Ampex Corporation AEXCA
February 01, 2005 - 3:43pm EST by
2005 2006
Price: 47.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 168 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Although Ampex Corporation has gone from $4.00/per share to $48/share, it remains one of the best investment ideas that I have seen in a long time. There are two parts to the business 1) the licensing of intellectual property and 2) its operating business of manufacturing and development of data storage systems and instrumentation recorders for the military. The company has approximately 4m fully diluted shares outstanding and a market cap of less than $200million. I believe that the minimum EPS that the company can earn for any year going forward is approximately $6.25 and there is substantial upside to this number.

The licensing business is generated by its patent portfolio which consists of over 600 worldwide patents. Their patents cover digital image retrieval, display, archiving and compression. Most of their patents expire in 2014. Their technology covers digital cameras, camcorders, dvd recorders and cellphone cameras and they have begun to sign up the world’s major manufacturers to licensing agreements. In the past quarter, they announced that they signed up Sanyo and Canon to licensing agreements. In Sanyo’s case they settled outstanding litigation. The payments that the company received were approximately $25.1 million. Of these amounts only a small portion will be recurring for 2005, perhaps $7 million. This is because the licensees received big discounts to make up front payments which the company used to delever its balance sheet.

Additionally, the company recently announced a license with Sony in late November, pursuant to which they received an upfront payment of $40 million, covering all of Sony’s products through April 2006 and then just camcorders beyond that. After April 2006, the particular patent licensed relating to still cameras expires and theoretically Sanyo and Canon stop paying while Sony begins current pay on the camcorder patent which was included in their licensing agreement which the company estimates is worth approx $14 million per year in ongoing royalty payments.

The company expects to sign all of the major digital still camera producers to licensing agreements over the next 3 months, with the exception of Kodak against whom the company recently initiated litigation. This will produce approximately 30+ million of licensing payments (assuming up front payments as opposed to pay as you go which may not be the case) and if they settle w/ Kodak they might receive an amount close to Sony’s $40 million.

Although the particular patent covering the licenses the Company has entered into as well as those being negotiated for digital still cameras expires in 2006, the company believes that they have numerous other patents that cover still cameras through 2014. Importantly, current trends are playing to the company’s favor. As the megapixels increase on still cameras and as still cameras increasingly incorporate video features which require greater compression, there becomes an almost certainty that digital cameras violate the company’s other patents which would require new licensing agreements. The company expects that it will enter into new licensing agreements for digital still cameras that begin in April 2006.

The company’s data systems division, designs, manufactures and services storage products that have very large capacities and fast data transfer rates. These products are principally used in digital recording, archiving and rapid restore/backup applications and are mostly sold to the Dept of Defense. The business has consistently generated approx. $4 million of earnings ($1 per fully diluted share). The current trends are favorable for the business given the geopolitical climate—their products are and will increasingly be used in reconnaissance missions for predator unmanned craft and for intelligence and data gathering by satellites. The company is in the middle of a product upgrade cycle which mgmt believes could possibly double its bottom line over the next couple of years.

The company used the upfront license payments to delever the company. The company had approximately $75 million of debt which was reduced by $60 million. Some of the debt had interest rates as high as 20%. This paydown saved the company approximately $8 million annually or about $2 per share. The company will take out their debt completely by the end of q2 05.

Lastly there is a $200 million NOL that expires in 2023.

Putting this all together you get:

Earnings Calculation:

2004 2005 2006
Operating business 4 4 4

Digital Still Cameras 65 30 7

Camcorders 6-7 6-7 20-22


litigation costs (4) (4)

Interest (0.75)

EPS HUGE $8.80 $6.25 (mimimum)

As you can see, the minimum earnings potential here is very high making this an incredibly cheap stock. Note that (1) I’m completely zeroing out still cameras after april 2006 which is unlikely, (2) I’m not giving the company credit for operating improvements in their data systems business (3) I’m assuming that the company does not enter into any licenses for DVD recorders (the company already has one license inked) which is unrealistic, and (4) I’m not giving any credit to the opportunity for the company to license the cell phone manufacturers (camera phones etc) which the company describes as a potential massive opportunity, and other opportunities to license their technology. I believe that the Company’s actual earnings will be a lot higher than what I’ve shown above. Keep in mind that with a better capital structure the company can be a lot more aggressive in pursuing licensing claims.

In any event, I believe that the 2006 EPS number is a minimum number that the company can generate from 2006 thru 2014. There is significant upside to this number. Additionally, the company will split its stock (not that this is an economic event but it will expand the float) and will get nasdaq listing by June.


1. Additional digital camera licensing agreements to be announced within the next 90 days.
2. Settling of its litigation v. Kodak.
3. Stock Split (not many shares in the float)
4. NASDAQ listing in June.
5. Strength of operating results when company year end earnings released in March.
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