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from Outstanding Investor Digest's December 31, 1996 Edition

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CENTURY MANAGEMENT'S
ARNOLD VAN DEN BERG

(continued from preceding page)

Van Den Berg: And based on the multiples of the closest acquisitions that we can find, we'd be talking about a private market value of 20-25 times.

OID: They sold at 20-25 times earnings?!
Van Den Berg: They sure did. And, in fact, that's not so surprising. Our studies suggest that the average P/E paid for acquisitions tends to peak at 22-24 times earnings in markets similar to today's. That's approximately what they tended to be, incidentally, in 1968, 1972 and 1987 and what they've averaged since 1994.

OID: And we thought double-digit P/Es were unholy...
Van Den Berg: Still, absent an actual acquisition, stock prices very rarely exceed 80% of acquisition prices and, therefore, tend to peak at more like 20 times earnings.
But getting back to Moore, the closest acquisitions that we can come up with suggest a P/E of 22-24. And so there's our private market value estimate of $45-50.

OID: Actually, using your figures, we come up with $60 to $75...
Van Den Berg: We don't use peak multiples in our valuations. During the 1970s, the average P/E multiple on acquisitions got as low as 13 and probably averaged 16-17. And that's what we're using. We try to be conservative....

OID: Please get that out of your system right now.
Van Den Berg: The best comparable sale that we can find for Moore Products is Elsag Bailey's acquisition of Fischer & Porter. They paid $29.90 per share - or approximately $157 million. Their earnings and cash flow were as depressed as Moore's. So we used normalized figures to calculate their multiples.
And using our normalized figures, we estimate that Fischer & Porter sold for .77 times price-and-debt-to-sales, .69 times price-to-sales, 13.6 times cash flow, 8 times EBITDA, 2 times book and 22 times earnings.
If we apply those same multiples to Moore's normalized figures, we come up with $38.93, $37.10, $53.18, $49.38, $41.40 and $55.00. Averaging those figures, we come up with $46.67. And that figure doesn't include their overfunded pension, their LIFO reserve or their excess real estate - which would add about $14.50.
So we believe our estimate is very conservative. Someone could very easily make the case that Moore's private market value is higher.

OID: Actually, I thought you just did...
Van Den Berg: We do look for a bigger discount here, too, because this company only has 2.6 million shares outstanding. It's a small cap stock. It's highly illiquid. And it isn't exactly the kind of company many institutions are going to look at.
But we operate in this area. So we're not concerned about what institutions do.

OID: Marty Whitman says the same thing - that he's not into studying abnormal psychology...
Van Den Berg: We don't care if Wall Street follows it. We do our own research. And given everything we see, we're convinced that not only is it selling well below liquidation value, but that it's selling at a tremendous discount to private market value.
Between their increase in sales, the slowing down of outlays on R&D and the fact that their capital expenditures are more or less equal to their depreciation, their earnings are going to be true free cash flow.

OID: In other words, available to their shareholders, not to their suppliers.
Van Den Berg: We can calculate free cash flow another way by starting with their gross cash flow and deducting capital expenditures. However, I expect their free cash flow to very closely parallel their earnings anyway. And when it does, their stock's going to trade more in line with the kind of valuation it's gotten in the past.

OID: Which is?
Van Den Berg: Well, its price-to-book multiple got as high as 1.7, 1.6 and 1.63 in 1983, 1986 and 1987. And its price-and-debt-to-sales ratio got as high as 1.32, .93 and .97 in 1983, 1986 and 1987. So if they get a price-and-debt-to-sales ratio of 1.00 - and again, they'll have $54± per share in sales this year - well, you can do the math as well as I can.

OID: Your confidence in my ability to multiply by one is much appreciated. But I imagine your point is that, again, it supports your valuation of $45-50 or more.
Van Den Berg: Exactly.

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