Seeking Alpha

American Capital book value gains 1%

  • American Capital (ACAS) book value per share of $19.28 vs. $19.04 at Q1's end, $16.62 a year ago. Current share price of $13.48 a 30% discount.
  • $0.07 net earnings/share, down $0.64 from a year ago thanks to poor performance (leading to reduced management fees) at American Capital Agency (AGNC) and American Capital Mortgage (MTGE).
  • 1.5% annualized ROE.
  • 9.1M shares repurchased at average of $13.77 each, accretive to book value by $0.17/share.
  • Earnings call tomorrow at 11 ET. (PR).
  • Earlier: Earnings report.
Comments (2)
  • User 11581281
    , contributor
    Comment (1) | Send Message
     
    ACAS and what you need to realized on its $5.4 billion of investments, which is 91% of the total assets at 3/21/2013 excluding the deferred tax asset.

     

    Why is the stock trading below NAV – there are three possible explanations (more are welcome too)
    1. The investing public is naive and unsophisticated, thus foolishly values this lower than its NAV and plunges like lemmings into the sea when there is a stock buyback and they unload.
    2. The investing public is awash with business acumen on investments, complemented with sophisticated analysis and is financially astute so that it digs deep into the bowels of the SEC filings and understands how the company arrives at its valuations of its assets and thus NAV and discounts the NAV to a stock price sold on the stock exchange, aka the “spread”.
    3. Both of the above.

     

    Looking at the most recent 10-Q there are $5.4 billion of investments at “Fair Value”, what is Fair Value one may ask. The Q also listed each investment by line item and type of instrument for each, showing its Cost Value and Fair Value. For example WRH cost is $394.6 million and its Fair Value is $199.9 a disappointing return at this measurement date. Conversely Mirion Technologies, Inc. cost is $83.2 million and its Fair Value is $199.9 a simply boffo return at this measurement date.

     

    So how is Fair Value determined? On page 22 of the 10-Q the company discloses the following. “We fair value our investments in accordance with the 1940 Act and FASB Accounting Standards Codification (“ASC”) ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) as determined in good faith by our Board of Directors. We undertake a multi-step valuation process each quarter to determine the fair value of our investments in accordance with ASC 820. The quarterly valuation process begins with the development of a preliminary valuation recommendation for each investment by our Financial Accounting and Compliance Team (“FACT”), which is comprised of valuation and audit professionals responsible for monitoring portfolio compliance and valuations. In preparing the preliminary valuation recommendations, FACT receives assistance from our investment professionals that both originated and monitor the investment as well as assistance from other departments including operations, accounting and legal.”

     

    Great so far, you can find the FACT team details on the company website too. You can read the accounting process for Fair Value on the subsequent pages but the key disclosures are:

     

    “ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.”

     

    The three levels of the fair value hierarchy (per ASC 820) and investments that fall into each of the levels are described on page 25 of the Q, but here is the point; the $5.4 billion of investments at March 31 were valued at “Level 3” of the fair value hierarchy which is defined as “ Level 3 inputs are unobservable and cannot be corroborated by observable market data.” See page 25 of the 10-Q.

     

    Starting on page 28 the company discloses the significant unobservable inputs in the fair value measurements of our Level 3 investments, which you need to have good understanding of financial theory and corporate finance to evaluate the assumptions underlying the inputs.

     

    So there is the issue. Do you believe in the company’s value it has assigned to these assets based on “inputs (that) are unobservable and cannot be corroborated by observable market data”? Some do, some don’t, and the latter may see the spread between the NAV and stock price as the discounted portion of the investments’ fair value assumptions. On the next earnings webcast (July 31, 2013 at 11:00 am ET) perhaps some of you believers can ask about the “Level 3” values. The webcast is a live webcast, free of charge, at http://bit.ly/ZirlKi, or by dialing (888) 317-6016.

     

    One may opine that the independent auditors are ever vigilant in expressing their opinion on the audited annual financial statements and performing quarterly reviews but they are relying on the representations of management.

     

    Another point to ask is does the share buyback mean that there are no investment opportunities out there that meet the investment criteria used, thus excess cash is returned to the shareholders? Share buybacks do not mean long term appreciation in the stock price.

     

    Good luck to all.
    30 Jul 2013, 09:40 PM Reply Like
  • BDHPlayer
    , contributor
    Comments (185) | Send Message
     
    From what I remember in past reports, when they have sold investments the sales price was in line with management's valuations from prior quarters.
    31 Jul 2013, 02:33 AM Reply Like
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