At the end of Q4, American Capital (ACAS) released quarterly buyback numbers. In what shouldn't be a huge surprise to investors, American Capital again repurchased a substantial amount of stock significantly below net asset value, or NAV. Based on the stock currently sitting in the $15 range, investors should expect even more buybacks going forward.
American Capital is a publicly traded private equity firm and global asset manager that manages $20 billion worth of assets, including assets on its balance sheet and fee earning assets under management by affiliated managers. Through an affiliate, American Capital manages publicly traded American Capital Agency Corp. (AGNC) with approximately $10 billion of net book value and American Capital Mortgage Investment (MTGE) with approximately $1 billion of net book value.
While some concerns exist with rising interest rates, the focus on owning portfolio companies should help generate higher returns during a growing economy. In addition, the short-term impact to the assets managed under American Capital Asset Management could be greatly overshadowed by the potential to grow assets under management in an environment without the Fed purchasing MBS assets.
In Q413, American Capital repurchased 8.9 million shares for $132.5 million. The average purchase price was $14.88 for an incredible 24% discount to NAV. Unfortunately; these repurchases have been at a substantial discount for all too long now. The below table highlights the quarterly purchase amounts and discounts going back to the start of Q311. In total, the company has bought 92.7 million shares, or 26.9% of the company's outstanding shares as of the end of Q211.
Price To Book Discount
Lots of variables come into place to explain the constant discount to book value for American Capital. For the most part, investors still don't trust financial stocks that got hit hard during the financial crisis. Prior to the crisis, the stock traded at multiples to book value over 1.4. After the crash, the trading range has typically been around 0.7x book value. All in all, the vast differences in stock price during the period was a substantial decline in trading multiple rather than a drop in actual book value.
Another issue is that the company continues to value assets including the European Capital subsidiary at substantial discounts to actual NAV. The $881 million equity investment in European Capital is valued at a $214 million discount to NAV plus a $52 million bond yield discount of performing debt assets if repaid at cost. The addition of these values would add nearly $1 to the current NAV.
Outside of the previously mentioned true up on the NAV for European Capital, the company has several catalysts to grow NAV from the current $19.54 at the end of Q313. The company has roughly $1.6 billion in equity assets that have the potential for organic growth. The main growth driver could well be the American Capital Asset Management, or ACAM, division that has the potential to grow assets under management at American Capital Agency and American Capital Mortgage. As this recent article details (see Potential Good News For American Capital Agency), the mREITs only control around 6% of the MBS market with the Fed in the slow process of reducing a position that now amounts to 26% of the market. The ability of mREITs and specifically these two managed by American Capital to expand and raise new funds will grow this important asset.
The following slide sums up the potential for growing assets at American Capital including the above-mentioned details and operating loss carryforwards that reduce taxes to allow share buybacks:
This next slide outlines the corporate asset structure that typically confuses investors. While American Capital operates in the same BDC sense as other firms, it invests more in equity than the typical debt structure of other BDCs. The confusion on this operating structure might be a major contributor to the NAV discount.
Between the numerous catalysts to grow NAV and the ability to continue purchasing stock below NAV, American Capital remains a huge value. Investors need to quit over thinking the investment proposition and buy this stock that continues to grow NAV in the simplest form of all: stock buybacks below NAV. The discount won't last forever, as eventually the market will catch on the huge value.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.