BUSINESS
Adeia Inc., together with its subsidiaries, operates as a consumer and entertainment product/solutions licensing company worldwide. It licenses its innovations to companies in the entertainment industry under the Adeia brand.
INVESTMENT RATING
With future capital returns forecasted to be above the cost of capital, ADEA is expected to continue to be a major Value Builder.
Adeia has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Adeia has a slightly negative Appreciation Score of 38 but a slightly positive Power Rating of 60, triggering the Neutral Value Trend Rating.
Adeia’s stock is selling at targeted value. The current stock price of $11.25 compares to targeted value 12 months forward of $12.
This moderately low appreciation potential results in an appreciation score of 38 (62% of the universe has greater appreciation potential.)
Adeia has a Power Rating of 60. (This slightly positive Power Rating indicates that Adeia’s chances of achieving attractive investment performance over the near to intermediate term are only average.)
Contributing to this slightly positive Power Rating: recent price action has been favorable. Offsetting factors are the Semiconductor, Related Devices comparison group is in a slightly weakened position currently; and the trend in Adeia’s earnings estimates has been unfavorable in recent months.
INVESTMENT PROFILE
Adeia’s financial strength is average. Financial strength rating is 45.
Relative to the S&P 500 Composite, Adeia Inc has moderate Growth characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that ADEA is higher risk. Relative weaknesses include: low financial strength, high financial leverage, and high earnings variability. Adeia’s valuation is moderate: moderate dividend yield, low P/E ratio, and moderate price/book ratio. ADEA has unusually low market capitalization.
CURRENT SIGNALS
Adeia’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.
Adeia’s current technical position is very strong. The stock price is in a 3.5 month up move. The stock has appreciated 58.2% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
Adeia Inc (NASDAQ: ADEA) suffers from notable negative changes in investment behavior: negative upside/downside volume developed.
Adeia Inc (NASDAQ: ADEA) suffers from meaningful negative changes in fundamentals: significant quarterly sales deceleration occurred, significant quarterly earnings deceleration occurred, and the consensus estimate for December, 2024 decreased significantly.
The stock is currently rated C.
Adeia Inc (NASDAQ: ADEA) stock closed at $11.25 on 2/26/24 after a slight decline of -1.0%. Trading volume in this decline was normal. Relative to the market the stock has been strong over the last nine months but has declined -9.1% during the last week.
CASH FLOW
In 2023, Adeia experienced a very significant reduction in cash of -$31.0 million (-27%). Sources of cash were much lower than uses. Cash generated from 2023 EBITDA totaled +$244.2 million. Non-operating uses consumed -$6.4 million (-3% of EBITDA). Cash taxes consumed -$12.6 million (-5% of EBITDA). Re-investment in the business amounted to -$40.6 million (-17% of EBITDA). On a net basis, debt investors withdrew -$203.4 million (-83% of EBITDA) while equity investors received -$12.2 million (-5% of EBITDA).
Adeia’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Adeia Peer Group. (Since 2020 Non-operating Income, %EBITDA has experienced a sharp recovery.) In most years, Adeia was in the third quartile and top quartile. Currently, Adeia is at median at -3% of EBITDA (-$6.4 million).
Adeia’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Adeia Peer Group as well. In most years, Adeia was in the top quartile and lower quartile. Currently, Adeia is at median at -5% of EBITDA (-$12.6 million).
Adeia’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Adeia Peer Group. In most years, Adeia was in the top quartile and lower quartile. Currently, Adeia is slightly above median at -17% of EBITDA (-$40.6 million).
Adeia’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Adeia Peer Group. (Since 2020 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Adeia was in the second quartile and top quartile. Currently, Adeia is lower quartile at -83% of EBITDA (-$203.4 million).
Adeia’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Adeia Peer Group. In most years, Adeia was in the lower quartile and top quartile. Currently, Adeia is slightly above median at -5% of EBITDA (-$12.2 million).
Adeia’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Adeia Peer Group. In most years, Adeia was in the lower quartile and second quartile. Currently, Adeia is lower quartile at -13% of EBITDA (-$31.0 million).
Adeia’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Adeia Peer Group. (Since 2017 Cash, %Revenue has sharply decelerated.) In most years, Adeia was in the second quartile and top quartile. Currently, Adeia is at median at +21%.
