American Capital (ACAS) reported 1Q13 earnings on 4/30/2013 [Source]. Net operating income after income taxes, for 1Q13 was $46 million, or $0.14/share. This was below the analysts’ consensus estimate of $0.27 per share and, of course, missing analysts’ estimates to the negative impact stock prices, even if the estimates are not meaningful. In this case, it is likely temporary as informed investors use it as a buying opportunity.
Quarterly earnings, are often used to measure the performance of companies, but are not a good metric for asset management companies. You will recall we centered our investment on ACAS’s improving balance sheet and measuring progress by book value (or net asset value) per share. Book value per share increased from $17.84/share in the fourth quarter 2012 to $19.04/share in the first quarter 2013 showing a 6.7% increase for the quarter and an annual rate improvement of about 27%. This is hardly a bad result. The balance sheet improvement continues as illustrated in the graph below.
After successive quarters of improvement the company’s shares are selling at $14.30/share, a 24% discount to an improving book value and a potential 32% further gain to our current estimate of intrinsic value of $18.87/share.
1Q13 Results as Reported [Source]:
NAV per share
- For 1Q13: $19.04 NAV per share a $3.33 per share, or 21%, increase over 1Q12 NAV
- For 1Q13: $1.20 per share, or 6.7% (27% annualized), increase over 4Q12 NAV
Net Operating Income (NOI)
- For 1Q13: $0.21 NOI before income taxes per diluted share or $68 million a $47 million decrease from 4Q12; $0.14 NOI after income taxes per diluted share, or 46 million
- $0.12 net realized earnings per diluted share or $38 million a $60 million decrease from Q412
- $0.97 net unrealized appreciation per diluted share, or $308 million a $283 million increase over Q412
- $1.09 net earnings per diluted share, or $346 million; a 25% annualized return on average shareholders’ equity and a $223 million increase over 4Q12
Stock Repurchase Plan
- 9.0 million shares repurchased, totaling $128 million, of American Capital common stock at $14.23 average price per share; $0.14 accretive to NAV per share
Book value, net asset value (NAV)
- $19.04 NAV per share, a $1.20 per share, or 27% annualized increase over 4Q12
The following table illustrates how net asset value per share grew $1.20 to $19.04 (27% annualized from 4Q12) with an operating income “disappointment” of $0.21/share before tax and $0.14/share after tax. Although net operating income before tax was $0.21/share ($68 million); net earnings that reflect investment appreciation in addition to operating income was $1.09/share or $346 million. Operating earnings tell only a part of the story for asset management companies.
The company realized $281 million of realizations from portfolio company sales and committed $98 million to 2 new investments that will hopefully generate attractive returns in the future. The book value per share growth over the past 3 years has been approximately 29% through asset value appreciation, debt reduction and earnings.
[Source] page 42 1Q13 Earnings Presentation
The following table shows operating revenue was down $47 million from 4Q12. Management explained during the conference call:
- The 4Q12 had $17 million non-regular dividends from portfolio companies due to dividend recaps completed prior to year end;
- Approximately $11 million higher transaction fees due to a strong volume of new originations in the 4Q12;
- The net impact of reserving prior period interest and dividend income from new debt and preferred equity non-accruals in the 4Q was a negative $11 million;
- Using proceeds from the realizations of interest and dividend producing investments to either repurchase stock or repay our securitized debt;
- Proceeds from the realizations of higher yielding mezzanine debt investments 1Q13 were reinvested in lower yielding second-lien senior debt investments;
- These factors were partially offset by an increase of $6 million in dividends from American Capital Asset Management.
In quarters with stronger transaction volume or better non-accrual results; revenues may be higher than this quarter.
[Source] page 43 1Q13 Earnings Presentation
American capital has invested $11.4 billion in operating companies since inception and the chart below shows the results of senior debt, mezzanine debt and equity combined in “all investments” below. Of the $10.1 billion exited since inception a 15% annual return was realized and of the total including current holdings a 12% annual return was earned. It takes time for companies to create value and quarter to quarter results are not meaningful.
[Source] page 6 1Q13 Earnings Presentation
Viewing the company’s performance through restructuring since the economic crises shows a 40% annualized growth rate realized since 4Q09.
[Source] page 15 1Q13 Earnings Presentation
ACAS share price trades at a discount to the net asset value and current intrinsic value estimate implying the potential for a further 30%+ gain excluding the real prospects of continued book value growth.
Disclosure: Long ACAS