PCO - Pendrell Corporation

[Patmo]

The summary of this thesis is that it is a patent troll trading for net cash, actively looking to buy into a profitable business to use significant NOLs that might be worthless.

 

It seems like an okay place to park a tiny bit of cash and roll the dice, you stand to lose a bit of money on cash burn but gain big if the company closes a deal within the year and the NOLs work out. I can't say that I am super optimistic about the chances, but it is still a clear catalyst for the stock.

 

Anybody with experience with those types of investments, feel free to chime in, this is just inexperienced, surface level analysis that I posted. Hope to get some discussion going

 

[valuedontlie]

Market cap is $171m or so and net cash is $176.3m right now... they have a $31m in receivables which they except to collect $15m by July 2017 and another $16m in 2018/2019... So net cash is really something like $207.3m if you think they won't burn any cash... BV is $202m and probably the right way to look at it at this point...

 

Management seems pretty confident they'll be breakeven on a cash flow basis until they find a deal and they think there's a bit left to wring out of the existing patent portfolio...

 

CEO takes $6,000 in salary to cover healthcare expenses and 99% of his pay in long-term stock incentives... I think he has a vested interest in getting something done...

 

They mentioned they'd be "disappointed" if they didn't have a deal done in 6 months or so for whatever that's worth...

[scorpioncapital]

I am not a lawyer - but this guy is - (http://ujinv.blogspot.com/2016/12/mtls-complaint-against-sandisk.html)

and I read it and do believe that the Sandisk lawsuit has a good chance of success. Why? First it's a hardware based patent. They have failed at software patent with Apple. Hardware seems more straightforward I've seen several 'patent trolls' with hardware battles on simple products do better. Likewise, Sandisk's major competitors have signed royalty agreements with Pendrell's Memory Technologies division. Sandisk makes memory card, I find it hard to believe that these memory cards are so radically different between say Samsung/Toshiba and Sandisk.

If they get even 1/10th of the number quoted in that article that's still $1 per share. Which is 15% in 18 months or 10% per year. But that seems a conservative assumption and for a lump of cash you could do worse.

 

[Jurgis]

Couple observations:

 

- Stock is controlled by Craig McCaw and Bill Gates entities.

  https://www.sec.gov/Archives/edgar/data/1359555/000119312516619097/d37907ddef14a.htm

  Not that Bill Gates cares probably and their returns on the stock have been abysmal in last 5+ years.

 

- New CEO's history is not great, but probably to be expected. Drexel Burnham in 80's...

  https://www.bloomberg.com/profiles/people/1512781-lee-e-mikles

  http://www.bizjournals.com/stlouis/news/2015/01/23/mikles-president-of-novelly-s-futurefuel-resigns.html

 

Anyway, it could probably work out well. Usually with patent trolls the key is to buy when good news are not expected and sell when they get a big court win and stock spikes 2x or something. I'd be doubtful that Mikles will purchase a good company at reasonable price for future business. He doesn't seem to be a great capital allocator ... and good companies are expensive nowadays. But positive surprises happen. And yeah it's under cash value now.

[Foreign Tuffett]

 

I'll get right to the point: Pendrell (new ticker is PCOA) is trading for significantly under net cash. Just to be reemphasize, it is trading for less than net cash minus all liabilities, not just at a discount to NCAV.

 

Background

Pendrell has the dubious distinction of failing in two different business lines: satellite communications and intellectual property licensing (aka patent trolling). These failures have resulted in the company possessing $2.5 billion in NOLs as of YE 2016. The NOLs don't begin to expire until 2025, with a big chunk not expiring until 2032. Telecom billionaire and Pendrell Chairman Craig McCaw controls over 50% of PCOA's voting power through a dual A/B share class structure, so minority shareholders are just along for the ride. Lee E. Mikles was brought in as interim CEO in 11/14 (changed to permanent in 6/15). Mikles has done a good job of reducing costs, which has resulted in the company printing impressive operating profit numbers in 2016 ($15.2 million) and through the first 3 quarters of 2017 ($18.3 million). At the current price I think the market is pricing in no future revenue from Pendrell's IP licensing segment, which is in runoff mode.

 

Pendrell is on the hunt for an acquisition that will allow it to put its cash to work and utilize its NOLs. While McCaw's tenure as Chairman has been disappointing so far, he is a self-made billionaire with decades of experience and connections in different areas of telecom. I haven't been able to find much information about Mikles capital allocation record, but over the last three years I think he's made the right moves and positioned the company well.

 

I think Pendrell management recognizes that the company is cheap, as they've repurchased shares at least three different times in the past year, in each case at a significant premium to where the stock currently trades. Note that I'm translating all numbers to reflect the recent reverse share split.  In early 2017 they purchased 24.3K shares from the Crusader Fund at the equivalent of $655 per share. Last October they purchased 2000 shares from an unnamed investor at $673 each. Finally, as part of the reverse share split they cashed out 739 would-be fractional shares, also at $673 each.   

 

Rough Valuation 

I have attempted to insert an image below. If it isn't visible you can check the attached for a screenshot. Note that the most recent financials are from 9/30/17, so I've made several pro forma adjustments to reflect subsequent events. I think a conservative fair value # for the company is around 90% of NCAV, which comes out to ~ $732.50 per share.

