Mezzanine Seating with Apollo Investment

| About: Apollo Investment (AINV)

Apollo Investments [NDQ:AINV] August 21, 2009 - $9.01 /share.

52-week range: $1.99 (Mar. 17, 2009) - $20.29 (Sep. 19, 2008)

Dividend = $0.28 quarterly = 12.4% current yield

Apollo (NASDAQ:AINV) specializes in making mezzanine and senior secured loans to middle market companies ($50 million - $2 billion revenues). They also can make direct equity investments. They were founded in 1990 and came public in February 2004 at $15.00 /share. As a regulated investment company they pay almost no corporate taxes and are required to distribute most of their investment income to their shareholders each year.

After posting excellent results in 2004 through early 2007, AINV’s business model suffered greatly with the freezing of the credit markets. EPS grew from $0.71 in 2004 to $3.64 in 2006. Full year losses followed in 2007 and 2008 before Apollo turned profitable again in the March and June quarters this year.

Apollo Investments was able to sell 20.7 million shares in a secondary offering last week at a price of $8.75 /share. Net proceeds to the company came to $173 million after underwriting expenses. That includes the full demand from overallotments.

Insiders have been steady buyers. Last week three separate company officers bought 37,500 shares between them for a total of $330,000 or an $8.80 /share average price. These insiders ought to know what their buying – it was the CEO, the CFO/Treasurer and the President/COO.

The last seven insider transactions before last week were 100% on the buy side. They occurred from March 2008 right through June of 2009 at prices as low as $4.23 and as high as $15.09 /share.

Zacks now expects 2009 – 2010 earnings of $1.38 and $1.40 respectively. Value Line’s latest report (dated August 21, 2009) looks for $1.70 in both years. That makes the current multiple a very reasonable 6.5x the lower Zacks estimate. The dividend had been reduced from $0.52 to $0.26 earlier this year when the credit markets hit bottom. Management just announced an increase to $0.28 for the next record date in late September. If that rate holds steady, the current yield will be a generous 12.4%.

Even if the shares do nothing that yield looks awfully tempting in today’s two-percent CD world and with 10-year Treasuries paying under 4%. A rebound to just nine times low-end projections would bring AINV back to $12.42 or plus 37.8% from last week’s closing quote. Unless you feel this company won’t continue its recovery, the total return potential looks to be outstanding.

The fact that there have been ten successive insider buys against zero insider sales gives me confidence that the roof in not falling in.

Value Line has a 3 – 5 year target zone of $14 - $20 with the assumptions of a 9 or 10 multiple on earnings of $1.80 /share. Add in the double digit yield and the total return potential looks exceptional. Note: Do not confuse Apollo Investment Corp [AINV] with Apollo Group [APOL] the for-profit education company. I have written an earlier post on APOL and it can be referenced here on

Disclosure: Author is long AINV shares and short AINV puts.