Eureka Correspondence

Household savings rates, Ethane Pipeline's fall, and explaining stock price valuation discrepancies.

Analysing the household savings rate

Various articles, such as Adam Carr’s Will rising unemployment cut the sharemarket, refer to the ‘household’ saving rate - often cited as around 10%. Wondering if this includes the mandatory 9.25% super contribution? If so, the discretionary saving rate would approach zero. I guess this is not the first enquiry along these lines - but this point needs to be made clear in published articles to avoid confusion.

MB

Adam Carr’s response: Thanks for your letter. The household savings ratio does indeed include superannuation. However, and while your point is intuitive, it can’t reliably be said that savings would tend to zero in the absence of compulsory super.

As an example, through much of the period from 2002-2007, the household savings rate was barely above 1% – and that was with compulsory superannuation. Indeed savings rates actually fell (from rates up to 10% to 0%) after compulsory super was introduced.

Generally, the measurement of savings is inexact and flawed as it is a residual item that can be subject to large revisions. On the upside, many argue that discretionary principal repayments on mortgages are in fact savings and should be included in that measure.

It’s important to note that these issues have been with us consistently for some time. There is information content when the household savings ratio goes from 0 -1% to something like 11% now.

Explaining EPX’s price fall

To my knowledge, the recent Ethane Pipeline Income Fund (EPX) share price fall (30% ) has not attracted any request from ASX for explanation.

The risk profile associated with single supplier/entity has not changed unless there is some newly emerged risk (which should be announced to ASX or unit holders). But someone obviously is in possession of other info, which has contributed to the share price fall. As John Abernethy covered the stock in Infrastructure fund’s sound income pipeline, his comments would be much appreciated.

RS

John’s response: The share price corresponded with the half-year profit announcement, which indicated that earnings declined in the December quarter. 

Earnings were forecast to decline in the outlook statement at the November shareholder meeting. The decline was due to a change in pipe rental contract terms (30 September) and a plant closure by Quinos for 15 days in October.

Clearly the market was surprised by the earnings decline because the outlook statement was neither clear nor specific in its forecast.

However, the unit price decline was excessive and really was indicative of poor communication by the company.

Clarifying Collected

Hi David, your article concluded: “According to our value investor partners, StocksInValue, the intrinsic value for CSL is $62.90. Investors are generally advised to buy CSL at current levels.”

Buying CSL at the current price of $70.31 does not make logical sense with an intrinsic value of $62.90 (assuming this is correct?). Would you please explain your rationale for this buy/price/value discrepancy?

By the way, I have noted in another publication that CSL has a broker consensus price target of $71.83, but ranging from as low as $62.20 up to as high as $80.00.

TM

David’s response: Thanks for your letter. Collected Wisdom collates recommendations from broker reports, newsletters and major daily newspapers to provide a consensus view on a particular stock. As such, StocksInValue is one among many sources that I consider. Further, it has a long-term value methodology that is generally more conservative than how brokers assess stocks.  

With broker price targets, I take the average from brokers polled on Bloomberg to find ‘consensus’. You will find the gap between the highest and lowest price target is often large.

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