Background

American Capital Ltd. (ACAS), manager of two publicly-traded mREITs and practically the only business development company ("BDC") to pay no dividend at all, reported its quarterly results this week. This article identifies both good news and bad news in that report. Although ACAS' fee-based funds-management business is having a greater effect on the company, most of ACAS' assets and income still result from its own investments of its own capital in its own portfolio companies.

For a longer view of the firm, this author has ten earlier articles on ACAS.

Business Basics at ACAS

Before the crash of '08, ACAS' management complained on calls that the firm - then called American Capital Strategies - was unfairly valued as a BDC rather than being valued more richly as an asset manager. In other words, valuation was driven by the net asset value (NAV) rather than by applying to the

American Capital Ltd. (ACAS) recently reported its fourth-quarter and full-year results for 2012. Unlike some better-known businesses, American Capital doesn't have an internationally-recognized mobile device brand or makes its money doing something straightforward like renting cars. Understanding the company's performance over the reporting period is complicated by the company's internal complexity, so some examination is needed to make sense of the numbers.

This paper's purpose is to review the salient facts about American Capital and draw attention to the numbers that best illustrate the company's performance.

Apparent Complexity: Risk or Asset?

American Capital invests its own money, like the reader. For a fee, it also invests money provided by others. Some of the investments are aligned in similar industries to promote synergistic effects, and some are intended to have a dramatically different risk profile than the rest of the portfolio. The company's tax characteristics have become complex over

Wayne Gretsky, a legend in ice hockey, explained the difference between good players and great players like this:

A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.

and:

Skate where the puck is going, not where it's been.

Crediting Apple (AAPL) with a "first mover advantage" in smartphones isn't really accurate - Microsoft (MSFT) had smartphones years before - and it misses the meat of Apple's platforms approach. A "first-mover advantage" implies a one-time effect that fades over time, leaving the world's Betamaxes in the dust behind Johnny-come-lately technologies like VHS, DVD, Blu-Ray, and streaming high-def digital subscriptions. This article explains how Apple's software platform - far from providing a one-time first-mover-style advantage - helps the company to skate where the puck will be in the markets offering the best growth.

The Dark Ages

In

Apple Inc. (AAPL) has grown over the last decade or so from a personal computer maker to a producer of music players, phones, tablets, set-top boxes for home-entertainment, and traditional personal computers. In connection with that transition, Apple implemented a new pricing policy that shifted the company from a premium-priced computer vendor to a mass-market manufacturer committed to competing with products at price points designed to deny price shields to competitors. Apple moved from a niche personal computer vendor to a mainstream electronics company whose market value exceeded that of any other firm on the planet.

The Run-Up and the Fall

Apple Inc. saw its share price drop from $700 to $500 over the months leading up to the most recent quarterly announcement. When Apple's "Mother of All Reports" announced an "extraordinary" 13-week holiday quarter producing $54.5 billion in revenue - and $13.1 billion of

Apple Inc. (AAPL) -- manufacturer of the world's highest-satisfaction, most-loved, and best-selling tablet -- is persistently rumored to intend selling Apple-branded televisions or otherwise entering the home entertainment market with a product competing with game consoles. Some of the stories are clearly labeled as fantasies (bigger-than-HD screens dwarfing competitors' pixel counts), but many of them claim evidence like insider reports from assemblers, reports of testing, or information from screen suppliers. Apple doesn't make a game console per se, but software developers have commented repeatedly on the strength of Apple's phones and tablets (and mini-tablets) as game console substitutes. Success with iOS devices as portable game-machines, and developers' attention to iOS for game development, has positioned Apple to evolve its product line to include a living-room game console. What risk do competitors

Apple Inc. (AAPL), longtime maker of Macs and more recently the producer of iPods, iPhones, and iPads, has suffered a serious setback in stock price. From the week of the last iPhone launch, shares have been on a slide:

One might attribute some of this to headlines highlighting Android's gains in unit share, but honestly: Apple's history hasn't been a story of success through unit share dominance. And with Samsung potentially shifting its products' operating system to Tizen, the story of platform market share as some sort of profit predictor will look even less appealing for Android as an Apple competitor: no Android OEM other than Samsung makes any money in the cutthroat mobile business.

Something else is behind Apple's slide. Perhaps - as some suggest - Apple is doomed to descend into low-margin competition to make profitless commodity products, like nearly everyone else.

