Sorry for the double-post but, having spent a brief hour or so today thinking about where IMF is today versus the last 10 years of its trading history, i have come to the conclusion that the stock is potentially cheap, particularly in light of yesterday's JV announcement.
As any follower of this stock knows, valuing this stock with any sort of exactness using conventional DCF valuations is effectively impossible because the future cash flows to be enjoyed by shareholders are the sum of dozens of highly uncertain cases with highly variable outcomes, in terms of both cash flowing quantity and timing. It's literally impossible.
So, what i find to be a useful relative value metric is simply to look at the implied market premium IMF's intangible asset base (i.e. its cases) is being ascribed at any given point in time. What i do is simply compare IMF's market cap relative to its intangible asset value, ascribing 100% of the market premium to IMF's intangible asset (and, implicitly, assuming the market values all other assets at $1-for-$1). Below is the data for the last 10 years:
Ratio of implied market value of intang : B/S value
2.54
1.69
4.39
3.69
2.89
2.72
2.86
2.19
1.92
1.76
As can be seen above in the last row of the table, this number has gone as high as 4.4x in 2009, all the way down to 1.7x in 2008. Based on this very rudimentary relative value metric, IMF is now as cheap as it has been for a decade, relative to its case investment portfolio - the market seems to be implicitly assuming that IMF's future returns from cases will be substantially lower than those of the past. Part of this, i think, has arisen because IMF's investment returns have slowly declined since 2010-2011, as their intangible investment relative to potential claim value has increased over time:
As can be see above, their ratio of claim value : intangible investment has declined from >30x in 2007-2010, down to its current level of ~24x, meaning that, all other things being equal, they are investing more per case for each dollar of potential future return. However, even on the ratios of market cap as % of PF claim value (i.e. adjusting for this increased investment relative to potential future upside) and market value of intangible relative to future claim value, the stock is now as cheap as it has been since 2008.
However, to paraphrase the great Tim Shaw of Demtel, "but wait, there's more!". In addition to the prima facie relative value case outlined in simple terms above, as a result of yesterday's announcement, IMF has created from thin air a potentially valuable asset; namely, a performance fee on its JV with Fortress. This, of course, doesn't show up on the balance sheet, but assuming i understand the JV correctly, IMF could see a large performance fee flow to it 5-6 years from now if they successfully deploy Fortress' $150m equity capital at IRRs in excess of the (as yet unknown) hurdle rate. To value this performance fee today is, of course, effectively impossible given the returns from the venture and timing of cash flows are unknown, but it is the "hidden asset" enjoyed by similarly structured fund managers in other fields (such as infrastructure, real estate and so on).
So, all other things being equal, IMF appears to:
1) Be trading cheap relative to its future potential profitability, as suggested by its case investment and claim value relative to current market capitalization;
2) Be trading even cheaper on a relative basis than suggested by (1), because the performance fee is an intangible asset the business hasn't previously had; and
3) Have gone a long way to solving what i think is probably the most pressing issue the business has always had; namely, its funding constraints.
Happy to hear thoughts of others, particularly countervailing thoughts.
IMF Price at posting:
$1.83 Sentiment: Buy Disclosure: Not Held
