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Don’t get rid of M&F shares, but don’t buy more

Dear Mr. Berko: I bought 200 shares of M&F Worldwide in September 2008 at $36 because my broker said it was going to go to $90 and then split two for one.

It’s been downhill ever since.

It fell to $9, but I still held it, and now its $25. It’s supposed to earn $6 per share this year, so why does it sell at four times earnings, which is cheap?

Should I hold, sell or buy 200 more shares? –N.T., Joliet, Ill.

Dear N.T.: M&F Worldwide (MFW, 52-week high of $34.02 as of May 12), formerly known as MacAndrews & Forbes, sells technology services and checks to banks from its Harland Clarke division.

It’s also a leading designer and manufacturer of high-precision camera systems for the TV and movie industry. MFW is also the world’s largest producer of licorice extracts used by food processors, the pharmaceutical industry, cosmetic companies and almost all tobacco products. Then, through its Scranton, Pa., division, MFW provides data-management solutions and testing, tracking and survey services to municipal, state and other government agencies.

This year, MFW expects to generate $1.8 billion in revenues from those businesses and net $6 per share. Those earnings mean that MFW trades at an extremely low P/E ratio of 4, so the shares look interesting.

There are only 20 million shares, which trade about $6 below their $31 book value. This, too, makes MFW look attractive.

MFW has a free cash flow of $240 million and $15 in green standing behind each of those 20 million shares. And this makes MFW look pretty good.

However, I can’t find an analyst north or south of the Mason-Dixon line who follows MFW. But Andrew Bary, who writes for Barron’s, published a very positive article on the stock in mid-January.

The reason MFW is trading on the cheap is that few of the suits on the Street trust Ron Perelman, its colorful, high-energy, self-serving, in-your-face founder, who owns at least 43 percent of the stock. Perelman has an ego bigger than Texas and has been married four times.

He is actively engaged in many worthwhile charities and is often giving of his time and his money. However, some folks on the Street are not comfortable with the manner in which he comports his business activities – Revlon, Panavision and Sunbeam, to name a few – and question his probity. MFW seems to be his personal fiefdom run for his benefit and his bosom associates. And there’s a running rumor that Perelman might purchase 10 million shares he doesn’t own, and the talking price is $35 per share.

However, Perelman, who didn’t become a multibillionaire by writing personal checks for his toys, will certainly use MFW’s $240-billion plus cash flow to affect the purchase. So there might be a $10 gain in the shares if Perelman takes MFW private.

Still, I’d not buy the stock. Perelman is a manipulative genius, and I suspect he will find a way to capture the 10-point difference between the current price and possible offering price and put it in his pocket. He’s one of the few people in this world who can catch a fish, filet it on the spot and never get the stink on his hands.

A buyout not withstanding, there’s a possibility that MFW could trade in the mid-$30s. I’d hold your 200 shares, but don’t buy 200 more shares.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com.

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