Overview

No longer threatened by the prospect of bankruptcy, American Capital Ltd. (ACAS) is over its scramble to recover from the liquidity crisis. The firm has strengthened its balance sheets tremendously:

Management has shown American Capital can obtain credit in arms' length transactions with third parties free to choose whether to extend credit or not, rather than relying on a bankruptcy threat to secure new terms as it did in 2010. That normalcy has returned to ACAS' operations is illustrated not only by the successful post-crash growth of its managed funds business - and its growth in associated fee income - but by the new investments the firm is making with its own capital.

Wisely investing in what it knows, management has not only invested in its own publicly-traded funds but in follow-on acquisitions to strengthen its portfolio companies. ACAS seeks new business as well, having launched

This article on mobile manufacturers continues from Part I: Killer Competition (on how easily money is lost in mobile) and Part II: Samsung Sells More Stuff (which illustrates how money is, in practice, actually made in the mobile market).

In connection with an earlier two-part article on the mobile platform war (Part One and Part Two), this article offers readers a view of the mobile battlefield not simply by focusing of platform differences, but by looking into the complete product to illuminate which competitors are in a position to achieve what kind of result from what portion of the mobile gadget market. Although this article seeks to discuss hardware rather than platforms, the connection of some hardware vendors to particular platforms prevents complete separation of the two.

As discussed in Part II of this article, Apple (AAPL) and Samsung (SSNLF.PK) make the mobile market's profit.

This article is the second part of a series discussing the mobile hardware market and its major players. Part I provided the crucial background that most manufacturers are losing money on hardware, even if financially supported by a software vendor. Part III will examine Apple's (AAPL) ability to extract excellent profit from its relatively modest slice of the overall mobile market. This part examines Samsung (SSNLF.PK) - which makes the second-most money in mobile hardware - and illustrates Samsung's substantial differences from the unprofitable but high-volume Nokia (NOK), which Samsung recently unseated as the world's leader by handset sales volume.

In connection with an earlier two-part article on the mobile platform war (Part One and Part Two), this article offers readers a view of the mobile battlefield not simply by focusing of platform differences, but by looking into the complete product to illuminate which competitors

To understand whether financial success is a feasible result of a particular firm's fight in the marketplace requires some understanding of the difference between the winning strategies and the losing strategies already demonstrated in the hyper-competitive mobile hardware market. Factors historically viewed as crucial in the PC market may not drive success in the mobile market for reasons explained in Part One and Part Two of an earlier article on Google's position in the mobile platform war. (Spoiler: Google will gain share.) Hardware competition differs from platform competition in ways that impact product competitiveness, profitability and the market addressable by a manufacturer's particular hardware or hardware strategy. This article offers readers a view of the mobile battlefield not simply by focusing on platform differences, but by looking into the production of the physical product to examine which competitors are in a position to achieve acceptable

The first part of this article gave an overview of Google Inc. (GOOG) and how its business model affects its objectives in the device platform space. In that part of the article, Google was described as competing for the volume market by supplying low-cost operating system software under a strategy of deriving profits after the point of sale by directing device buyers into Google-directed revenue streams. Google's benefit in the platform war is thus driven by use, not (generally) device purchase. This article compares that plan with competitors' plans and explains what this means for Google in the platform war.

Competitors. What's a look at a market worth, without a look at competitors and the threats they pose? Google's competitors aren't all direct competitors, but there are several competing platforms.

Apple. Apple (AAPL) is the largest platform vendor by profit share, and operates the application store

Google Inc.'s (GOOG) position in mobile devices has soared in recent years as its Android platform has made gains in quality and availability. What does this mean for Google's bottom line? The purpose of this article is to describe both mobile platform competition (as opposed to hardware competition) and its significance for Google over the long term.

The mobile device industry is comprised of interlocking and interdependent vendors of mobile device hardware and mobile device platforms. This article examines Google's competitive position in platforms - the part of the product ecosystem that makes mobile device hardware work. The relative competitiveness of various platforms depends not only on the qualities of the software - which can change quickly, as evidenced by the development of various software marketed under the leading brands - but also on strategic factors such as how platform vendors profit from their platforms. A sister article

Purpose

When Apple's last quarterly results caused speculators to rush out of the shares momentarily, I wrote that the after-hours plummet into the $560s was an opportunity to buy. The regular-hours chart from July 12 through July 25 looked like this:

From July 25 to the present, Apple enjoyed quite a run, passing $700 before being pressured back:

While it's nice to see a double-digit gain within a few months ...

... it's also worth asking both why Apple suddenly collapsed ...

... and whether that fall is an opportunity, or is a dread portent of worse things to come. The purpose of this article is to examine how Apple has been doing as a business enterprise, to ascertain whether its recent valuation changes reflect the company's business outlook or represents a short-term blip driven by headline fears.

