Pendrell Corp (PCO)

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Key Statistics

Market Capitalization = $170.34 million

Cash & Equivalents = $187.22 million

Current Assets = $208.63 million

Total Liabilities = $8.5 million

Net Current Asset Value = $200.13 million

Z-Score = 2.19

Summary

Pendrell owns a portfolio of patents. They acquired most of their patents through acquisitions. In 2013, they purchased a number of patents (mostly dealing with memory storage) from Nokia. They have another group of patents purchased from ContentGuard, which prevent electronic content from being pirated. They also own patents related to digital cinema and wireless technology.

Pendrell makes most of their money through licensing the patents that they own, selling their portfolio of patents and through litigation to combat patent violations.

This is a business model which leads to wildly divergent operating results. In 2015, for instance, the company posted an operating loss of $121 million, while in 2016 the company had an operating income of $15.22 million.

Sentiment

I would classify sentiment against Pendrell as extreme hatred. Since 2006, the stock has lost 89% of its value. The current market capitalization is not only below net current asset value, it is below net cash value. If Pendrell simply took its cash on hand and paid all of its debts, it would pay for the company’s market capitalization. The market thinks that Pendrell is worth more dead than alive.

My Take

I placed 2% of my portfolio in Pendrell yesterday. Pendrell is a classic Ben Graham net-net or what Buffett would call a “cigar butt”. The nice thing about Pendrell is that nearly all of the net current asset value (NCAV) is pure cash, meaning that in a liquidation very little of the net current asset value would be lost. In contrast, many NCAV situations have most of the value tied up in inventory, which usually can only be liquidated at fire-sale prices. The true value of Pendrell’s stock is likely much higher, as the net current asset value assigns very little value to Pendrell’s portfolio of patents.

Obviously, bargains like this don’t come along without a reason. The reason for Pendrell’s undervaluation is its history of operational losses. Over the last 4 years, the company lost $3.32 per share.

I bought the stock purely for the balance sheet value. That’s why my “key statistics” section is different from those of companies I purchase for revenues & earnings. Pendrell could be liquidated, its portfolio of patents could be sold, and this could result in a positive outcome for shareholders. If the company isn’t liquidated, the slightest glimmer of hope could send the stock soaring. A major patent sale or a favorable outcome to ongoing litigation are possible events that could turn the stock around. Meanwhile, the NCAV value provides a floor for losses.

The main challenge with a net-net is simple: determining if the company will stay alive and not squander its net current asset value. I see little evidence of cash burn with Pendrell, as its cash on hand has remained consistent in the range of $138-$174 million over the last few years. Cash & equivalents are actually higher than they were a year ago: $187 million today vs. $176.31 million a year ago. The net current asset value should remain intact. Additionally, Pendrell has an Altman Z Score of 2.19, placing it outside of the zone of financial distress which would indicate that a bankruptcy is imminent.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

 

 

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