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Geoff Gannon March 14, 2018

Pendrell (PCOA) Follow-Up: Reading into a CEO’s Past and the Dangers of “Dark” Stocks

A member commented to the write-up I did yesterday on Pendrell. I think the comment and my response are worth making into a full follow-up “memo”.

So, here they are:

“Geoff,

This company definitely seems promising. I saw the blog post from Hidden Value that you retweeted and ended up buying a small starter position in the company after reading the 10k. That was before even seeing that you ended up writing a post on it.

I’m struggling to decide how to size the position right now, but really I have two open questions I’m working on.

  1. How big of a cash flow business can Pendrell reasonably acquire using their current cash position?
    2. How will the experience of being a “private” shareholder in Pendrell differ from owning stock in a more public position that files with the SEC?

Some further development of those two points:

  1. I know you assumed that they’d purchase the company with 100% cash equity. That seems like a very conservative assumption. If they’re going to behave and operate as a private corporation, there is no reason we can’t view PCOA as basically a private equity investment without the 2% management fee.

In that situation, wouldn’t they be likely to use leverage in an LBO like purchase? They could use somewhere between 30-50% cash with the rest being debt. That could change your EBIT target from 15 million per year, to something like $30-40 million per year. Therefore, the unleveraged 10.4 P/E could be something like a leveraged P/E of 4-6.

While management hasn’t guided to the use of debt versus all-cash transactions, I don’t see why they would choose to use all cash. By using leverage, they can better take advantage of their deferred tax NOL asset.

Obviously, this is purely an upside discussion, but you’ve already discussed the downside. (minimal)

  1. Although the company won’t file financial reports with the SEC, do private companies still usually prepare financial statements but not issue them publicly? Perhaps only to shareholders? Or should I assume I’ll not receive any regular updates at all about the financial condition of the underlying company while I hold this stock?

Geoff, any insight you can provide on those points would be most appreciated. Thank you for bringing the stock to my attention through your tweet.”

First of all, this is a reminder to all the members reading this to follow me on Twitter (@GeoffGannon). You can sometimes – if you pay attention to what I re-tweet, tweet, etc. – get an idea of what sort of things I’m reading about and even sometimes which particular company I’m current analyzing. Many times, nothing will come of it. This time, a stock write-up came of it.

 

 

Is an Unlisted, “Dark” Company Public or Private?

Just to be clear on the terminology, Pendrell is now an over the counter stock that doesn’t file with the SEC. It says it “went private” and that’s true in a sense. You need to get …

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Geoff Gannon March 13, 2018

Pendrell (PCOA): A Company with Cash, a Tax Asset, and Almost No Liabilities

Pendrell is essentially a non-operating company with two assets: cash and net operating loss carryforwards. The cash appears on the balance sheet. The net operating loss carryforwards do not.

The most recent balance sheet is dated December 31st, 2017. It is found in the 10-K. Total liabilities are $9 million while accounts receivable are $17 million. Since accounts receivable alone can cover all liabilities – I’ll assume that all cash is surplus cash.

Cash is $184 million. The company has 242,769 shares outstanding (there are both “A” and “B” shares). That means cash is about $758 a share. Let’s call it $750 a share in cash. As I write this, the stock is trading at $645 a share. So, let’s call that $650 a share.

Let’s try to simplify the situation.

The stock price is about $650. The net cash is about $750 a share. So, if you buy the stock you are more than 100% covered by cash. Liabilities are almost nothing. And there’s no cash burn. So, you’re getting more in cash than you’re putting into the stock. That’s your downside protection.

Where’s the upside?

The company’s net operating loss carryforwards are not listed on the balance sheet. There is a legitimate accounting reason for this. However, the accounting treatment doesn’t reflect economic reality. Let me explain.

Pendrell presents a table (in a note in its 10-K) that shows the net operating loss carryforwards would be $625 million (this includes California) but then shows a “valuation allowance” for the full amount. This means the company has this tax asset on the books for zero dollars.

Why?

The company is taking an allowance for the full amount, because there is nothing in its past history or current operations that would suggest it can use these net operating loss carryforwards. Here’s the quote:

“For all years presented, the Company has considered all available evidence, including the history of tax losses and the uncertainty around future taxable income.  Based on the weight of the evidence available at December 31, 2017, a valuation allowance has been recorded to reduce the value of the Company’s deferred tax assets, including the deferred tax assets associated with the NOLs, to an amount that is more likely than not to be realized.”

That amount is essentially zero.

And that’s the right way to account for the net operating loss carryforwards. However, it’s not the right way for an investor to look at their value. How should we look at their value?

Pendrell has federal and state (California) net operating loss carryforwards.

 

California Net Operating Loss Carryforwards

The state net operating loss carryforwards are for past losses of $1.3 billion suffered in California. They begin to expire in 2028. I’ll just assume these state net operating loss carryforwards are worthless.

 

Federal Net Operating Loss Carryforwards

These net operating loss carryforwards begin to expire in 2025 with “a significant portion” expiring in 2032. Pendrell has $2.5 billion in federal net operating loss …

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Geoff Gannon March 11, 2018

Booking Holdings (BKNG): A Fast Growing Industry Leader Built on Network Effects and a Strong Brand

 

Write-up by Mister Compounder

 

Summary

 

  • Asset light business model, with infinite return on capital, that requires little capital to grow enabling the use of cash flow for other purposes.
  • Booking is currently trading at a free cash flow yield of 3.6%, before acquisitions and including adjustments for dilution of 1%
  • The risks involve pricey valuation, overpaying for acquisitions in M&A deals, young industry and risks of increasing competition due to the attractive economics of the industry.

 

Overview

 

Booking Holdings (formerly Priceline) was founded in 1997 by Jay Walker and was listed in 1999. He later left the company in 2000. Since its inception, Booking has not split their stock, so the company today trades at more than $2,000 dollars a share. It wasn´t until recently that the company changed the name to Booking Holdings.

 

According to the current CEO, Glen Fogel, the reason was:

“We want to have a name aligned with all the different things that we do. We are now doing things that enable people to book hotels, homes, apartments, rental cars, flights, dinner reservations. Booking Holdings unifies all of these different things.”

The easiest way to think about Booking is to think of it as a distributor of inventory of hotels and airlines. Through acquisitions of meta search sites like Kayak and Momondo, they have developed into something like an online travel retailer. These acquisitions were a consequence of the emergence of the meta search sites. Meta search sites are price comparison websites, matching prices of different OTAs (Online Travel Agencies) and in this way challenged the business models of the traditional OTAs. Today, the international online travel market is really considered a travel duopoly, dominated by Booking Holdings and Expedia. These two companies are really holding companies for owning other brands.

There are some differences in the business models, though, where Expedia is more exposed to flight tickets and the merchant model, while Booking is more exposed to hotel rooms and the agency model. I’ll touch more on this topic later in the article, but if you want a nice, brief introduction to the business model, I can recommend this article on Business Insider.

 

Even though Booking Holdings consists of several brands, the company today is really all about Booking.com which is close to 90% of gross profit. In addition, Booking also has brands like Kayak, Rental Cars, OpenTable and Momondo (which they acquired last year). Booking in total has more than 1.5 million properties in more than 220 countries. Today, Booking Holdings as a company generates more than $12 billion in sales and $10 billion in gross profit. Approximately $9 billion of that gross profit is generated from Booking.com.

 

Booking has three types of revenue sources:

 

  • agency revenues at approximately 76% of revenues
  • merchant revenues at 17% of revenues
  • advertising and other revenues at close to 7% of revenues

 

Agency revenues consists of the commission rate that Booking can take in bookings …

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