Description

Do you like locorice? Then buy shares in M & F Worldwide (New York Stock Exchange). MFW is the world's largest producer of licorice flavoring, as well as a leading producer of natural flavorings.

The company operates in a mature industry (flavorings and fragrances), but is growing at three times the pace as its peers in the industry. A small cap stock traded on the New York Stock exchange, M&F is a giant cash flow machine, with little overhead and management that is not very imaginative in spending this cash.

The company is a true value stock with limited business risk, and limited competition. MFW sells for roughly 1.1 times sales and 6.6 times 1999 trailing earnings. I suggest that at the current price, the shares are selling for less 6 times 2000 estimated forward earnings. Earnings for the year to date (first six months) are up roughly 15% over the previous year.

In 1999, the company used surplus cash flow to eliminate a $20 million convertible preferred share issue entirely, and also paid down outstanding long term debt by $12 million. At present rates, in less than 18 months, the company will have the ability to pay off its total debt. This would serve to increase shareholders' equity by an additional 40%.

One brokerage firm (Wasserstein Perella) presently rates the common shares as a "strong buy" and predicts a two year target of $11.

At present, the company generates a net profit margin after tax of 16.6%, and generates a gross operating profit of 38.8%, up from 35% for the same period last year. Return on shareholders equity runs well in excess of 25% and is rising steadily.

In recent news, the company has announced (and is carrying out) a 2 million share repurchase in the open market for cancellation. This will reduce the outstanding shares by 10% in the next 12 months. A 10% reduction in shares outstanding, + a 15% increase in net profits may result in a 20%+ total increase in profits for the next 12 months.

With its' pristine balance sheet, dominant market share in core business, little correlation to the economic cycle, rapidly rising earnings and low share price, the company is ripe for a buyout by another company in the same industry.

Catalyst

Internation Flavors and Fragrances is seeking to revitalize its share price. A new CEO has been appointed from Univever, and he intends to build upon IFF's dominant market and strong balance sheet. He was well known as an acquirer of companies, and has stated that he will make acquisitions. MFW would be my first choice, if I was in his shoes. IFF could afford to pay up to $12 per share in their stock for MFW and would still reap significant synergies from the deal. IFF's earnings would increase by $.20 per share, and would restore a measure of Wall Street favor to the worlds leading food additives company. Therefore, investors with a two year horizon should expect a buyout offer for M&F Worldwide for at least twice the present share price. Downside risk is minimal, unless the entire world ceases to eat licorice.