Recently, an unusual move happened in MNCN. Suddenly, MNCN drew interests. I got a notification too from my old group and read the press statement from the company that basically says the sudden price meltdown has nothing to do with the state of the company. The secretary further stated that MNCN company fundamentals remain strong. I have become interested. Is it good as advertised? As per usual, I only believe until I compute EVA numbers. As for price action, the picture looks ugly. But let's focus on EVA. Maybe I struck gold here.
The first thing to note, EVA has been positive and increasing. That is sweet. MNCN is actually a company with a strong performance. The secretary spoke the truth. There was a slump in 2018, but interestingly, TTM Q1 data shows me better performance. So, yes, the price meltdown, which happened around the time of Q1 release, has nothing to do with the fundamentals, as far as I am concerned.
So does this mean we have a winner? Dear readers, you should know by now that knowing the performance of the company is only a half-way of our work as investors. We need to know now, "what the market is thinking? What expectation is already put in place?"
But before that, let me take a look deeper into the performance. What drives EVA growth for MNCN? What value drivers make MNCN into what it is?
The answer is that EVA is much more influenced by the change in productivity (EVA margin) than growth. Revenue growth contribution to value is stable which is quite rare. For the past 3 years, on average, growth contributed 0.3% to EVA growth (EVA momentum) of 0.7% annually. That EVA growth record is fantastic. Nonetheless, we need to be aware that EVA margin has been fluctuating.
To be fair, EVA margin is quite high averaging 6.0% for the past 4 years and TTM Q1 2019 showed improvement. From EVA margin breakdown, we could see that the high EVA margin is due to a sustained increase in NOPAT margin which in turn due to lower COGS% of sales. It has been expanding its fixed assets base to support its internet generating revenue business.
I personally think the lever to increase EVA margin further has now become limited. MNCN could not possibly increase its gross margin further...maybe, but it is a safe assumption. With no further gun powder in EVA margin, that leaves growth to be the only lever that could propel MNCN EVA growth, which has been 0.3% a year historically. In other words, soon enough MNCN is likely only (but still good) to score EVA momentum of 0.3% a year. Keep this number in mind.
Now, what does the market think? If we only look at EVA, we would be tempted that MNCN has been falling unjustly. After all, MVA has bee falling, while EVA has been increasing. In a lot of cases, that means the stock is undervalued.
This is why it is also important to know what the expectations were given the share price. The expectation numbers I rely on are FGR (Future Growth Reliance) and MIM (Expected EVA Momentum).
These two numbers tell me that back in 2015 and 2016, the stock is most likely overvalued. Too much expectation is still in place. That tells me that the major decline from the top for this stock is due to unrealistic expectations. As is always the case, eventually investors adjust their expectations to a more realistic level.
Remember that on average from 2015-2018, MNCN EVA momentum is only 0.7% per year. And what did the market expect? MIM were 7.4%, 5.9%, 1.5%, in 2015, 2016, and 2017 accordingly. Only a wild optimist could justify its decision to buy in 2015 and 2016 even though the price has been in a downtrend.
2018 was interesting as the market expected negative EVA growth. This is very likely an indication of extreme pessimism taking place. It is a classic example of how the market works in a cycle that goes from optimism to pessimism. At present price, the market is effectively expecting a no-growth EVA. What do you think?
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