Digimarc has no debt and $43 million in cash as cited above. They have 7.4 million shares outstanding, meaning that at current quotational value, the stock trades at an enterprise value of $26 million outside of cash for a profitable company with one of the world’s most valuable patent portfolios around.

Digimarc compares very favorably to other intellectual property licensing companies. On average intellectual property companies trade at 4 times revenue and over 15 times earnings, even in this terrible market. Digimarc by comparison trades for 1.25 times sales and 10 times my estimate for next year.

Financial Assumptions

According to management, fiscal 08 revenues will increase to $19 million from $13 million in fiscal 07. I assume that revenue will grow a very conservative 25% in fiscal 2009, which based upon market research, past performance and its backlog should be pretty easy to attain.

The pro-forma financials on the Form 10 state Digimarc’s net income for the first half of 08 to be $1.588 million. I decided to assume that Digimarc earns no income in the second half due to one-time items resulting from the spin-off (consulting fees, costs from downsizing, attorney fees etc.). I assume that with the additional revenue and lack of one­time expenses that the company earns $3 million in fiscal 2009. At current prices, Digimarc is trading at 10 times my estimate for fiscal 2009 earnings.

Summary

With almost $6 a share in cash, an intellectual patent portfolio treasure chest, a growing profitable licensing business in a fast growing and important field, Digimarc is well positioned even in this terrible economy. When the market recovers and stabilizes, this is the type of company that will do well, a growth company with excess cash with exciting technologies. Get it while it’s still a value stock.

Aaron Edelheit of Sabre Value Management presents “Small Cap Diamonds in a Rough Market.” Sabre is generating 19% annualized returns.

How has the small cap value sector outperform so long? Edelheit argues this is because there are periods of illiquidity and volatility. Edelheit focuses on insider buying, spin-offs and restructuring.

Photochannel (PNWIF) is now at $2 or 7 times earnings. They managing front and back end of photo sites. Clients include Costco, CVS, Tesco and Wal-Mart Canada. It is an excellent recurring revenue model. Revenue is suppose to grow 100%. They are creating a wide economic moat with high switching costs. It took Costco 9 months to move their photos. By storing so many images online it will cost a lot to move to another system.

Why not just have retail customers upload it from their computer? It is just a matter of education. As customers upload online, Photochannel grows.

People keep printing photos even in a recession. New customers of Costco, Sam’s Club and Kodak China. Digital prints are up 27%. Print orders online grew 64% online. Home printing is declining, lost 12% of its market share. Home printing is expensive.

There is optionality value of the potential Kodak China and Kodak India income, 25000 kiosks.

They will receive 5% of everything that goes through the kiosks. Each kiosk does $3 a day at 25,000 locations with no expenses to Photochannel.

Why so cheap? Not covered by sell side analysts, small cap Canadian index down over 44% YTD. A few funds have been forced to sell. Its at the lowest price in two years while it added customers and now making money. The company is growing revenues at 80% selling at 7 times earnings is unheard of.

Hemisphere GPS (Toronto: HEM)

Precision agriculture including GPS guidance and auto-steering becomes best proctices on the farm. Payback can be 6 months or less thanks to soaring input costs.

Sold their first product to China yesterday. They grew revenues by 59% in Q2 and should grow revenue 50% plus in 2008. They are raising prices and the grain bull market typically last 10-14 year and we are in year 2.

Why is it cheap? A rival company won business to Agco but HEM still with them as a customer. Rivals product doesn’t work yet.

Only 9 times this years earnings. Insiders are buying shares. They have called for a 5% buyback. There is IP value here that there are only 4-5 companies with the technology. New markets include autonomous mining vehicles. The mining companies don’t have this technology.

Limoneira (LMNR)

Producer of avocados that owns 7,000 acres of prime California real estate. They just got 500 acres to get entitled for residential development. The weather is amazing at this location.

The also own a rectangle of land in Ventura that overlooks the Pacific ocean. It is only one of 2 project to be built in Ventura in the next 10 years.

They also own water rights going back to 1893. They have 5 million acre feet in Santa Paula Basin and another 10 million un-adjudicated in Fillmore Basin. They also own their own mutual water company shares worth $100 million. They also have their own pipeline conduit to Ventura that waters avocado trees that could be used to sell water to Ventura and Oxand

Digimarc (DMRC/D)

It has strong patent portfolio according to WSJ Patent Scoreboard, 21st strongest. The company is not trading yet since it is a spinoff. They do digital watermarking. They are used on picture, audio, and data files.