 

 

Why it's Cheap

I think the stock has sold off for a few reasons, none of which have much to do with its fundamental value.

* A recent 100-for-1 reverse share split

* Voluntary de-listing from the NASDAQ, now OTC-traded

* Pending SEC de-registeration

* Recent tax classification as a "Personal Holding Company," which means the company could be subject to a punitive tax on undistributed net income. This tax status is why they paid a $12.32 per share dividend at the end of last year.

[netnet]

This is one of the better NCAV/netnet type stocks, although with the delisting one of the catalysts is going in the wrong direction. 

 

In its favor:

• You have a majority holder, McCaw, who is presumably a shareholder value maximizer and not a raper and pillager, a la Perlman, specifically I don't see any egregious self dealing. This is particularly important given that soon they will not be a reporting company.
  
• It is not bleeding cash.
  
• It does have some wild cards to the upside.
  

 

Bottomline, for those who have a basket of these things this might be worthy of an overweighting. (That said it seems that blind mechanical selection, i.e. the pool, has outclassed those who selected from an algorithmically derived pool of stocks.  See studies of Magic Formula investing, cited by Greenblatt, or more generally S&P 500 investors!)

 

[Foreign Tuffett]

This is one of the better NCAV/netnet type stocks, although with the delisting one of the catalysts is going in the wrong direction. 

 

In its favor:

• You have a majority holder, McCaw, who is presumably a shareholder value maximizer and not a raper and pillager, a la Perlman, specifically I don't see any egregious self dealing.
  
• It is not bleeding cash.
  
• It does have some wild cards to the upside.
  

 

Bottomline, for those who have a basket of these things this might be worthy of an overweighting. (That said it seems that blind mechanical selection, i.e. the pool, has outclassed those who selected from an algorithmically derived pool of stocks.  See studies of Magic Formula investing, cited by Greenblatt, or more generally S&P 500 investors!)

 

Obviously trading volume is somewhat limited, but I wouldn't be surprised to see them repurchase shares, especially once the SEC de-registration process is complete. It should be a "no brainer" for a financially sophisticated management team to buy (the equivalent of) $1 of cash for less than $1.

 

The only reason I can think of for them not buying back stock at the current price would be if management has its sights on an acquisition candidate that looks very promising.

[Tim Eriksen]

Is there ongoing revenue?  If so how much?  Obviously there is occasional revenue from settlements/judgments.

[Foreign Tuffett]

Is there ongoing revenue?  If so how much?  Obviously there is occasional revenue from settlements/judgments.

 

I think it's fair to call Pendrell's revenue episodic or sporadic. The 9/2017 IP licensing agreement agreement with Disney is a good example.

 

http://pendrell.com/sites/default/files/media/Disney%20Press%20Release%20170915.pdf

[scorpioncapital]

I own some of this. Apparently since it went dark it has gotten a bigger discount. I want to see what the reason for going dark was - which we'll see in retrospect. It looks a bit like a SPAC with some vestiges of IP patents that have some continuing residual value. It's possible they'll leverage up if they find a target, unless they use the money to start something from scratch.

[Foreign Tuffett]

I own some of this. Apparently since it went dark it has gotten a bigger discount. I want to see what the reason for going dark was - which we'll see in retrospect. It looks a bit like a SPAC with some vestiges of IP patents that have some continuing residual value. It's possible they'll leverage up if they find a target, unless they use the money to start something from scratch.

 

From the most recent annual proxy:

 

"Board believes that De-registration and De-listing will reduce costs, redirect resources to the Company’s business initiatives, provide increased operational flexibility, and provide visibility to potential business partnerships that are not available as a reporting company."

[Grahamfan2]

I believe they cannot repurchase shares until after filing the 10k

[Tim Eriksen]

I believe they cannot repurchase shares until after filing the 10k

 

What is your basis for saying this?  Specifically in light of the fact that they will not file a 10-K since they deregistered.  Do you mean distribute an annual report?  Are you of the understanding this is imposed by outside rules or internal restrictions (i.e., Pendrell's insider trading policy)? 

[scorpioncapital]

The company told me prior to deregistration that they would file a 10-k for the full year.

 

[Foreign Tuffett]

I believe they cannot repurchase shares until after filing the 10k

 

What is your basis for saying this?  Specifically in light of the fact that they will not file a 10-K since they deregistered.  Do you mean distribute an annual report?  Are you of the understanding this is imposed by outside rules or internal restrictions (i.e., Pendrell's insider trading policy)?

 

Grahamfan2 is correct that the company is not able to purchase shares in the open market until it files its 10-K. And yes, it will be filing a 10-K. Both of these items are per Pendrell management.

 

 

 

 

[cardinalcap]

Does anyone have an idea what the Kingston case was settled for?  How about updated financials?

[Foreign Tuffett]

Does anyone have an idea what the Kingston case was settled for?  How about updated financials?

 

I doubt anyone here has the updated financials given how few outside shareholders remain involved. If you own shares you I would recommend contacting the company to see if it will send them to you.

 

Kingston settlement is probably confidential.