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Summary

  • American Capital reported Q2 '14 earnings.
  • Investors should continue holding the stock and even add to positions at the significant discount.
  • Despite the supported move to unlock value, the stock has not closed the gap with NAV as anticipated.

American Capital (NASDAQ:ACAS) reported a solid quarter with a strong rebound in the appreciation of the investment management business. In total, NAV grew to $20.12, up $0.83 or 4% per share from the prior quarter. With the stock price closing around $15.15, it now requires a 33% gain to match NAV. With operating income only growing $0.15 before taxes, the majority of gains came from unrealized appreciation of assets including the investment management group, American Capital Asset Management, LLC or ACAM, that had an estimated $101 million price appreciation.

The news at the company though remains solely focused on the split up of the investments from the management business. The CEO promises to present a plan to the board of directors by Q4 though nothing is guaranteed based on the complexity of separating the units and ensuring the tax benefits are maintained. Even with the $101 million increase in value for ACAM, it is now only valued at roughly $925 million. The division earned $93 million in adjusted EBITDA over the last year. The following snippet from the earnings presentation highlights the growth potential in the asset management group that now manages 3 public companies and 9 private funds:

(click to enlarge)

Source: ACAS Q2 '14 Presentation

Previous research was happy that the company was moving forward with ending the stock buyback program in order to pursue the separation of business units to unlock value. Roughly three years of buying back a substantial amount of stock at a massive discount to NAV helped increase NAV, but it hadn't increased the stock price. Unfortunately, the move to split the business lines will take into 2015 to complete. The stock remains very attractive at these levels with the growth potential of ACAM and the ability to eventually trade closer to NAV.

Disclosure: The author is long ACAS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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