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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