Thursday, May 15, 2003 1:31:14 PM
In IDCC's case, for example, its revenue base and operating cost structure have significantly changed during the last 4 years so that one can now see that total sales per share (>$2.50) is going much faster than total operating expenses per share (<$1.50) as its patent generation has increased. Last year IDCC filed 43% of all outstanding patent applications worldwide.
That said, here's one quantitative approach that combines an interesting form of patent citation analysis with a traditional book value-based valuation method. Note that this purely quantitative approach does not include any qualitative assessment about management.
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..............How does CHI’s crystal ball work? It uses patent citation analysis to figure a company’s technological strength, the power of its unique intellectual property.
Every month CHI Research looks at every approved patent from the US Patent and Trademark Office. The front page of the approval form lists the prior patents that the newly approved technology builds upon. It also lists academic articles used by the newly patented technology.
This patent information, plus a company’s research and development (R&D) expenditures, forms the basis of patent citation analysis.
CHI looks at four indicators:
1) The current impact index is an average of how often a company’s patents are cited by later patents approved within five years. You know a patent is an important technological advance if lots of later patents cite it.
2) Science linkage measures the average number of times a company’s patents cite scientific papers and similar research publications. This indicates how much a patent is building on cutting-edge scientific research.
3) Technology cycle time (TCT) is the median age in years of the US patents cited on the front page of a patent. A company with a low TCT is citing very recent patents and therefore innovating rapidly.
4) R&D intensity in a given year is R&D expenditures divided by sales. It measures how central R&D--the bedrock of technological innovation--is to a company. CHI gets this figure from Schonfeld Associates.
With these four indicators and a proprietary formula, CHI calculates a technological strength rating for every company that was granted at least 50 patents granted over a five year period, and maintains at least 25. Because some industries innovate more quickly than others, CHI compares companies within their own industry. CHI currently covers 300 companies in 22 industries.
"We don’t cover Internet stocks," says Pat Thomas, associate analyst at CHI, "because none of them have enough patents--if any."
With another proprietary formula for each industry, CHI uses a company’s technological strength rating to determine what its market-to-book valuation should be. Market-to-book equals the price per share divided by the book value of the company per share.
Divide this market-to-book value by the actual market-to-book value and multiply the result by the current price and you get a price target for the company.
At the beginning of last year Coherent had a market-to-book ratio of 0.84, but its technological strength indicated it should have been 4.13," says Thomas. "Coherent’s patents were cited 17% more often than the industry average and were six times more likely to cite scientific research. Its technology cycle time showed that it was innovating 10% faster than its peers. As a result, we placed a price target on Coherent of $61.16--(4.13/0.84)*$12.44.
"Our valuations are based solely on the quality of the companies’ patents," says Thomas. "They’re quantitative and purely objective. We have no opinions of our own to inject into the model. Our valuations are not based on what companies tell us. We don’t talk to them. We don’t judge whether management is poor or the stock market is depressed."
http://216.239.53.104/search?q=cache:NpUypTniT1gC:www.chiresearch.com/docs/techinv.php3+book+value+p....
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