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 Royalties (PZA.TO, PZRIF), among others, and those are really sort of like a lower-end version of McDonald’s (MCD) as a master franchisor, collecting a sales royalty for use of the brand name but not doing the aggressive franchise management (or material supply and standardization) of most of the big fast food chains.

Within the area I’ve been looking at, consumer products, brand licensing is commonplace even if there aren’t all that many public companies who specifically focus on just being licensing/royalty firms — we all see licensed stuff on which IP owners earn royalties everyday, whether it’s a Ferrari T-shirt or a NFL replica jersey or a Hello Kitty lunchbox or a Star Wars action figure. Probably the most well-known transactions in this space in recent decades have been inspired by Target corp, with their deal to license the surfer brand Mossimo many years ago when it was a declining fashion business, and to license in ...

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