MNDO Valuation

Valuing MNDO is fairly straightforward.

Multiple Approach

It has net cash of about \$1/share (\$18.5M). Its normalized annual earnings are about 5M/year, or about \$0.25/share. Since they have been good stewards of capital, we don’t need to discount cash. If we slap an 8x multiple on the earnings, we arrive at 0.25*8 + 1 = \$3/share intrinsic value.

Cash Flow Approach

The value of a perpetuity throwing a steady annual cash flow of \$c/year is:

$\displaystyle v = \dfrac{c}{d},$

where d is the discount rate. This assumes a growth rate g = 0.

For MNDO, we can take d to be the cost of equity, which is around 10%. If we use these numbers, we get a value of \$0.25/0.10 = \$2.5. Adding net cash, we arrive at \$3.50/share.

If we use a higher hurdle rate (d = 15%), we get \$1.0 + 0.25/0.15 = \$2.66/share. Since the current price is lower than this price, if my assumptions are correct, I should earn more than 15%/year. This seems reasonable given the company throws of a 12-13% dividend. Any correction in the earnings multiple will put me over my hurdle rate.

What if the growth rate is nonzero (positive or negative). Then the value becomes,

$\displaystyle v = \dfrac{c}{d - g},$

where the cash flow in the numerator is now the cash flow next year, which I assume to be the same as this year for simplicity. If the steady growth rate is plus or minus 1%, the value varies between \$2.56-\$2.80.

Conclusion

Thus, it seems that MNDO should yield 15+%/year, unless its business model breaks down swiftly. If this happens over 3 years, then there is enough margin of safety to protect all the invested capital. If this does not happen, and MNDO is able to adapt like it has in the past, this can be a 20%/year investment.

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