PROFITABILITY
Adeia’s return on equity has improved significantly since 2014. The current level of 18.9% is 1.71X the low for the period and is -41.5% from the high.
A major analytical focus for ADEA is a very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors.
The productivity of Adeia’s assets declined over the full period 2014-2023: asset turnover has experienced a downtrend.
Reinforcing this trend, pretax margin experienced a strong overall downtrend even as it experienced a very sharp recovery after the 2022 low.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
Adeia’s return on equity is upper quartile (18.9%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is at median (7.2%) reflecting asset turnover that is at the lower quartile (0.35X) and below median pretax margin (20.6%).
Tax “keep” rate (income tax management) is slightly above median (84.2%) resulting in after tax return on assets that is at median.
Financial leverage (leverage) is at the upper quartile (3.10X).
GROWTH RATES
Overall, Adeia’s growth rate has slowed very considerably in recent years.
Adeia’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been -3.6% per year. (More recently it has been -22.6%.)
Total asset growth has been -2.3% per year. (More recently it has been -23.4%.)
Annual E.P.S. growth has been -8.6% per year.
Equity growth has been -11.3% per year. (More recently it has been -34.5%.)
No consensus growth rate forecast is available for Adeia.
Relative to the Adeia Peer Group, Adeia’s historical growth measures are erratic. Revenue growth (-3.6%) has been substantially below median. E.P.S. growth (-8.6%) has been substantially below median. Equity growth (-11.3%) has been lower quartile. Total asset growth (-2.3%) has been lower quartile.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Adeia’s stock price performance has been variable and significantly below market. Between April, 2013 and February, 2024, Adeia’s stock price fell -45%; relative to the market, this was a -83% loss. Significant price moves during the period: 1) June, 2021 – April, 2023: -66%; and 2) January, 2017 – November, 2017: -57%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 13.2% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through January, 2024 of 13.2% is substantially above median relative to Adeia Inc Peer Group.
Current 5-year total return performance of 0.7% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of 0.7% relative to S&P 500 Composite, Adeia’s total return performance is at the lower quartile relative to Adeia Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, ADEA’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is above median. Price/equity ratio is slightly above median. Ratio of enterprise value/assets is slightly above median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
Relative to Adeia Peer Group, ADEA’s overall valuation is normal. The highest factor, the price/equity ratio, is at the upper quartile. Ratio of enterprise value/assets is near the upper quartile. Ratio of enterprise value/revenue is slightly below median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the price/earnings ratio, is at the lower quartile.
Adeia has a large value gap compared to the median valuation. For ADEA to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 4.51X to 5.07X. If ADEA’s ratio of enterprise value/revenue were to rise to 5.07X, its stock price would be lower by $2 to $13.
For ADEA to hit lower quartile valuation relative to the Adeia Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 4.51X to 2.14X. If ADEA’s ratio of enterprise value/revenue were to fall to 2.14X, its stock price would decline by $-9 from the current level of $11.
VALUE TARGETS
With future capital returns forecasted to be above the cost of capital, ADEA is expected to continue to be a major Value Builder.
Adeia’s current Price Target of $12 represents a +9% change from the current price of $11.25.
This moderately low appreciation potential results in an appreciation score of 38 (62% of the universe has greater appreciation potential.)
With this moderately low Appreciation Score of 38, the moderately high Power Rating of 60 results in an Value Trend Rating of C.
Adeia’s current Price Target is $12 (-5% from the 2023 Target of $13 but +9% from the 02/26/24 price of $11.25). This plateau in the Target is the result of a -31% decrease in the equity base and a +38% increase in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple. The forecasted growth has no impact. The forecasted increase in cost of equity has no negative impact.
PTR’s return on equity forecast is 62.3% — substantially above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is significantly above the 2017 low of 16%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2017 and 2023. The current forecast is significantly below the 2022 peak of 17%.
PTR’s cost of equity forecast is 14.2% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2015 and 2023. The current forecast is well above the 2017 low of 8.5%.
At Adeia’s current price of $11.25, investors are placing a positive value of $1 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 45.1% versus a cost of equity of 14.1%.
PTR’s 2025 Price Target of $12 is based on these forecasts and reflects an estimated value of existing assets of $9 and a value of future investments of $3.
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