American Capital, Ltd. (NASDAQ:ACAS) reported its earnings after the market closed Tuesday and reported solid results with Net Asset Value increasing by $1.84 to $15.71. ACAS closed Tuesday at $9.68 a share or less than 62% of NAV. ACAS will probably pop up on Wednesday morning but the opportunity to buy assets at a nearly 40% discount is becoming more unusual in this market and investors should consider "backing up the truck" and loading up on this stock.
I have followed ACAS since the depths of despair in early 2009. At that time survival was a real issue. ACAS is a Business Development Company (BDC) and, among other problems, it had substantial amounts of debt reaching levels which created leverage issues because of the statutory limits on BDC leverage. Lenders were very skittish about loans to BDCs and refinancing was problematic. I can remember that the debt of Allied Capital (NYSE:AFC) was trading at 20-30 percent of face value; the assumption was the widespread defaults were virtually inevitable. ACAS tightening its belt and has consistently reduced debt and leverage since then. As of March 31, 2012, on a year over year basis net debt (total debt minus cash) was reduced in one year from $1.546 billion to $614 million. At this point, ACAS has gross assets in excess of $5 billion and is now, if anything, underleveraged.
ACAS has not resumed paying dividends and is using excess cash to repurchase stock instead. In the first quarter, ACAS repurchased some 5.5 million shares at an average price of $8.79 - an enormous discount to NAV. ACAS is actually reducing share count through its repurchases - fully diluted share count is now 340 million shares and is down from 358 million shares a year ago. The dynamics of a share repurchase program for a company trading substantially below NAV are a matter of simple arithmetic. When you use balance sheet case to repurchase shares, your NAV per share increases because you are essentially buying $15.71 for $9.68. ACAS seems committed to use its ever increasing pile of cash in this way until its share price reaches what will be an ever-increasing NAV, at which point it will likely resume dividends.
ACAS appears to have solid management and has done a good job of getting control of its investments and minimizing bad debt problems. It has a "kicker" in that it is the management company for a large and growing agency mortgage REIT, American Capital Agency Mortgage (NASDAQ:AGNC) and earns management fees which increase with increases in the assets under management in this increasing popular REIT in an increasing popular sector. ACAS is now one of my strongest long positions.