American Capital (ACAS) Reports 1Q12

American Capital LTD (ACAS) reported 1Q12 earnings after the market close 5/1/12 and held the conference call today at 10 CT. It was another good report from ACAS. Our investment thesis remains on track and the only disappointment from last quarter is being addressed. ACAS remains an attractive investment  in my view trading at a 37% discount to current book value and a 47% discount to our estimated intrinsic value of $18.87/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.

First, about last quarter’s disappointment, you will recall was; “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?” 

Management addressed it with the following:

  1. The company repurchased 5.5 MM shares for $48 MM at an average price of $8.79 per share in 1Q12; this was $0.12 per share accretive to March 31, 2012 NAV per share.
  2. The company expanded the share repurchase and dividend program, extending
    it through December 2013 and reset the cumulative start date to the beginning
    of 2012.
  3. The $182MM cumulative repurchases since 3Q11 has increased NAV by $.44/share, the equivalent of $143 MM of additional retained earnings.

Some selected comments by CEO Malon Wilkus during the conference call supporting share repurchase:

“So by buying back shares, we’ve been able to substantially enhance our book value per share, and we think it’s incredibly and wonderfully accretive and incredibly a great opportunity.”

Later in response to this question from Greg Mason – Stifel, Nicolaus & Co., Inc. “Malon, it feels like 1 year ago, you were talking about a lot of things you want to do with your capital, including starting backup the buyout business and investing in a lot of new portfolio companies. It seems like your tone now is much more excited about share repurchases and talking about what you think the value of the stock is. Given you’ve got $300 million of [cash], how should we think about your usage of that capital going forward, excluding the debt pay down that you have to do?”

Malon Wilkus (underline added for emphasis):

“… we had $300 million of cash. And as you’ve seen in the past, we’ve been producing about $1 billion of liquidity a year. So we do have an enormous amount of capital resources and highly liquid resources, which we’ve been able to draw on over the years to — certainly we’ve been using it to retire debt. That debt retirement really is coming to an end in the next 18 months. And so we do have to think about our capital uses… The
first thing I have to say is that the market today for deploying capital is incredibly rich. By that I mean that prices are high and if you’re trying to buy companies and terms are poor if you’re trying to lend to companies. So there is a frothiness in the market, it seems to us…
But there is dramatically fewer M&A opportunities to lend into. And so we are finding that if you are maintaining your standards, it is a difficult market to deploy into. In our case, that’s not such a bad thing because we have [what] we think a fabulous opportunity to invest in ourselves. We’re trading at extreme discount to our book, and we think that represents a great buy opportunity. And so we have been using it, using a chunk of our capital for that purpose, and we intend to do more of that.”

Couldn’t agree more.

Business development companies are often owned by income investors relying on the dividend as a source of income. During the question and answer session management was asked about resuming the dividend payment. They have been clear on this; they will use available funds to repurchase shares when the share price is below book value and pay dividends when the share price is above book value.

This is just smart capital allocation. Think of it this way; our shares of ACAS are simply certificates reflecting our ownership in the assets of the underlying business. If management has a choice of paying us a $1 dividend or using the $1 to buy $2 in assets for us; what would you rather have? I’ll take $2 in assets for my $1 all day long.  Ironically I hope the share price stays low longer so management can continue the share repurchases at this large discount and buy us $1 for about $.50. I can be patient; after all how many 100% return investments are out there?

1Q12 Financial Summary:

  1. Net operating income (NOI) of $0.24 before income taxes per diluted share, or $81 million a $3 million decrease over 4Q11 and $0.14 NOI per diluted share, or $49 million, after income taxes. Recall no cash tax will be paid due to the tax loss carry forward.
  2. Net realized loss of $(0.17) per diluted share, or $(58) million, a $195 million decrease over 4Q11.
  3. Net unrealized appreciation of $1.88 per diluted share, or $638 million, a $181 million increase over 4Q11.
  4. Net earnings of $1.71 per diluted share, or $580 million, a $14 million decrease over 4Q11.
  5. Cash proceeds from realizations of $396 million.
  6. Securitized debt repaid; $118 million.
  7. NAV per share $15.71.

1Q12 Portfolio Valuation from the News Release:

For the quarter ended March 31, 2012, net unrealized appreciation, before income taxes, totaled $659 million. The primary components of the net unrealized appreciation were:

  1. $287 million unrealized appreciation in American Capital’s investment in American Capital, LLC, its alternative asset management company, due to an increase in actual and forecasted growth;
  2. $78 million net unrealized appreciation from American Capital’s private finance portfolio, generally as a result of improved portfolio company performance and improved multiples;
  3. $117 million of reversals of net unrealized depreciation upon realization of portfolio company investments; and
  4. $164 million net unrealized appreciation in American Capital’s investment in European Capital, primarily due to an increase in European Capital’s NAV and a decrease in the implied discount to European Capital’s NAV.
  5. The Company’s equity investment in European Capital was valued at $711 million as of March 31, 2012, compared to the $868 million fair value of European Capital’s NAV at the end of the first quarter, which was 82% of NAV as of March 31, 2012, compared to 67% of NAV at the end of the prior quarter.

CEO Malon Wilkus commented:

“Our NAV per share grew by $1.84 for the quarter to $15.71, delivering a 53% annualized return for the quarter,” said Malon Wilkus, Chairman and Chief Executive Officer. “We have earned $2.7 billion of net income from when the U.S. GDP turned positive in the third quarter of 2009, while our shareholders’ equity has grown from $1.9 billion to $5.1 billion. 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 ratio, we believe our shares are an excellent value. Therefore, our Board of Directors extended by a year our stock repurchase and dividend program through December 31, 2013. Since we initiated our stock buyback program, it has been accretive to our NAV by $0.44 per share. If we had not repurchased these shares, we would have had to earn an additional $143 million during that three quarter period to have produced the $15.71 per share NAV we have today.”

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.

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