American Capital (ACAS) Reports 4Q11

American Capital LTD (ACAS) reported earnings after the market close 2/14/12.

It was a good report and our investment thesis is on track but there is one disappointment. More on that later.

Our Net Asset Value (NAV) estimates of $13.48/share by yearend 2012 was exceeded yearend 2011 as the company reported $13.87 NAV per share a $1.95 per share or 16%, increase over Q3 2011. Share price still trails at about $9/share.

The best way to monitor this investment is to track book value increases. These will eventually be reflected in share price increases as the share price to book value discount
shrinks over time.

The company repurchased 8.4 million shares totaling $59 million of American Capital common stock at an average price of $6.97 per share; $0.17 accretive to our NAV per share.  These purchases were made at a 50% discount to the $13.97 reported NAV. It’s hard to imagine a better allocation of capital than purchasing shares at a 50% discount for the benefit of shareholders.

The benefits of converting to a Subchapter C corporation in 2Q11 became obvious as net earnings per share were $0.48 or $166 million before the deferred tax benefit and was
increased by $1.24 per diluted share or $428 million with the deferred tax benefit to $1.73 net earnings per share or $594 million.

The additional net earnings due to the Subchapter C conversion contributed $1.30/share of the total $1.95/share increase in NAV for the quarter. This $1.30/share would not have been available without the conversion to a “C” corporation.

Debt was reduced from yearend 2010 to yearend 2011 by 45% or $1008 million from $2259 million to $1251 million.

There were no surprises in the earnings conference call and it seems we can hope for more of the same going forward. Some comments:

  • Outlook: uncertain macro economic trends, however portfolio
    companies performance moderately positive.
  • Potential sources of NAV growth include accretive share
    repurchases and $547 million potential at European Capital.
  • Potential appreciation of $1.8 billion in ACAS equity portfolio.
  • Will purchase shares below NAV and pay dividends above NAV.

The one disappointment is I’d prefer to see more aggressive share repurchases at the existing 50% discount to company value. ACAS is doing due diligence to invest in other companies, how many potential 100% return investment opportunities are they looking at that can beat the share repurchases? Doesn’t ACAS’s management know ACAS better than any prospective company out there making this a low risk high return opportunity? Aside from this a solid report.

Q4 2011 Selected Financial Summary from ACAS news release:

Reported Net operating income (NOI) of $0.67 per diluted share, or $229 million; a $162 million increase over Q4 2010; and $0.24 per diluted share, or $84 million,
before deferred tax benefit.

The company reported $1.33/share net unrealized appreciation per diluted share, or $457 million; $81 million increase over Q4 2010; $0.72/share, or $249 million before deferred tax benefit.

The company reported $1.73/share net earnings or $594 million; $213 million increase over Q4 2010; $0.48/share, or $166 million, before deferred tax benefit; and $1.24/share, or $428 million, deferred tax benefit.

They received $356 million of cash proceeds from realizations on the sale of assets in the normal course of business and repaid $268 million of debt.

The company repurchased 8.4 million shares totaling $59 million of common stock at an average price of $6.97 per share this contributed $0.17 to NAV per share.

Reported $13.87 NAV per share a $1.95/share or 16% increase over Q3 2011.

The CEO Malon Wilkus commented:

“Last year proved to be another volatile year and I am very pleased with our performance against that backdrop,” said Malon Wilkus, Chairman and Chief Executive Officer. “Our NAV per share grew by $3.16 for the year to $13.87, delivering a 30% increase since the end of 2010. We have now experienced net earnings on our investments in nine of the ten quarters since the low point of our valuation in the second quarter of 2009, earning $2.2 billion during that period. We believe that the performance of our portfolio will
continue to be positive as the U.S. economy continues to recover. Based on this confidence and the current price to book, we believe our shares are an excellent value and expect to continue our share repurchase program in 2012. We remain focused on growing shareholder value by improving our balance sheet, growing our portfolio companies, originating high quality investment opportunities and increasing our NAV per share.”

You can find the full earnings press release here.

You can listen to the earnings webcast and find the presentation here.


I am long ACAS.

The information contained herein is provided for informational purposes only, is
not comprehensive, does not contain important disclosures and risk factors associated with investments, and is subject to change without notice. The author is not responsible for the accuracy, completeness or lack thereof of information, nor has the author verified information from third parties which may be relied upon. The information does not take into account the particular investment objectives or financial circumstances of any specific person or organization which may view it. The author is not a registered investment advisor and does not represent the information as a recommendation for readers to buy or sell the securities under discussion. Nothing contained within may be
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