I try not to buy into businesses with either lumpy cash flow or earnings. They are notoriously hard to value, especially if they seem to follow no particular earnings cycle.
Nutmeg said:The statement in bold is only partly true because the bulk of the cases that IMF fund do not go to trial. They settle. And they settle because the likelihood of which side of the dispute is going to win is usually fairly clear well before the commencement of the trial. I say this as a litigation lawyer myself, usually on the opposite side of the claims funded by IMF. For a corporate defendant, the prospect of a contested trial and a finding of liability will often compel settlement even where the claim is defensible. Thus, a plaintiff's claim may have only a 40% chance of success but that is often enough to compel a settlement on terms that give IMF a substantial return on its investment. This is because, ultimately, corporate defendants always stand to lose a lot more in a public trial in terms of costs and reputational damage than do individual plaintiffs.
This is why I got into the stock. I was chatting about this with a lawyer friend of mine. He laid it out very simply, in almost every case a decent lawyer knows his chances of winning going into it. The other side does too and that's why they never go to trial because they already know what the outcome will be. Lawyers are some of the most risk averse people I know (if you've ever read a legal opinion, you'll know what I mean!). There's a misconception about the legal profession largely led by Hollywood stereotypes. The nice thing about IMF over SGH is that they don't need lots of expensive lawyers on their payroll.
I don't think you can look at this stock in terms of price-earnings ratios because there is no reliable earnings stream. The only thing that you know for sure is their current case portfolio. Would it be possible to do some rough calculations as to how much they expect to receive from future settlements and discount them back to work out an NPV? You can't tell the exact timing, settlement proceeds, expenditure or success rate, but it might help as a guide. I would also suggest adjusting for whatever working capital is required.After listening to Sutton, it is hard to resist the conclusion that, at current prices, IMF is considerably undervalued with enormous upside and minimal downside. I say that because at around $1.35 per share IMF is trading over a forward P/E of 5. At that level, IMF's US adventure has not been factored in at all and yet the prospect for the US adventure to take off in a big way must be considered very high. This is because:
I don't think you can look at this stock in terms of price-earnings ratios because there is no reliable earnings stream. The only thing that you know for sure is their current case portfolio. Would it be possible to do some rough calculations as to how much they expect to receive from future settlements and discount them back to work out an NPV? You can't tell the exact timing, settlement proceeds, expenditure or success rate, but it might help as a guide. I would also suggest adjusting for whatever working capital is required.
When looking at businesses like this I try to separate profitability and cash flow. Profitable businesses can still have a liquidity event.
I agree with most of what you have said. Definitely limitations with the valuation model I suggested, but I do not see any other way you could attempt it without inviting even more potential inaccuracy and speculation!
I once spent a bit of time trying to put a value on IMF, found the easiest way was to average out the dividends over the last 5 years then use a DDM. Discount rate 7.5% and dividend growth rate of 2%. IMF is about 30-40% undervalued - the question is does one have enough confidence in the business model and management over the medium term? I sort of do....never enough to allocate a large amount to it.
I have owned IMF and will again subject to a further drop in price.
IMF's management and business model are pretty solid in my view.
I once spent a bit of time trying to put a value on IMF, found the easiest way was to average out the dividends over the last 5 years then use a DDM. Discount rate 7.5% and dividend growth rate of 2%. IMF is about 30-40% undervalued - the question is does one have enough confidence in the business model and management over the medium term? I sort of do....never enough to allocate a large amount to it.
I have owned IMF and will again subject to a further drop in price.
7.5% is quite low, considering you can get that in some of the big4 hybrids? For IMF use no less than 12%, may be even 15%...
If I was to use a valuation model for IMF, I would treat it as an LIC, focus on the difference in discount to a medium term valuation peg. Exploit the extremes and have an adequate investment timeframe.
I did some research last night and have to admit the DDM is the wrong valuation tool. IMF have only being paying dividends since 2007, there is not sufficient dividend history to make a valuation. I am in agreement with the posters about the future work and potential for growth but I am unable to obtain a basic medium term valuation peg. I am going to file IMF in the "too difficult" basket.
Lol. That's the exact same basket I have it in. I think those who get it right will enjoy pretty good returns. But I struggle to understand The Good Wife on TV so I have no chance in understanding a lawyer business.
I am not the sharpest tool in the shed so the “too difficult” basket is actually a large skip outside the house.
Lol. That's the exact same basket I have it in
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