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Donkey Kong

Donkey Kong
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  • PDL Biopharma: Agreement With Genentech And Roche Is A Net Negative [View article]
    You clearly believe that PDLI is (still?) overvalued, but you never actually provided any indication of fair value as of today or on 12/31/15 when the Queen et al patents effectively expire.
    Based on the current portfolio of assets and the agreements in place, our analysis shows that PDLI is currently worth approximately $8.30 per share including dividends under a liquidation scenario over the next two years (using net cash flows on a non-NPV basis through 3/31/16). The $8.30 figure assumes that management makes no additional investments in income producing assets going forward which would obviously increase our valuation (i.e. assume an option value of zero) along with the potential for dividends beyond the liquidation period (2 years).
    I think it would be helpful if you shared more detailed thoughts with respect to your valuation and the methodology behind it (I assume you have a ton of analytical work that supports your article). It would appear that you have attributed minimal if any value to both the Depomed royalty agreement and the various senior secured investments made to date (BV of $90.8 MM), hence my interest in the details behind your valuation.
    Feb 6 09:00 AM | 1 Like Like |Link to Comment
  • PDL Biopharma: Agreement With Genentech And Roche Is A Net Negative [View article]
    There are numerous closed-end funds that trade at a premium to NAV though I assume you would not be inclined to purchase any of them. Is it then your position that PDLI is not really an operating company, but simply an investment fund and therefore should never trade at a premium to its NAV / liquidation value?
    If so, then I understand why you believe that PDLI should be worth no more than book value at 12/31/15. However, I'm not sure accounting book value is really a meaningful figure for PDLI or useful in conjunction with a valuation metric given the significant historical dividend payout, evolution of the business strategy over time, etc.
    To date, management has done an excellent job allocating capital and I believe that they will be able to deploy capital going forward that generates attractive returns for shareholders. Assuming PDLI does not reach my price target of $10.00 in the interim, I am willing to wait until 12/31/15 to see if these new investments result in a stock price higher than the current $7.65 while collecting $1.20 / per share in dividends over the next 2 years. I can only assume you believe that PDLI will be trading well below $7.65 on 12/31/15.
    Feb 5 02:17 PM | 2 Likes Like |Link to Comment
  • PDL Biopharma: Agreement With Genentech And Roche Is A Net Negative [View article]
    Your bank account analogy is a specious argument. You are comparing money sitting in a low-risk bank account earning next to nothing vs. actually investing the money in a higher return asset. I think your analysis effectively implies a de facto liquidation because you are assuming there is no guarantee that management will be successful in finding new investments that generate premium returns (zero option value) and the stock is overvalued because it exceeds the current liquidation value.
    Another way to think of about value could be utilizing the PVGO methodology. The value of PDLI is comprised of run-rate earnings / cash flows plus the present value of the future growth opportunities (PVGO). You may argue that run-rate earnings (visible cash flows) are low and that the majority of the current stock price is comprised of the PVGO which are simply too cloudy for your liking.
    Feb 5 11:31 AM | 2 Likes Like |Link to Comment
  • PDL Biopharma: Agreement With Genentech And Roche Is A Net Negative [View article]
    There is nothing philosophically wrong with my original questions. First, there are thousands of public companies that generate above-market returns on capital / equity. If this were not the case, there would be no economic reason for these companies to be in business and no public company would ever trade at a premium to book value. Second, your analysis assumes only one course for PDLI going forward - the Queen et al patents expire and the company essentially liquidates at a value below the current stock price.
    Management has stated its intention to continue operations beyond 2016 based on the desire of its shareholders. Therefore, I believe my two questions are spot-on. Can management continue to assemble an attractive portfolio of assets over the next two years (prior to the final royalty payments in Q1 2016)? Will this new portfolio of assests generate returns at or in excess of those historically?
    Feb 5 10:37 AM | 2 Likes Like |Link to Comment
  • PDL Biopharma: Agreement With Genentech And Roche Is A Net Negative [View article]
    A 2% short position is fairly typical in a long / short portfolio. What I really wanted to know was how many actual shares you were able to short in the pre-market (PDLI is not exactly FB when it comes to pre-market trading volume).

    I agree with your statement that the option value is now gone (I stated back on 12/3/13 that the probability of huge settlement from Roche-Genentech and a subsequent special dividend were low) and the stock certainly got ahead of itself when it touched $10.21 in early December 2013 on hopes of a big settlement award.

