Model Portfolio rmcduff:RMG2

M & F Worldwide (nyse: MFW) ($37.93) is the world's largest producer of checks. The firm also has a growing information processing division, called Scantron. This division handles automated testing and data processing for schools and businesses throughout the US. Finally, the company is the world's largest producer of licorice.

MFW has grown through acquisition, using the steady cash generation from the licorice business as a stepping stone. In the past four years, the firm has purchased several check printing companies for EBITDA multiples of 6X and 8X respectively. Recently, the firm has also added a data business from Pearson for less than 8X my estimated EBITDA. This $225 million purchase was paid for with cash on hand.

MFW now has a total enterprise value of $4.16 billion. The firm is highly leveraged, but generates tremendous cash flow, relative to its total size. As much of the debt is long term, the current credit market turmoil has no impact on MFW. A high percentage of the outstanding liabilities represent deferred taxes. These may or may be realized. Accordingly, my balance sheet outlook is conservative.

I forecast that MFW can generate in excess of $480 million of EBITDA in 2008, which represents a margin of roughly 29%-30% of the $1.6 billion of forecast revenues. Annual interest expenses should run in the range of $205 million in 2008. Capex requirements could be less than $100 million per year.

My 3 year forecast suggests that EBITDA could rise to roughly $520 million in 2011. Assuming that the market continues to price MFW at just 7.5X EV/EBITDA, I estimate that the shares could be worth $76. This represents a potential return of more than 100% above the current share price.

The closest peer, Deluxe Corp. sells for a much higher relative valuation, and has been losing market share to MFW over time. As MFW's cash flow capability becomes more recognized by investors, a higher relative valuation could occur.

MFW also has the ability to float Scantron to the public, when market conditions warrant. Scantron would appear to be a desirable stock in its own right. A public flotation would greatly delever M&F.