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Acacia Research Corporation Message Board

  • petercohen33 petercohen33 Mar 7, 2013 2:32 PM Flag

    J.P.Morgan Mar 5th

    Applied & Emerging Tech
    Monthly Top 3
    ACTG, NCR, and ZAGG
    Applied and Emerging
    Paul Coster, CFA AC

    J.P. Morgan Securities LLC

    For March’s Applied & Emerging Technologies monthly top 3 picks, we
    are maintaining ACTG and ZAGG, and adding NCR as our top long ideas.
    We are removing TIVO, though we maintain our Overweight rating; stay
    in the stock heading toward the patent litigation trial with Motorola in May

     ACTG/OW – Maintaining as a top 3 pick. ACTG increased 9.5% in
    February (S&P500 up 1%) owing to solid 4Q results. The company does
    not issue guidance, but management narrative suggests the deal pipeline
    is at record levels, now diversifying to include auto, med tech and
    energy deals. We are approaching the first Apple trial, a potential
    catalyst for the stock. Our YE13 price target is $40.00.

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    • Investment Thesis
      We believe patents, as an asset class, and licensing, as a business model, present
      attractive long-term investment opportunities. Companies that generate recurring
      revenues from royalty payments, such as Dolby, Rovi, and Qualcomm, can command
      high margins and often high valuation multiples. There are vast licensing
      opportunities in areas like smart phones (250,000 patents, according to RPX Corp),
      digital media, semiconductors, medical technology, ecommerce and other growth
      Acacia is a leader in patent licensing. Acacia, with 265 IP portfolios, and
      controlling over tens of thousands of patents, is one of the largest most active patent
      dealers or non-practicing entities (NPEs) in the United States. PatentFreedom
      estimates that Acacia represented about 10% of all lawsuits by the larger NPEs in
      North America in the period 2005 through 2010. Acacia is aggregating patents in
      some of the most valuable technology areas, including mobile computing, location
      based services, computer power management, flash memory, telematics, digital
      media playback and enhancement, and data storage; recently diversifying into
      medical technologies, automobile, and energy.
      Acacia is benefiting from two trends. First Acacia is becoming a go-to company
      for IP-rich operating companies that seek to monetize patent portfolios. Acacia can
      act as a proxy for the patent author and execute licensing agreements through
      subsidiaries, without fear of a counter-suit. Second, Acacia is beginning to enter into
      ‘comprehensive licensing agreements’ with large corporations that seek protection
      from patent claims in key technology domains so that they can proceed with
      unfettered execution of their product and service strategies.

      • 1 Reply to petercohen33
      • Acacia’s model is attractive and should improve, yielding well over 50% PF gross
        and over 40% PF operating margin, but should improve further with scale, mix shift
        toward wholly-owned patents (no costs share) and as the amount of enforcement that
        goes to litigation diminishes.Acacia's licenses its partners’ technology patents to large-scale operating
        companies, sharing revenue with the partner on a 50/50 basis. We think this
        allows the company to scale quickly with modest capital commitment.
        There are catalysts ahead. We expect Acacia to announce new 'comprehensive
        licensing agreements' with major corporations over the next year or two, given recent
        management commentary and announced comprehensive agreements. We believe
        these agreements could bring in $20-$40 million of revenue, each. Second, based on
        discussions with management, we believe Acacia is close to concluding large
        partnership deals that will give the firm access to thousands of patents, increasing the
        firm’s licensing scope. We also believe a settlement with Apple is likely in the next
        6 months. The Adaptix portfolio could yield six more sizable settlements in the next
        four quarters.
        We reiterate our Overweight rating for ACTG meaning that we expect ACTG to
        outperform the mean of our coverage universe in the next 6-12 months. The stock is
        trading at 13.5 times our CY13 PF EPS forecast of $1.97, which is a 27% discount to
        the 3-year mean P/E multiple (current year basis), and an attractive multiple for a
        growth stock with powerful earnings potential.
        ACTG stock looks attractively valued relative to its near-peers based on
        EV/EBITDA and P/E bases. We also note that the stock looks very attractive on a
        PEG basis, normalizing for the higher share-count in 2012, and a jump in tax rate in
        2014. We estimate the PEG at about 0.5x.

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