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MOD-PAC CORP. Message Board

  • dtejd1997 dtejd1997 Mar 14, 2011 1:31 AM Flag

    How many puffs in this cigar?

    Hey all:

    I've been looking at MPAC for years, ever since it was spun off from Astronics. I recently took a position, and am kicking myself for waiting as long as I did...

    I am wondering though, how many puffs are left in this cigar? (this is an analogy that Professor Graham & Warren Buffet have used in the past). As an investor you pick up a "cigar butt" of a company on the cheap, and attempt to get a free puff or two out of it before it is "used up".

    This is in reference to companies that are selling WELL below book value, and have traditionally NOT earned their cost of capital.

    I would argue that MPAC definitely has one OR two "puffs" left in it. There is a possibility that there may be even more puffs to be had...

    HOWEVER, (to prove it has more than one of two puffs left) MPAC is going to have to earn an acceptable rate of return on it's equity. What would that rate be?

    I don't know...

    But I can definitely say it is above 10%. Why is that? Well, MPAC is paying 10% on it's mortage for it's main building...MPAC is also a micro-cap company in a competitive business.

    I would therefore argue that MPAC needs to earn somewhere around 12% or so on it's equity. I don't think MPAC will ever trade ABOVE book value if it can't do this.

    MPAC is clearly NOT doing that. I think it is earning 5-6% in the beginning of 2011.

    MPAC will need to earn somewhere around $.85 to $1/share to trade significantly above book value.

    There is much to like in MPAC:

    A). Management has turned the business around significantly in the past 18 months. It is now profitable!
    B). Book value is at a TANGIBLE $7.50/share. There is virtually no "good will".
    C). Debt has been paid down significantly and CASH is starting to pile up.
    D). Management is buying back shares at a healthy discount to book. The buybacks are outpacing option dilution.
    E). Most employee options are under water, some significantly so. There is not going to be much dilution below $6 or so.
    F). They own their main production facility.
    G). MPAC is selling at a SIGNIFICANT discount to book value, and at prices BELOW $5, there is a margin of safety.

    Unfortunately, MPAC has a few bad points....

    A). The equipment of the company has been substantially depreciated. How much more life is left in it? Is there going to be significant capital expenditures needed in the next couple of years?
    B). The company is paying 10% on it's mortgage on the offices & production building. That seems a bit high to me...
    C). Management drove the company into the ditch in the first place.
    D). There were some related party transactions (of questionable worth) in the past (Vistaprint). I hope that there are no related party transactions going forward in the future.
    E). MPAC is making money, but their return on equity is around 5-6%, which is not acceptable in the long run.
    F). Tax loss carry forwards are nearly exhausted.
    G). Company is located in high tax, business unfriendly state (Buffalo NY).

    I have a position now in MPAC and will probably start adding to it if it goes down. I think the next 12-18 months will be very telling for this company.

    Any thoughts?


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    • Thank you for your analysis.

      MPAC came up on a screen of mine (the AAII Piotroski screen) and I bought some earlier this week.

      The board posting seems a little sparse - but that's ok. I can live without the bashers and pumpers.


    • I don't think you'll get many responses on this board... it's kind of a ghost town around here. Not enough shares traded, I suppose.

      I have held a position in MPAC for the last several years, beginning around $1.67/share... adding to my position gradually, as I've watched management turn the ship around.

      I think the analogy of "puffs" remaining works better for a company that is dying a slow death. MPAC is on the upswing, with a bright future... so I don't think it works for this one.

      I need to update my analysis before I can provide hard numbers, but I believe the company will provide the sort of earnings you are calling for. I'll get back with my estimate when I have time to do it right.

      Good luck.