abh3vt, researcher, Valuing companies with NOL the right way in my opinion, is to assume full tax (then calculate the P/E, PEG etc) no matter how long or how much the NOL expiration date and the amount of NOL carryforwards accumulated.
And instead, the NOL value should be added to the balance sheet (as asset, such as short term investment).
Enterprise value calculation will later capture this asset and lower the EV/Income or EV/FCF (which helps make the company look more attractive and not as misleading as adding the tax in income statement.)
For example MDF has about $19-$20M NOL and if I assume that MDF can benefit from all those NOL (as MDF is profitable) then I will add $7M in asset (20M times 35% tax rate) which incerase the book value to $20M (or $18 tangible book value).
Then after incorporating the tax benefit into the asset section, I will use the after tax income (even they haven't pay now) to calculate their PE and PEG. MDF is expected (by me) to make $11M for 2004 pre-tax (assuming $2.1M in Q4), Then 2004 after tax earning will be $7.15M, and with current market cap of $139M, their after tax PE is 19. This is the number that I think investor should focus on. (because this is more reppresentative of what the company operation under normal circumstanced will be). Look at MSTR.. are they cheap with PE of 7?
It is imperative to taken non-paying-tax-benefit out of the equation/valuation the tax will one day be paid assuming the company make money).(People unconsiciously miscalculate/wrongly value the company by ignoring the tax because they think not have to pay for some time equal to not having to pay forever)
Or they think to overcome the 35% hurdle rate when the tax hits is easy. Do people know how hard it is to grow business (revenue and profit) by 35%
Hence, my conclusion, MDF at this moment is rightly valued... (PE of 19 not bad at all IMO)
I'm still long on MDF
BTW, I picked up 20,000 more share of EMRI at .60 because I found out from their 10Q that they have $15M+ NOL which is an instant $5M in asset (future income). At that time their market cap is only $15M. Now I think it's also fully valued.
The moral of the story is that we can take advantage of the NOL situation (either by buying the stock when no one know about those hidden asset, i.e. future NOL benefit or selling the stock when it gets overheated.) My Objective with MDF is very long term investment so I'm trying to educate current shareholder and new investor about the current situation for MDF and hopefully they understand and have the right expectation.
Stan
