NTAV Acacia Research ACTG Sum of Parts
Update on this NTAV stock and a Sum of the Parts Valuation
I did a write-up on Acacia Research ACTG last year. The company had just put some of their cash hoard to work, buying manufacturing company Deflecto. The oil and gas Benchmark appeared to me to have upside potential also. Well, they just reported a profitable quarter. Revenue was up 412% year over year, thanks to an IP settlement related to its Wi-Fi portfolio, bringing in $69 mil of the $124 mil in revenue.
Total company adjusted EBITDA reached $50.7 million. Earnings per share for Acacia was positive at $.25. Free cash flow was positive at $335k.
Benchmark Energy had sales of $18 million and generated free cash flow to repay over 25% of its debt. The $18 million of sales is the highest quarterly figure since being acquired. All of Benchmarks 470 wells are producing. They also have 27,000 undeveloped acres in the Cherokee play in the western Anadarko Basin.
Their Printronics business had a drop in revenue but generated over $7 mil in free cash flow. The more recent acquisition, Deflecto, brought in $28 million in revenue. It’s expected to add around $130 million a year in revenue going forward. Acacia management has said Deflecto is free cash flow positive also.
Deflecto makes three main types of products. In commercial transportation, they make emergency warning triangles and vehicle mudguards. In HVAC, air ducts and air registers. In office products literature holders, sign holders, and floor mats. They have a blue-chip customer base, with long-term relationships with more than 1,500 leading retail, wholesale and OEM customers and distribution partners globally
Valuation Update
Acacia ACTG still has a whopping $327 mil in cash on the balance sheet with a market cap of $358 mil. After this past quarter, we are still under NTAV- net tangible asset value here with the stock at $3.72. NTAV is $460 million, and the current market cap is $358 mil.
Since the stock is down even more since last year and some things are coming together operations wise I decided to do a sum of the parts valuation. Before I go into that, I just wanted to bring up some big-picture thoughts on the direction the company is going now.
In years past, most of the companies revenue would come from the intellectual property side. This is a very sporadic, lumpy revenue source. As they have gotten more into the oil and gas production and manufacturing with Deflecto, I see this as obviously bringing in more stable revenue. Perhaps the stock market will acknowledge this.
I’m far from an oil and gas expert but some research I did lends some good possibility to natural gas prices rising near-term. Over the next two years, EIA expects that nat gas demand in the U.S. will generally grow by more than supply this year. They expect inventories will be drawn down to 4% below the five-year average by the end of 2025.
Energy Demand Long-term
Higher energy prices short-term aren’t my base case here with Benchmark’s success long-term of course. I know enough about the history of nat gas to know that there is always an abundance of supply. I do however believe that the demand side will surprise long-term in part due to all the data centers that are going to be built. The newest mega data center Stargate is actually being built now and is powered by its own natural gas turbines.
The joint venture Stargate is projected to require a whopping 15 gigawatts (GW) of electricity! This is equivalent to the electricity usage of a small nation or enough to power several U.S. cities. The U.S. Department of Energy projects that data centers could consume up to 12% of all U.S. electricity by 2028. Up from this years 5.6–8% of total U.S. electricity.
There is currently a Jevon's Paradox emerging. Wider artificial intelligence and LLM adoption, and improvements in efficiency, will lead to vastly greater consumption of electricity due to increased cloud demand.
Sum of the Parts
Let’s go through the individual businesses of Acacia to see how I arrived at my what I would call a conservative base case.
IP Patent Licensing
I found some other patent licensing companies like InterDigital and RPX and applied a conservative 3.0 revenue multiple to ACTG’s. I took out this one-time big $69 million figure recently from the last quarter to get a fairer picture. The last ten quarters brought in $44 mil TTM revenue combined. I used an annualized $17.6 mil at a 3 multiple and calculate this IP segments value at $52.8 million.
Commercial Printing via Printronix
The printing segment had $28 mil TTM revenue. Based on comparables I see a 2 mutliple being a good base case here. 1.5 to 2.5 was the range. So we get $56 million for this segment.
Energy via Benchmark
I used $57.8 for Benchmarks annualized revenue and gave it a 1.8 multiple or $104 million total for this segment.
Manufacturing via Deflecto
I am using a conservative $127 million in revenue at a 1.5 multiple or $190 million for this segment.
Life Sciences Portfolio
The reported value of the private clinical-stage pharma interests are $25 mil. Approximately 26% interest in Viamet Pharmaceuticals, Inc. (via 64% ownership of MalinJ, which holds the Viamet stake). 18% interest in AMO Pharma, Ltd. and 4% interest in NovaBiotics Ltd.
ACTG has been pretty savvy with their pharma investments. The ACTG life sciences biotech pharma portfolio has given them a 87% ROI since acquired with proceeds of $564 mil. ACTG has sold off most of the original 19 companies.
Current stakes
Viamet Pharmaceuticals: Antifungal drugs, likely Phase II/III.
AMO Pharma: Rare disease therapies (neurological), Phase II/III, orphan drug focus.
NovaBiotics: Antimicrobial therapies (e.g., cystic fibrosis), Phase II, addressing drug resistance.
A 1.5 book value multiple is pretty conservative for these it seems as it could be 2.0 in comparable stage pipelines. So this segment lets say is worth $50 million.
Our grand total sum of the parts value for Acacia is $452.8 million in enterprise value.
Acacia Research ACTG current enterprise value (EV) is just $165 mil. EV/sales is currently .74 which is very undervalued. The sum of the parts valuation is $452.8 mil EV or 144% higher than its current EV. Even if we used just market cap which is $358 million there is still value here with sum of the parts.
Final Thoughts
I see this as the kind of stock that requires patience. It fits into the real deal value stock category if you will. The market is wrong on the valuation but how long can the market stay wrong? The company has always been a value-trap so to speak over long periods. I think there are enough good things here with the possibility of some robust cash flow down the road. The Deflecto should help with that. With the strong balance sheet I see it as a good opportunity long-term. If the stock price takes off higher some month you take some profits and see what develops. They have time on their side here with so much cash and good businesses.