Value Stock Acacia Research Corporation (ACTG)

Growth business with deep value discount

Acacia Research (ACTG) is a business and intellectual property acquisition company. They acquire and manage public and private companies, ideally below $2 billion, in industries including industrial, energy, technology, and healthcare verticals. Their focus is on buying businesses below intrinsic value.

In the annual report, they say, “we are particularly attracted to situations where we believe value is not fully recognized, the value of certain operations are masked by a diversified business mix, or where private ownership has not invested the capital and/or resources necessary to support long-term value.”

I noticed this company in a deep value screen a couple months or so ago and only glanced at the business description. I skipped it and dismissed it as probably just another SPAC or something like a mezzanine debt investment company. I was wrong. There are some very good business segments in Acacia. It is basically like a holding company.

They have been diversifying into different industries thanks to an activist hedge fund, Starboard Value. Starboard has been investing in Acacia as far back as 2019, from my research. Starboard owns 61% of Acacia Research’s shares outstanding. In 2019, Jonathan Sagal, Managing Director of Starboard Value, joined Acacia’s Board of Directors.

Business Operations

They have a strong patent business as well as a subsidiary Printronix that is the world leading industrial printer company. They also have a $10 million control investment with a 50.4% equity interest in Benchmark.

Benchmark is a Texas independent oil and gas company engaged in the acquisition, production and development of oil and gas in mature resource plays in Texas and Oklahoma. They have 13,000 acres mostly in Texas and an interest in 125 wells. The cool kicker with this business is it is about to seriously expand. On February 16, 2024, Benchmark entered into a Purchase and Sale Agreement with Revolution. Under this agreement, Benchmark will purchase around 140,000 net acres and approximately 470 operated producing wells in the Western Anadarko Basin spanning Texas Panhandle and Western Oklahoma.

This transaction is expected to close in the second quarter of this year and will be funded by Benchmark with $145 mil in cash. Acacia’s contribution is $57.5 mil in cash. This will bring Acacia’s interest in Benchmark up to 73%.

In June 2020, Acacia acquired a life sciences portfolio consisting of investments in 18 public and private life sciences companies. The purchase was funded with approximately $282.0 million from available cash and capital from Starboard. By the end of 2023, they have received proceeds of $507.1 million from the portfolio.

Growth

In the most recent quarter revenue grew 64% year over year. The intellectual property segment made up 57% of revenue and was the main driver of growth. It consists of patent licensing, enforcement and technologies. The company has a good track record here, with 1,600 licenses agreements executed and 200 patent portfolio licensing and enforcement programs. Over the years, they have generated gross licensing revenue of approximately $1.8 billion.

One of the main things that attracted me to this company was the consistent revenue growth over the last five years. The five year revenue CAGR is 62%! The only negative year for revenue was 2022.

The IP revenue growth for full year 2023 was a whopping 356%. Total revenue from all segments combined grew a very robust 111%.

Free Cash Flow and Earnings

Free cash flow had a nice turn from negative to positive this past quarter. They had $54 million in free cash flow. However, net income was slightly negative as they lost $186,000 vs an income gain of $70 million in the previous quarter. Net income has been fluctuating. They did have positive net income in 2020 of $86 mil and $118 mil in 2021.

Valuation and Final Thoughts

The balance sheet is incredibly strong with a current ratio of 21.4. There is $553 million in current assets as of quarter end March 31, 2024. $438 million is in cash. Cash has been stable and grown over the last 5 years. Cash is up from $340 mil last quarter.

Net current asset value is $511 mil. Net tangible assets are $538 mil.

The current market cap of Acacia Research is $526 mil with the stock at yesterdays close of $5.26 a share. So, the stock is trading for slightly below net tangible assets. Trading below net tangible asset value meets my criteria for a deep value stock. I believe this valuation is especially pertinent in the case of this company because of the large equity stake in the oil and gas Benchmark, that will have 153,000 acres and 595 wells.

It seems like there is value in the sum of the parts valuation approach here with Acacia. To me the IP and patent business is just fine enough to take for this valuation too with the growth it has had. This company is definitely one of the most intriguing deep value stocks I have run across.

Stock History

I looked at the stock price history going back to the late 1990s. It historically has been a pretty high beta stock. The stock had a big run in the dot-com years up to 2000. It also had a big run post 2008 recession up until 2011. It sold off for years after the 2011 top but tripled off the Covid 2020 lows. The stock finally got some momentum this year and has trended up all year from the $3.50 level bottom. Key price levels are the red lines below. Technically, this is a bottom whether you call it a base and rounding bottom like I do or a head and shoulders.

Full disclosure: I don’t have any positions in ACTG but am planning on buying shares