Deep Value Opportunity for Patient Investors
What You’ll Learn
- History and business of Pendrell
- Quick valuation target
- My reason for buying Pendrell
I’m starting with a warning.
Illiquid, closely held, de-registration (suspending SEC reporting), susceptible towards an unfriendly shareholder environment. The negatives are significant and is only suitable for patient long term investors.
But I’m embracing the words of Mohnish Pabrai’s, “Heads I Win, Tails I Don’t Lose Much“.
Here we go.
Deep Value Idea: Pendrell Corp (NASDAQ:PCO)
History of Pendrell
Founded in 1995 acquires and develops businesses with technologies protected by intellectual property rights. Over the past five years Pendrell (NASDAQ:PCO) acquired IP rights and continue to monetize these IP assets. During the first half of 2016 Pendrell entered licensing agreements with DirecTV and Toshiba. This agreement permitted use of Pendrell’s IP for the development, manufacturing and distribution of their products. These licenses and future negotiations with other possible licensees provide important cash flow for Pendrell’s next business venture. Before its current commercial focus, Pendrell operated as ICO Global Communications building satellite networks, providing voice and data communications services.
During the prior 5 years, Pendrell acquired and monetized IP (Intellectual Property) rights. The company continues to monetize existing IP assets but today’s main focus is on deploying and leveraging its cash, and NOL by acquiring new business opportunities.
To optimize its new business strategy, management aggressively reduced expenses, headcount and simplified operations.
Further, the board recommended and approved de-registration/de-listing as the next step in further reducing overhead expenses and improve strategic focus.
De-registration concentrates management’s efforts on purchasing and leveraging NOL assets with new acquisitions, continued IP monetization, and further license their existing patents.
Near $2.5 billion in NOL (net operating losses) created when PCO was ICO Global Communication. ICO Global filed for chapter 11 bankruptcy August 1999 after their satellite was destroyed during its launch attempt. Then telecom billionaire Craig McCaw’s steps forward to acquire in 2000. McCaw has controlled PCO ever since and is Executive Chairman. More importantly this large NOL creates advantages when competing to find a profitable company.
This talented equity compensated management team is uniquely qualified to allocate the large balance of cash, NOL and remaining hidden assets to increase the company’s market value. Management has deep expertise in finance, taxes, mergers, acquisitions and technology licensing with proven entrepreneurship success. Today the total number of employees are 14. SGA annual expense was 30.078M in 2012 reduced 75% to 7.508M for the year ending 2016. This drastic reduction of SGA expenses supports their commitment towards value enhancement.
Pendrell’s CEO Lee Mikles served as Future Fuel (2005 to 2013) CEO. He has extensive experience in corporate finance, chairman of Mikles/Miller Management. Pendrell CFO Steve Ednie has 20 years’ experience in senior finance, accounting and tax roles. He served as Director of Tax at Expedia, Chief Tax Officer for XO Communications and Clearwire Corporation. Pendrell’s Corporate Counsel is Timothy Dozois. Securities law compliance, mergers, acquisitions, divestitures, and technology licensing are his areas of expertise. Executive Chairman Craig O. McCaw’s experience; founded Clearwire in 2003, director at Nextel Communications acquired by Sprint in 2005 and XO Communications. Further, he was the Chairman and CEO of McCaw Cellular Communications which he built into the nation’s leading provider of cellular services in over 100 U.S. cities. It sold in 1994 for 12.60 billion to ATT. Lastly, McCaw is the CEO of the venture capital firm Eagle River Investments. The firm’s focus is on strategic investments in telecommunication and technology companies.
Pendrell sits on valuable patent assets. I admit knowing nothing of the fair value or the uncertain outcome of pending litigation. The trial against ScanDisk is set on October 2017 for importing patent infringing products. They continue to discuss their digital rights licensing with motion picture studios and theater operators. In addition, PCO continue to pursue appeal of two adverse jury decisions against Apple,Google and manufacturers of Android devices.
For a more informed analysis of Pendrell’s patents check out http://ujinv.blogspot.com/search/label/Pendrell
First, How I Found This Idea
From the original post on July 4th, 2016:
PCO trades below net cash. Current market price is $0.51 per share versus $0.63 in net cash (PCO then did a 1:10 split, so price is $5.10 per share and $6.30 net cash in today’s stock price).
Negative enterprise value of 30.36M per Yahoo finance, NOLs over 2 billion, valuable patents, PCO lost 2012 suit against Apple, filed appeal.
No pensions or debt with head count reduced to 13 from 73 in 2013. Executive chairman Craig McCaw is worth 2 billion.
What is Pendrell Worth Today?
A few repetitive but notable comments on the table below.
Current net cash per share at $5.79 and current AR of $.61 for a total of $6.40 per share.
This compares favorably to the current market price of $6.00 as of the beginning of May.
In addition, large net operating losses to leverage with the purchase of a profitable acquisition. During the most recent quarter, Pendrell smartly allocated its capital by purchasing 2,232,293 of its own shares at $6.55 per share for a total of $15,935,465.
The existing patents generated positive 2.23M operating income and 3.44M net income for 2016.
Is Management Eating Their Cooking?
Take a look at the ownership.
I understand the risk and its not suitable for all investors, but I purchased after last year’s write up and consider the current price an opportunity.
My reason for buying in a nutshell can be summarized as:
- net cash
- capable equity incentivized management
- optionality from patent litigation
- ultimate new acquisition to leverage corporate assets
Disclosure: Long PCO
This article was originally published on ShadowStock and is reprinted here with permission.
About the Author
Shadowstock’s goal is simple. The persistent pursuit to uncover and share the best ignored investment ideas in the tradition of Graham and Dodd. My academic experience includes a degree in both Accounting and Investment Finance from Baruch College, New York City. Professional experience covers responsibility for financial systems development/management coupled with financial controllership and analysis at Fortune 500 companies. Health issue forced me to leave. My investment posts are nonprofit.
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