That's the most optimistic of six scenarios Salmon presented in a note to investors a few days ago. The most pessimistic scenario is that Valassis' existing $300 million state court win is overturned on appeal and Valassis loses its other actions, leaving it with $0 in wins and millions in legal bills.
Valassis has sued NAM in multiple courts in a years-long war for control of supermarket coupons and those little ads you see on grocery store shelves. They're enormously lucrative for both companies. Valassis alleges that NAM has used illegal pricing tactics to maintain an unfair level of market share.
Here's Salmon's $3 billion scenario:
...the federal court determines the damages amount to be inline with Valassis' pre-trial estimate of $900 million, which would then be trebled to $2.7 billion. Including the state award, Valassis would receive $3 billion total.Salmon described how he arrives at his $32 stock estimate thus:
We ascribe 85% likelihood that the company will ultimately prove successful in at least one of the two courts and receive some amount of damages. This percentage is based in part on 15% rate at which the Michigan state court judge's decisions are overturned on appeal according to Valassis management. We also assume there is no change to the original $300 million damage award in state court.
Valassis hired a damages expert prior to the state case who estimated damages at $900 million. We use this figure as the upper boundary for a potential award in federal court; if assessed at this level, total federal damages would be $2.7 billion after damages are trebled.(He also adds in some boring stuff about general improvements in Valassis' regular business, which I'm ignoring here.) The stock is valued thus:
We view our target as $21 of "fundamental value" and $11 of "litigation value." We believe the market sees these two values as closer to $16-$17 and $2-$3, respectively.Is he right? Before you invest your retirement savings into Michigan federal court judge Arthur J. Tarnow's gavel (trial starts Feb. 2, so place your bets now!), consider the main flaw in Salmon's argument. He presents this table to demonstrate his calculations:
(Click to enlarge.) There's a problem with this: This table looks to me very much like a standard "Expected Return" calculation. When you're trying to assign a single value to an asset that faces several different potential outcomes, with a different probability of any single outcome prevailing, what you do is multiply each potential outcome by the percentage probability of that outcome, and then add all those values together. That gives you the mean expected return of all the potential outcomes -- a single value that, in theory, is a rough average of all the potential outcomes.
But there's a fatal flaw with expected returns: Although the calculation accounts for all the possible future scenarios, the one thing you absolutely know for certain about the future is that only ONE scenario will actually prevail. In Salmon's estimation, even the most likely scenarios -- 3 and 4 -- have only a 30 percent chance of happening. Which means there's a 70 percent chance they won't happen. It's the same with all the other scenarios -- for any given scenario, the odds are that it's more likely that it won't happen. So, while Salmon is estimating a potential upper limit $2.7 billion windfall, using Salmon's own numbers there's also a 60 percent probability that Valassis will win less than $567 million in total (scenarios 1 through 3 bundled together).
This isn't too problematic for Valassis because even in the worst scenario it doesn't lose any money, it just fails to win. But still, the idea that a mish-mash of scenarios adds $11 to the stock is optimistic, in my opinion.
And finally: Why is it that when businesses have sudden major expenses they're considered one-off charges by Wall Street and ignored, but when they have sudden windfalls it's priced into the stock? Just askin'.
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- Valassis Wants Rupert and Lachlan Murdoch to Testify in Federal Trial