April Idea of the Month: License to Generate Cash

By Travis Johnson, Stock Gumshoe, April 17, 2015

Make sure to read the comments following this article — big news (possibly bad) came out on the company and the stock dropped sharply the evening after I published this article, I’m still digesting the news and will probably share additional thoughts in the near future.

If you’ve been reading Stock Gumshoe for long, you probably know that I love royalty businesses — companies that, instead of running a big operating business with lots of moving parts, whether it’s developing a drug or building a gold mine or establishing a retail supply chain or whatever other capital-intensive and risk-imbued activity that sector demands, simply invests some cash or some intellectual property, sits back to watch the operators grow the business, and skims a payment off the top-line sales in perpetuity.

I’ve suggested a few companies in this vein in the past — Ligand Pharmaceuticals (LGND), Altius Minerals (ALS.TO, ATUSF), Sandstorm Gold (SAND), Dorchester Minerals (DMLP) and others (I currently own LGND, ATUSF and SAND) — and today I want to dig into another one that’s in a much different, consumer-focused business: licensing and earning royalties/licensing payments on brands.

There are several companies in this area. Some are focused on a specific chain or one specific brand, in Canada a line of these companies has evolved in the restaurant space that includes the A&W Revenue Royalties Income Fund (AW-UN.TO, AWRRF), Boston Pizza Royalties (BPF-UN.TO, BPZZF) and Pizza Pizza Royaltie