclusion, if you want to treat the stock as a speculative play, well go for it, but it does not pass my favourite test — is its intrinsic value greater than its share price — and that’s why I am passing on the stock.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, October 22, 2010