Pendrell (PCOA) is in the business of licensing IP rights on the portfolio of patents it holds. In 2017 the company divested the majority of its patent portfolio but still holds digital rights management patents owned through their subsiduary ContentGuard and memory & storage patents owned through their subsiduary Memory Technologies, these latter patents were acquired from Nokia in March of 2013. Since 2014 the company has entered into license agreements with several leading memory device makers and the firm generates its income through the sale and licensing of its patents, and through litigation settlements from the enforcement of its patents. The firm's current IP Portfolio consists of patents which have either already expired or will do so between 2018-2035.
In Nov 2017 the firm engaged in a 100-1 reverse stock split and then Dec 2017 they de-listed from the Nasdaq and filed for de-registration of their class A common stock, the company now trades on the over-the-counter (OTC) market. Management is proactively looking for acqusitions to add to their IP portfolio but have stated that they are unable to find compelling investmnts at present and will only delpoy capital when the price is right.
Okay, now to the interesting stuff. Pendrell Corp is currently trading below Net Cash.
The firm has $184.5 Million in cash on the balance sheet and around $9 Million in Total Liabilities, its current Market Cap stands at 158.7 Million. This means the company is currently trading at around 0.9x Net Cash. In other words, after paying its debt down Pendrell Corp has more cash than its market capitalization!
What about NNWC (Net-net working capital)?
The company also has around $17.3 Million in accounts receivable and 2 Million in net income tax receivables. Since Income tax receivables are classed as non-operating receivables we wont include them. As Ben Graham advised when calculating liquidation value we'll discount receivables by 25%
This results in the firm trading at around 0.84x NNWC (Net-net working capital).
Why is the market so pessimistic toward the company?
Like many Net-nets Pendrell Corp's earnings have been quite lumpy and the company has seen losses over the last 10 years with negative earnings in 2008,2010 & 2013-2015, however the company has returned to profitability in 2016-2017.
Now things get really interesting,
When Pendrell formed back in 2000 their intention was to 'develop and operate a next generation global mobile satellite communications system'. In 2011 the firm started selling assets associated with the satellite business and in 2012 they divested the remaining vestiges of the business and transferred the international subsiduaries to a liquidating trust which also saw the conclusion of a litigation settlement with Boeing.
The 2012 divesture and transfer tiggered tax losses of $2.4 Billion!
That's bad, right?
Far from it, as managment states in their 2017 10-K, they believe that this $2.4 Billion 'can be carried forward for up to twenty years'. That means that the company will not have to pay any income tax on any future earnings for around the next two decades!
What could trigger a repricing by the market?
Even a small amount of good news can drive up the price of a Net-net, for Pendrell Corp it could be the sale of assets, a positive litigation settlement or something else. In the mean time it appears that the liquidation valuation may hold up well. Unlike many Net-nets that burn through cash like its going out of fashion, Pendrell Corp's cash pile has grown from $162 Million in 2015 to $184 Million at the end of 2017.
In summary, Penrell Corp looks like the kind of Net-net that a young Warren Bufett would have been interested in. Investors should be aware that the stock is likely to be highly illiquid and subject to a wide bid/ask spread. The significant under-valuation and upside potential certainly makes up for this though.
I came across this stock after reading the work of Geoff Gannon and ValueStockGeek so I would like to extend my thanks to them!
Disclaimer: The author holds no interest in the companies mentioned in this article at the time of writing.
David J. Flood
UK based Value Investor.
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