Access Plans: An Inefficiently Priced Stock

Jul.15.11 | About: Access Plans, (APNC)

The Efficient Market Theory states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always reflect all relevant information. According to the theory, stocks always trade at their fair value on exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. However stocks with few or no analysts tend to be more inefficiently priced as relevant information on these companies is less immediately out there.

A company that appears inefficiently priced is Access Plans, Inc. (OTC:APNC) A quick look at what this company does. Access Plans is a leading membership benefits marketing company with three main divisions:

  1. Wholesale Plans Division where the plan offerings are customized membership marketing plans primarily offered at rent-to-own retail stores.
  2. Retail Plans Division where the plan offerings are primarily healthcare savings plans which allow members access to a variety of healthcare networks to obtain discounts from usual and customary fees.
  3. Insurance Marketing Division which markets individual major medical health insurance and other insurance products through a national network of independent agents.

OK, so how are they undervalued? Two points:

  1. At the company level evidently management agrees with the undervalued proposition as they announced on November 11, 2010 plans to explore strategic alternatives to deliver value to shareholders including considering taking the company private. Management rightfully questions its current share price. The stock trades at a p/e of under 10 and a price to sales of under 1. It has eliminated all of its long-term debt and repurchased shares.
  2. The numbers:In their most recent earnings report, the company announce that revenues for the three months ended March 31, 2011 increased 2% to approximately $13.8 million, compared with approximately $13.5 million in the second quarter of FY2010. Operating income increased 144% to approximately $3.1 million, versus approximately $1.3 million in the prior-year period, with net income increasing 155% to approximately $1.9 million, or $0.09 per diluted share, in the second quarter of FY2011, compared with $0.7 million, or $0.04 per diluted share, in the corresponding period of the previous fiscal year. Further that cash, cash equivalents and restricted cash increased 48% during the first half of FY2011, from $6.2 million on September 30, 2010 to $9.1 million on March 31, 2011, which is about 45 cents per share in cash. The company has no long-term debt outstanding.

In its latest annual filings, the company cash flowed $5,380,571 vs. $4,108,183 the previous year. For the first 6 months of this year, the company has cash flowed $3,382,459, implying a run rate of more than $6.7 million for the year! Where are they generating all this cash flow from? As of March 31, 2011 in SEC filings, they reported that their wholesale plans were offered at approximately 4,910 locations and that of the locations 2,880 locations were Rent-A-Center owned locations operated under their brand, Rent-A-Center, Inc.,Nasdaq (NASDAQ:RCII). The companies sells insurance and other plans to customers so that the customers are protected in the event of inability to pay for their rented product. Rent-A-Center sells the plan (it is in their interest to have customers not default) and gets a cut of the premium and the rest is paid to APNC. A win-win for RCII and APNC.

Interestingly Rent-A-Center is thriving in this economy. Stock in Rent-A-Center, which leases televisions, couches, computers and more, is up 57 percent from a year ago to nearly $32. Nine of the 11 analysts covering the company say it will rise further and that investors should buy it.

However even though APNC is clearly managing their money conservatively, they need to grow more to attract investors. Some growth will come from adding new contracts at their more than 200 established customers, but this will mean steady growth. What about potential explosive growth? Doing a little research we discover that the Mexican retailing giant FAMSA is expanding into the USA. It turns out that they sell the Access Plan. Look at the small print at the bottom of the page. Expanding into the Latino community and perhaps into the larger Mexican market makes tremendous sense. They currently only sell in the US and Canada. Mexico is natural expansion now that they have the FAMSA connection.

So what do we have? A company that is generating significant cash flow, with steady and potentially rapid growth, in a cash rich, conservatively managed operation where the company seems frustrated. Its major shareholders own more than 50% of the company. This inefficiently priced company won't last much longer at these levels.

Disclosure: I am long APNC.OB.