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September 20, 2008 – Comments (7) | RELATED TICKERS: ACAS

...who owned ACAS before it jumped about 40% in two days (or, as I had, bought it for your dad's IRA)?

7 Comments – Post Your Own

#1) On September 20, 2008 at 6:56 AM, awallejr (82.72) wrote:

(Riases hand).  I even blogged about it.  So tempting to sell it because I am in the green with it, but I bought it for the long haul and expect it to go higher over the years, assuming we survive this financial mess.  Now if it rises "too much" in a short term I will probably sell it and rebuy on a correction, but you are talking a $40 price if that happened.  Stock is still undervalued where it is, mid 30s would be a more "fairer" price considering its yield (which is already covered through half of 2009).

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#2) On September 20, 2008 at 9:28 AM, chk999 (99.98) wrote:

I've owned it for over a year. I still think it is undervalued. Owning it is basically a bet on Malon Wilkus. All long as he is healthy and firing on all cylinders, I think it is at worst a hold. I reinvest the dividends in more shares, so this could turn into a large position over time.

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#3) On September 20, 2008 at 11:07 AM, EnigmaDude (98.06) wrote:

My FA at AG Edwards had convinced me to buy some shares back in May 2007 but we sold those shares in July of this year based on concerns that the financial sector would continue its meltdown for a while. I'm still not convinced that the recovery is here to stay.

I also wrote a blog about it back in May when they announced the spin-off of American Capital Agency Corp. This is what DemonDoug had to say at the time:

  "sounds like dating a chick in her late 20's who used to be a supermodel and who claims she just got over HPV and herpes.  she might make you happy, but make sure you're protected, cuz otherwise your portfolio might get really sick!  And then you'll sour on her and dump her like a bad newspaper."

Long term I like ACAS, but I would not buy back in just yet.

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#4) On September 20, 2008 at 12:20 PM, awallejr (82.72) wrote:

Well if you like it long term why wouldn't you buy back in now when the price is low?  I could understand if you are concerned that financials are still due to take more hits over the year, but I submit we bottomed.  Of interesting note, in July right before the FRE and FNM bailout, financials all tanked HARD.  I bought BAC at 18 and ACAS at 18 back then.  After Wednesday of this week when everything tanked hard these 2 stocks never went to those July lows.  That is good news for the stock actually. 

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#5) On September 20, 2008 at 1:34 PM, TMFHelical (98.70) wrote:

Fleabagger,

I did.  I'd pat myself on the back but with a basis of $33.5 it is hard to get over the bias inherent in my purchase price (meaningless though it is here).  I liked it cheaper and I like it here, but expect to see some form of dividend cut 6 months out or so.  Here is what I wrote on the income investor board after the last quarterly.

 

Before adding my comments, I do suggest that all shareholders or those considering owning this company give a listen to the (long) quarterly conference call through the company website and review the accompanying slides. Management does a great job of communicating the companies operations.

http://www.americancapital.com/investor_relations/shareholder_presentations/slide_shows/ac/2008q2/f2008q2_Analyst_Call_Summary.pdf

This is a simple business model, but operates in complex manner. ACAS as a business development company (BDC) buys or finances companies, assists in and benefit from their operations, then resell them, often financing the sales themselves. The key to being successful is buying value, and adding value through operational expertise. ACAS has been historically very successful and shareholders have benefited through the receipt of substantial dividend payments.

This model is currently under pressure however; asset write downs affect deployable capital as BDCs are limited in the amount of leverage they can employ (1:1 debt to equity). ACAS is currently below this limit, so isn't currently forced to liquidate assets. Net operating income (NOI) has rarely been enough to cover the dividend on its own, and the company uses realized earnings that include proceeds from the sale of portfolio companies to meet the payout. It becomes hard to project that future portfolio sales will be above costs as these assets depreciate in value, though this is partially offset by more favorable debt financing on these sales that should boost future NOI. The Q3 dividend of $1.05 /share is neither fully supported by NOI ($0.71 / share) or realized earnings ($0.95 / share which was below past guidance), though the current dividend is in part being paid from cash generated in prior quarters. So the act of carrying cash forward to make future dividend payments foreshadows a modest future cut, since the realized earnings of today do not meet the current payout.

If all that sounded like bad news, the good news is that all this is more than priced into ACAS currently. The company is trading at a historical low of price / book with the market assuming that additional asset write downs will occur and a dividend cut will follow. The company is not projecting a dividend cut in the near term, and forecasts again raising the payout in Q4 2008, but even a significant payout haircut (which may not happen) in mid 2009 would offer new shareholders with a market beating yield. I own the company (basis north of $33) and have no intention of selling and may well add when I am again eligible.

TMFHelical - Long ACAS
Community Analyst Team
 

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#6) On September 20, 2008 at 8:05 PM, russiangambit (29.49) wrote:

Yes, I owned this one for dividend. Bought it in $20-$25 range several weeks earlier, it seems to be a good company , shorted mercilessly. But I sold on Friday anyway, it was just too good to last. Also, sold a similar company ALD (Allied Capital).

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#7) On September 20, 2008 at 9:54 PM, FleaBagger (29.37) wrote:

Enigma and russian -

This time of uncertainty about financials in general is exactly when you can profit from owning strong, well-managed, conservative companies like American Capital. AmCap owns cash-generating companies and other non-CDO assets that are being written down without losing any of their long-term value or cash generating power. This means that new accounting rules causes their book value to be underreported, at a time when most financials' book values are overreported, causing the market to sell them down to a discount to reported book value, allowing you to get them at a double discount.

This is why their share price is (or recently was) just twenty times their quarterly dividend. While they do lack the operating income to continue paying this high dividend indefinitely without selling depressed assets, the high yield is nevertheless not indicative of imminent balance sheet collapse, as in the case of high phantom yields of subprime lenders and other financials in recent times. That may not sound like a tremendous vote of confidence, but how much do you want? The operating cash flow is still high enough to pay more than 10% of the share price, during a recession, while holding on to assets until they become fully valued.

Basically, if the company is worth $40 per share, why wait until the rest of the market recognizes that before buying? Especially when you'll miss out on $6-8 of dividends per share in the meantime!

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