The Recap: Apple's Competitive Environment

As previously described, Apple (AAPL)

When last we saw our intrepid hero, Research In Motion (RIMM) had begun posting accounting losses but announced it was on track to release a completely revised new BlackBerry 10 operating system and device family by year-end. Management seemed confident that a well-funded attack by Microsoft's (MSFT) current vendors -- followed by a reinforcing wave of Windows Phone 8 device manufacturers including the likes of Dell (DELL), HTC (HTCXF.OB), and Samsung -- would not prevent the company from selling its new product in China or other major markets. Particularly in the hugely populated emerging-markets regions, poor network connectivity seemed to give BlackBerry products an edge over the decidedly network-heavy alternatives sold by Apple (AAPL).

Betting on the revolution, billionaire Prem Watsa raised his stake in RIMM. Although Microsoft paid developers to make applications for its tiny mobile platform, its chief lackey Nokia

Background

Back before the crash of 2008, American Capital Ltd. (ACAS) was a leveraged Business Development Company ("BDC") taxed as a Registered Investment Company ("RIC"), and managed a leveraged private equity portfolio that was diversified across numerous industries. The portfolios leveraged depended on debt arrangements that included a revolving account: the company could borrow as deal-timing required, and was free to repay funds without fear of loss of access to cash for later investments. The company paid an attractive dividend because it was required as a RIC to distribute substantially all its taxable income in a similar manner as a REIT - and with the same pass-through tax effects. In the years leading up to 2008, the company's leverage and dividend yield looked like this:

During this period, FAS 157 was implemented. A holding company like Berkshire Hathaway (BRK.B) must apply FAS 157 to derivatives, but not to

Purpose

Some onlookers have interpreted declining Average Sale Price in Apple Inc.'s (AAPL) major product categories to imply that Apple lacks pricing power, and must thus slide inevitably into a commodity market where its profit will collapse - so you must sell! This article reviews Apple's articulated pricing policy, and the results of that policy on unit sales, to examine the following question: Does Apple's pricing reflect the powerlessness implied by critics, or instead suggest that Apple is pursuing a pricing policy intended to protect its profitable position in the markets in which it competes?

First: A Common Sleight Of Hand

Sometimes, we hear that Apple has a product line (like iPods) with declining sales, or that is suffering cannibalization (say, to iPhones). Think about this for a moment. With more than half of iPods now iOS devices, it should be evident that Apple's phones (iOS

Background: The Numbers

Back before the tech bubble burst, lots of tech companies seemed to trade at nosebleed prices. A look at Cisco (CSCO) and Microsoft (MSFT) -- both bellwether tech companies with solid track records of selling strongly into business enterprise -- shows that even the mighty can stumble:

These price collapses can be viewed in part as rationalization of P/E ratios:

With that in mind, let's look at similar charts for Apple (AAPL) -- from the same Dec. 15, 1999, (pre-tech crash) to the present -- for a view on whether Apple appears to be a frightening bubble at present prices:

While the price has certainly headed to the moon -- and the P/E has in the past soared into nerve-jangling territory -- Apple's P/E is both distinctly lower than it has previously been, and at about 16 is in the same ballpark as either Cisco or Microsoft.

Overview

American Capital Ltd. (ACAS) is a business development company (BDC) that is currently taxable as a C-corp so that it can take advantage of 2008-era "tax assets" that prevent the company from owing taxes on operating profits. A description of the company's performance in 2008 and its ensuing recovery can be read in a prior article. Before the crash of '08, though, the company's management had expressed in earnings calls their frustration that the market plainly valued the company as if it were a basket of investments rather than valuing with the sorts of multiples typically accorded an investment manager. With the suspension of the dividend in 2008, shares no longer traded at a slight premium to the net asset value (NAV) per share, but at a discount to NAV.

The company's valuation has, in short, taken a vastly different turn than that intended by management. Does

On August 9, 2011, American Capital Mortgage Investment Corp. (MTGE) raised approximately $199 million in a public offering and concurrent private placement. Since the firm's IPO at $20, investors have suffered a variety of disappointments in the form of employment numbers, consumer sentiment, and other potential harbingers of a threatened double-dip recession. One year on, how have early investors done?

Background

To gauge the incentives of the parties, it's helpful to know who the parties are, and whom is being paid for what. American Capital Mortgage Investment Corp. has no employees. It has no compensation expense, but is externally managed by a fully-owned subsidiary of American Capital Ltd. (ACAS). All its officers are compensated by American Capital, which is obliged to provide management in exchange for the monthly payment of one-twelfth of 1.5% of stockholders' equity. MTGE therefore has no management compensation schedule to threaten