    From our perspective, there are two major questions facing PDLI. First, can management replace the royalty cash flows and remake the investment portfolio prior to the expiration of the Queen et al patents by Q1 2016 (2-years). Second, assuming management can successfully transition to a bio-tech BDC, will the new investment portfolio generate returns commensurate with those historically from the Queen et al patents.
    Feb 5 09:44 AM | Likes Like |Link to Comment
  • PDL Biopharma: Agreement With Genentech And Roche Is A Net Negative [View article]
    Similar to the statement in your article that it is impossible to verify management's claim of higher royalty rates from Roche-Genentech going forward, it's impossible to verify your claim of shorting PDLI @ $9.45 during pre-market trading on 2/3/14. If I recall correctly, the post-announcement pre-market reaction on 2/3/14 was rightly benign (while $9.45 represents a 3.85% gain over the prior Friday's closing price of $9.10). I'll just assume that the levels you quoted are the truth.
    I also had a couple of follow-up questions for you:
    How many shares did you short at $9.45 in the pre-market?
    Have you already covered your short? You said in your comment above that you had already taken "measures to insure a gain".
    Feb 5 09:11 AM | Likes Like |Link to Comment
  • PDL BioPharma settles litigation with Genentech, Roche [View news story]
    Jack: Assumed you doubled down today at $8.88 a share. My comments above were essentially a follow-up to thoughts I shared back on 12/3/13 when PDLI was trading north of $10 and the stock was up almost 25% in less than six weeks. Expectations (e.g. $1 billion litigation settlement vs. Roche/Genentech resulting in a huge special dividend) seem grossly inflated at that time.
    We have been long PDLI since November 2010 at an average cost basis of $5.09 a share and are currently short the May 2013 $10 calls. I certainly understand the risks facing PDLI as management remakes the company given the roll-off of the Queens et al patent royalties by Q1 2016. Management has done an excellent job, but I'm not convinced the "new company" will generate returns commensurate with those achieved historically.
    At today's closing price of $8.90, I think PDLI offers average risk / reward with 20% potential upside excluding dividends and probably 10% downside. It's not an attractive short from our perspective given the 20%+ short interest and 6.75% dividend yield.
    We are sellers north of $10 a share (hence the short call position) which would represent a tripling of our investment on a total return basis over the past 3 years.
    Feb 3 11:36 PM | Likes Like |Link to Comment
  • PDL BioPharma settles litigation with Genentech, Roche [View news story]
    The CEO of PDLI stated in today's press release that the new fixed royalty agreement benefits shareholders. I did a quick calculation. Based on the new fixed royalty structure, worldwide sales of Avastin, Herceptin, Lucentis, Xolair, Kadcyla and Perjeta would need to exceed US $16 billion in order to generate more royalty revenue for PDLI than the previous agreement. I also assumed a U.S. and ex-U.S. sales split of 62% / 38% in order to calculate royalty revenue.

    I think a number of the momentum-style investors were anticipating a special dividend from the settlement which I think was a stretch (see my post of 12/3/13). The overall market is getting slammed today, but this announcement could also be putting some pressure on the stock.
    Feb 3 04:06 PM | Likes Like |Link to Comment
  • Spin-Off To Payoff: National Oilwell Varco [View article]
    Your CAGR formula is correct, but the number of periods is 9 not 10 -- think (n - 1) so "1/10" should be "1/9". Your starting point for the calculation is 12/31/03 and your ending point is 12/31/12 or 9 years in between.

    P.S. Please don't apologize for being unaware of NOV back in 2009 while you were in high school. I'm sure you and most of your classmates were focused on things other than investing in stocks. You are still way ahead of the game.
    Jan 16 09:08 AM | 4 Likes Like |Link to Comment
  • Spin-Off To Payoff: National Oilwell Varco [View article]
    An excellent synopsis of NOV, especially for your debut report on SA and much higher quality than many of the individual company reports that grace this site.

    There was a good mixture of bottom-up, fundamental analysis married with the potential catalyst from the spin-off of the distribution business later this year. I am the sole portfolio manager for a small family office and NOV is one of our largest holdings. We have been long NOV since July 2009 with an average cost of $31.00 a share ($25.65 when you factor in dividends and the sale of some covered call options). Yes, NOV has underperformed over the past couple of years, but we are more than happy to wait for Mr. Market to figure it out. Based on our analysis, we believe fair value for NOV shares is approximately $125-150.

    A couple of minor comments with respect to your valuation table. First, you should not include NOV when you are calculating the averages for the various valuation metrics. The averages should only include the other comparable companies. Therefore, you can analyze NOV vs. the other comparables and the composite average. Second, I think it would have been more consistent with traditional equity analysis to show the CAGR in EPS vs. your cumulative earnings growth figure for NOV of 1,140% since 2003. Investors think more about YOY changes or CAGR. FYI -- NOV 2003-2012 EPS CAGR = 32.3%.