They have $13 million of revenue in 2007 and expected to grow to $20 million in 2008. 77% gross margins and profitable. Can be used to scan YouTube video for watermarks and even to help monetize that content when it is identified.

How does the 21st strongest patent portfolio in information technology in the world equal a $50 million EV?

Edelheit closed the presentation with a call for participants to be a mentor. I can’t argue with his value claim with that.

A question noted that it is important to look at how many years the patents have left in the Digimarc portfolio of patents.

George
www.fatpitchfinancials.com

Leon Cooperman, Omega Advisors

Cooperman his presentation with a somewhat optimistic (or “realistic” as he called it”) view of the current state of the markets. Cooperman believes that the bulk of the damage has already been done to the markets, and was hopeful for several reasons:

• Evidence that housing is finally bottoming
• Residential investment is at recession lows
• Housing affordability is improving
• Equity valuations are reasonable, if not better
• Price to replacement cost book values are at below average
• ROE for S&P 500 is near historically high levels
• More companies (13% of S&P 500) are yielding more than 10 year Treasury—most in 15 years
• Yield curve is positively sloped
• Corporate America is in good shape from a balance sheet perspective- Debt to capital near 30 year lows
• Liquidity is high (although there is fear to use it)
• Inflation expectations are receding.

Cooperman likes Atlas America (ATLS), which owns three other publicly traded MLP’s (Atlas Energy Resources (ATN), Atlas Pipeline (APL), and Atlas Holdings (AHD). Currently trading at $23, Cooperman believes the entire package could be worth $30-$77.

Aaron Edelheit- Sable Value Management

Edelheit presented at the Value Investing Congress West last May, and his deep passion and conviction for value investing was equally apparent in New York. Edelheit pointed out the outstanding returns from the small cap value area of the market since 1970 (16.2%), but noted the disinterest here from many investors. He cited the following reasons for this situation:

• Small Cap Value can be very boring to investors
• There may be long periods with no news
• Illiquidity associated with SCV companies scares investors
• Too much volatility
• Little or no analyst coverage

One of Edelheit’s favorite ideas is Photo Channel Networks (PNWIF), which provides online digital photography solutions for retailers.

• At $1.50 per share, trades at 9 times eps (7 times 2009)
• Rapidly growing, revenue up 250% last quarter
• New customers Sam’s club, Costco, Kodak China
• Digital printing business growing rapidly (64% last year)
• No analyst coverage

Jonathan Heller, CFA

Disclaimer: I have no positions in any of the companies mentioned

The Mortgage Crisis
Whitney Tilson and Glenn Tongue of T2 Partners kicked off day 2 with a sobering look at the mortgage crisis. For his part, Tilson believes that we have not yet seen the worst. His extremely detailed presentation (“The Latest on the Mortgage Crisis and Implications for Certain Financial Stocks”) paints a very bleak picture, suggesting that all things housing and mortgage related will get much worse before improving. Tongue and Tilson put their money where their mouth is with short positions in monoline insurers AMBAC and MBIA, Washington Mutual, and a long position in Fairfax Holdings (which has gained and may gain further in the mortgage crisis due to its credit default swap holdings).

Glenn Tongue gave an excellent overview on Berkshire Hathaway, making the bullish case based on:
• Over –capitalization
• In a great position to take advantage of opportunities this market presents
• Remains the premier capital allocator
Tongue Valued Berkshire on:
• Investments/share ($90,342)
• Plus PV of future pre-tax eps (excluding investments)
• Intrinsic Value of $156,000- $159,000, a 20% premium to current price
We can only hope that Whitney and Glenn are wrong on the depth of the mortgage crisis (wishful thinking) and right on Berkshire’s valuation.

Aaron Edelheit- Sabre Value Management
One of the very pleasant surprises this year was newcomer Aaron Edelheit, whose passion for value investing was very apparent in his presentation. Edelheit pointed out the outstanding returns from the small cap value area of the market since 1970 (16.2% annualized), but noted the disinterest here from many investors. He cited the following reasons for this situation:
• Small Cap Value can be very boring to investors
• There may be long periods with no news
• Illiquidity associated with SCV companies scares investors
• Too much volatility
• Little or no analyst coverage
One of Edelheit’s favorite ideas is Hemisphere GPS (HEM CN), formerly CSI Wireless. This misunderstood company is his largest holding.
• Hemisphere operates in the agricultural GPS arena, offering “auto steering” technology to farmers, which allows for more efficient use of tractors and thus their acreage, seed and fertilizer
• Pricing of HEM’s products are very favorable
• He forecasts rapid sales and earnings growth on the horizon

Jonathan M. Heller, CFA
*Author does not own any securities mentioned