Is MFW stock really cheap?
Jan. 23, 2011 10:35 PM ET
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Barron’s just published an article in its January 24 edition on MFW stock and Steven Kiel extended the MFW discussion by publishing an article in SeekingAlpha shortly after. Although they both failed to put up a price of how much the stock is worth, both concluded that at expected 2010 EPS of $6 and FCF of $200 million, the stock is pretty cheap at $21.89 current price and $425 million total market value.
I disagree. Before I get down to my valuation, let me explain the following assumptions:
First, free cash flow to the firm (FCFF) is suitable to analyze a firm, such as MFW, with a changing capital structure and/or large debts. FCFF would be FCF adjusted for debt interest expenses. MFW’s 2010 debt interest expense is close to $120. Assuming 40% tax rate for 2010 and $200 FCF, FCFF would be close to $270 million.
Second, with slowing check making business due to e-payments and regulation uncertainty around Licorice, total revenue and FCF are expected to trend down in the coming years. For simplicity, I assume revenue and FCF will stay flat and apply perpetual valuation model.
Third, I assume that 10% is a reasonable weighted average cost of capital.
With the assumptions, the total enterprise value of the firm is about $2.7 billion. Deduct $2.2 billion debt from FCFF to reach $500 million equity value. Therefore, current $425 million market value doesn’t seem an eye-popping discount.
Disclosure: I have no positions in MFW stock and derivatives.
Disclosure: I have no positions in MFW stock and derivatives.
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