    It looks like you are well ahead of many of your peers. Nice job!
    Jan 15 10:46 PM | 3 Likes Like |Link to Comment
  • PDL BioPharma guides above estimates for Q4 revenue [View news story]
    $119.57 MM revenue consensus is for Q1 2014 not Q4 2013 so an apples to oranges comparison. An error on the part of the author / SA.
    Dec 11 10:56 AM | 1 Like Like |Link to Comment
  • PDL BioPharma slips, article sees big downside [View news story]
    A pretty laborious explanation, but I catch your drift (evaluating return streams is one of my specialties). You strategy is to take your initial capital plus 10% of the table as quickly as possible so you are playing with "house money" going forward. Also, I assume your strategy operates on a pre-tax basis (i.e. taxes on the potential capital gain are excluded from the 10% gain calculation / number of shares sold?

    Based on my calculations, your cumulative pre-tax return (including dividends) on PDLI is approximately 102% at today's current price of $8.65. Looks like you purchased around 8,250 shares in late February 2011 at an average cost of $4.88 (total purchase price of $40,260). Sold 5,000 shares on 10/18/12 @ $8.40 generating proceeds of $42,000. Currently hold 3,250 shares worth $28,000+. Total dividends collected = $11,100.

    Value of current shares + sale proceeds + dividends = $81,213
    Initial investment = $40,260
    Total cumulative pre-tax return = 101.7%

    I'm not sure I concur with your statement that your portfolio is "risk less" or you have "nothing to lose" utilizing this strategy. In theory you will never have a loss on your initial capital assuming the stock appreciates enough sooner rather later. However, if the remaining shares do not appreciate or decline, your ROI is zero.
    Dec 4 11:33 AM | Likes Like |Link to Comment
  • PDL BioPharma slips, article sees big downside [View news story]
    "....since I am at 110% profit plus quarterly income."

    When did you purchase PDLI and what is your average cost basis?
    Dec 4 09:53 AM | Likes Like |Link to Comment
  • PDL BioPharma Is Severely Overvalued [View article]
    Speculative: One of the keys to being a successful investor is the need to understand the counter investment thesis (e.g. the bear case if you’re long & the bull case if you’re short). I manage a small family office (investment capital of $25 MM+) and our investment process is driven strictly by fundamental, bottom-up analysis (no charts, no momentum). We made our PDLI investment in November 2010 so I am quite knowledgeable about the company and its strategy. With an average cost basis of $5.09 = 11.8% dividend yield, we felt that the investment risk-reward was skewed heavily in our favor and have been proven right to date. At yesterday’s closing price of $10.10, we have more than tripled our investment on a total return basis over the past 3 years.

    PDLI shares are up 24.8% since 10/31/13 as a result of multiple factors (e.g. possible settlement with Genetech, a number of new investments, heavy marketing by the company, momo investors piling in, etc.), but we think much of the good news is already reflected in the current stock price. We are attracted to investment situations that have an event-driven component (e.g., we increased our investment in CBST several months prior to their negotiated patent settlement with TEVA in April 2011), but think the probability of PDLI receiving a huge cash settlement from Genetech is relatively low. Current investors who believe a substantial special dividend is just around the corner could end up being disappointed. Management has done an excellent job managing their asset base, but it will face numerous challenges over the next few years. Royalties from the Queen et al patents, representing approximately 95% of the company’s current revenue, will decline substantially starting in 2015 so management will have to remake the company. Past performance is no guarantee of future results and it’s not totally clear to us whether management’s recent investments will generate returns commensurate with those from the Queen et al patent royalities.

    It’s unclear how you came up with your $12-14 price target for PDLI and a future quarterly dividend of $0.16-0.17 (today’s stock price x 20%?). For us, 20%+ price appreciation and a 6.0% dividend yield is satisfactory, but not compelling. Our goal for any new investment is to generate a 100% total return over a 3-year time horizon and we are delighted that we could exceed that goal with respect to our investment in PDLI. At a price of $10, we are more inclined to be sellers than buyers based on the current fundamentals and the outlook over the next 18-24 months. Since we have a significant long-term capital gain we wish to defer, we will look to exit our PDLI position in early January 2014 assuming the stock remains at roughly current levels.
    Dec 3 10:18 AM | 3 Likes Like |Link to Comment
  • PDL BioPharma Is Severely Overvalued [View article]
    So any investment thesis that contradicts YOUR investment thesis is a " hatchet piece"?

    P.S. Stock is flat after hours.
    Dec 2 05:57 PM | 1 Like Like |Link to Comment
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