Immersion was one of the original stocks selling below cash, although was deleted from this group because (1) it no longer sold below cash, and (2) the company announced an internal accounting review of its medical segment. I suggested in a recent post that Immersion (NASDAQ: IMMR) may be worth looking at again down the road. Now that Ramius has filed a 13D, that time has come far earlier than I expected, and this filing was the featured 13D in Barron’s this weekend.
Immersion is basically a situation where some capital intensive assets (the medical segment and parts of the touch segment) are masking some good assets (the royalties and licensing mainly from the touch segment). Some extra protection is also provided as Immersion has a lot of cash on its balance sheet, although the company has not filed a quarterly report since May 2009 due to the accounting investigation. I think that the main question here is how to value Immersion on a sum-of-parts basis, which fortunately is possible as the company breaks out its segment data. However things get a little more complicated here because the touch segment has a product sales revenue stream and development contracts revenue stream that does not produce as high of margins as the licensing and royalties revenue stream, and both segments report negative operating income. Thus, a better way of thinking about how to value Immersion could be to value the company’s patents using the licensing and royalty revenue streams as a proxy.
Back of the Envelope Valuation
Assuming a 5-year average for the licensing and royalty revenues in our valuation amounts to ~$10M. I use the 5-year average here because although licensing and royalty revenues typically have very high margins and are close to pure profit, there are still some expenses associated with this activity, and this helps to act both as a proxy for the potential expenses here and keep our estimates reasonable but conservative. A median estimate using sensitivity tables for the royalty and licensing revenues amounts to around $99M.
As of the company’s last 10-q filing in May, Immersion has just over $80M in cash and no debt. The medical assets I will assume are worth the stated book value of around $10M, with operating leases worth about $8.8M based on a gross up of 8x 2008 operating lease expense. This puts Immersion’s valuation at ~$180M, or $6.44/share. The risk reward scenario looks attractive here.
Disclosure: I do not own shares in Immersion (NASDAQ: IMMR).
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