To be completely honest, i don't didn't really do a terminal value before arriving at the conclusion that the stock was good value. That may sound bizarre, but i know intuitively that the TV in this business is significantly more than nothing, and if the NPV of the current litigation book plus net cash is almost equal to today's market capitalization using sensible assumptions, then arguing over TV is just arguing over sense of degree to which the business is potentially mispriced.
Since you asked, the way i would think about TV with IMF is that you need to assume three key things: 1) how much capital they can deploy each year, 2) at what MOIC they deploy this capital (assume the 2.5 year case resolution target holds steady), and 3) how many years they can do this for. This, with an overlay for corporate overheads and tax, would give you a very rough and tumble idea for terminal value. Here's the big catch: as with all modeling exercises known to man, it's GIGO (garbage in, garbage out). Sitting here today, if we are being honest with ourselves, none of us have even the slightest idea how to dimension those three key variables, so all you can do is run a few rough scenarios and see what pops out. My personal view is that a lot of money appears to be coming into this industry recently (
https://www.bloomberg.com/news/feat...s-on-vw-lawsuit-could-yield-10-000-or-nothing), (
https://www.bloomberg.com/news/arti...r-to-secretly-bankroll-someone-else-s-lawsuit), (
https://www.bloomberg.com/news/articles/2015-03-18/hedge-fund-betting-on-lawsuits-is-spreading) which, according to the most fundamental law of capitalism, suggests returns are going to gradually go down across the industry. This, in combination with the three key risks i mentioned in my prior post, may in part be why the market doesn't ascribe much (or seemingly any) terminal value to IMF - it's just so hard to dimension with any certainty.
But, for the sake of argument, if i use a 20% discount rate, 30% tax rate, 2.5 year settlement average, and approx $10m annual corporate overhead (grown at 3%) to keep the lights on, and assume IMF can deploy $100m annually for 10 years at a 2.0x MOIC, i get a terminal value in 2020 dollars of ~$190m, which further discounted to today at 20% is ~$110m NPV. I suspect any analyst (or, indeed, member of IMF management) would say i am being very unfair in using a 20% discount rate and assuming that the whole business loses its licence to operate in 2030, and i probably am, but just for the sake of the exercise that's how i'd start thinking about things.
