Positive NPV

Communications Systems: One Cheap Stock

I suggest focusing most intently on the potential for growth, because if the future looks flat for them, then the price is currently priced about right. The FCF for the firm for the last three years has been flat yet steady. As a quick valuation, use $4.5mm as a FCF number. Assume that grows at 2% per year, which seems reasonable in a flat growth valuation scenario. Assume an equity cost of capital of 10%. Assume the stream lasts forever. Using a basic perpetuity valuation you get a NPV of the FCF streem of $56.25 mm. Add on the excess cash and you've got a firm that is probably fairly valued if the future for them is flat to mildly up.

For there to be upside on this one, growth in FCF will need to happen. If in your digging you see strong evidence of growth prospects, I'd like to hear about it. It could be a great play with lots of current safety.