mcp under valued by 40%, page-4

Ocker, I'll see your EXCEPT and raise you another EXCEPT:

To compare MCP's P/E today to its P/E over the past years is to compare apples with oranges. The inconsistency lies in the small matter of the differential capital structure.

Simply and crudely: MCP's EV today is around $265m ($200m market cap and ~$65m in average net debt for FY11). For the bulk of the 2000 to 2010 period, MCP's Net Debt averaged ~$120m, implying an EV (even at today's expanded issued share capital) of $320m.

At an EV of $320m, a P/E of 7.5x translates into an EV/EBITDA multiple of 6.2x (you can do the rudimentary arithmetic yourself; I've omitted it in the interests of brevity). Yet, at MCP's capital structure today, the EV/EBITDA at the same 7.5x P/E multiple is only 5.1 times.
(again, basic Excel spreadsheet workings will confirm this to be a mathematical axiom)

So, to get MCP to its long-term EV/EBITDA multiple implies around 30% equity valuation uplift.

At the risk of labouring the point, assume - as I do when investing in businesses - that you are to own, not just a share of the company, but the entire enterprise. Assume, too - as you should - that you look to minimise the period over which you recoup your outlay to purchase the enterprise in question.

In MCP's case, the business generates free cash flow of around $25m to $26m per annum. That puts the business on a FCF yield of:
8% based on an EV of $320m (12.3 year payback period), or
10% based on an EV of $260m (10 year payback period)

And that's the problem with the vanilla P/E multiple as a valuation tool; it fails to account for the important fact that not all "E"'s are created equal.

Hope you don't think me presumptious, but I thought I'd highlight what I believe to be some flawed logic in the unilateral application of P/E's. They're nice and quick, but the trade-off in their use is incomprehensiveness (is that a word?).

Regards and Prudent Investing

Cameron

PS. Without wanting to be overly pedantic, if you do insist on valuing MCP using a P/E multiple based on FY10 EPS, then be advised that underlying EPS for the year was 37.2cps, as distinct from the reported figure of 36.2cps (the difference being a $0.7m restructuring charge taken to account in JH10). But as I have admitted, it's somewhat of a matter of pedantry.