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Riding The Private Equity Wave (ACAS)
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ACAS
American Capital Strategies (ACAS) is a principal investment company with a diversified portfolio of middle market companies held through debt and equity positions.
ACAS also structures and obtains funding for LBOs by management and employees of subsidiaries, divisions and divested portions of larger companies.
To many, this likely appears to be an investment play fraught with credit risk.
But by examining the underlying parts of this company, you might come to a much different conclusion.
ACAS has quietly evolved into a publicly traded private equity (PE) play for investors, with a 7.3% dividend yield.
There is an ongoing feeding frenzy in the PE market for firms in the U.S. and Europe. The market is strong, some would argue bubble-like.
Over the past several years, a lot of companies have restructured their balance sheets and have built a stream of strong cash flows. One additional catalyst has been the rising tide of regulation beginning with the well-intended but arguably overreaching Sarbanes-Oxley bill.
For smaller entities, it not only drains cash to comply with new rules, it also drains management focus to non-productive issues.
ACAS, currently the leading middle market lender with 3% market share, has focused its effort to become an alternate investment manager. The major attraction for investors in ACAS is management's hope to expand its P/E multiple to trade in line with other asset management firms.
The upside is quite attractive. In addition, the dividend has been increasing every year. Since its IPO in 1997 at $15, ACAS has paid shareholders $23.33 in dividends. The rise in dividends has been steady and safe, and even during the 2001 recession ACAS continued to raise its dividend. ACAS expects its dividend to increase in 2007 by 11% to $3.68.
Since 2004, ACAS has averaged approximately 14 deals per quarter. The current portfolio is well diversified with its largest weightings in commercial services (15%), financial services (14%), real estate (6%) and health care services (6%).
Geographically, the investments are approximately 83% in the U.S. and 17% in Europe. Credit quality improved in the most recent quarter and total non-performing assets (delinquencies and non-accruing assets) decreased to 3.7% of the total loan portfolio, down form 3.9% in the prior quarter. Delinquencies were lower than expected and non-accrual assets were lower than expected as well.
ACAS expects 18% growth and 30% IRR from its operations. The company expects a 15-25% increase in net asset value (NAV) to $33.80-36.80. Earnings estimates for 2007 are for $3.55 and $3.75 for 2008.
The company has acknowledged that they expect earnings growth and dividend growth to slow. Many of the large gains in the portfolio have led the way for new investments which will need several years of seasoning. Using a dividend discount model to value the stock, ACAS is undervalued by 15%. If management get their wish and the stock is re-valued at an asset manager multiple, the stock could rise over 70% based on current 2007 estimates.
Investors can get a substantial dividend and catch the private equity wave without the illiquidity of the PE market place. As the transformation to an asset manager takes place, much of the perceived risk and volatility of ACAS will decrease as well.
ACAS also structures and obtains funding for LBOs by management and employees of subsidiaries, divisions and divested portions of larger companies.
To many, this likely appears to be an investment play fraught with credit risk.
But by examining the underlying parts of this company, you might come to a much different conclusion.
ACAS has quietly evolved into a publicly traded private equity (PE) play for investors, with a 7.3% dividend yield.
There is an ongoing feeding frenzy in the PE market for firms in the U.S. and Europe. The market is strong, some would argue bubble-like.
Over the past several years, a lot of companies have restructured their balance sheets and have built a stream of strong cash flows. One additional catalyst has been the rising tide of regulation beginning with the well-intended but arguably overreaching Sarbanes-Oxley bill.
ACAS, currently the leading middle market lender with 3% market share, has focused its effort to become an alternate investment manager. The major attraction for investors in ACAS is management's hope to expand its P/E multiple to trade in line with other asset management firms.
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The upside is quite attractive. In addition, the dividend has been increasing every year. Since its IPO in 1997 at $15, ACAS has paid shareholders $23.33 in dividends. The rise in dividends has been steady and safe, and even during the 2001 recession ACAS continued to raise its dividend. ACAS expects its dividend to increase in 2007 by 11% to $3.68.
Since 2004, ACAS has averaged approximately 14 deals per quarter. The current portfolio is well diversified with its largest weightings in commercial services (15%), financial services (14%), real estate (6%) and health care services (6%).
Geographically, the investments are approximately 83% in the U.S. and 17% in Europe. Credit quality improved in the most recent quarter and total non-performing assets (delinquencies and non-accruing assets) decreased to 3.7% of the total loan portfolio, down form 3.9% in the prior quarter. Delinquencies were lower than expected and non-accrual assets were lower than expected as well.
ACAS expects 18% growth and 30% IRR from its operations. The company expects a 15-25% increase in net asset value (NAV) to $33.80-36.80. Earnings estimates for 2007 are for $3.55 and $3.75 for 2008.
The company has acknowledged that they expect earnings growth and dividend growth to slow. Many of the large gains in the portfolio have led the way for new investments which will need several years of seasoning. Using a dividend discount model to value the stock, ACAS is undervalued by 15%. If management get their wish and the stock is re-valued at an asset manager multiple, the stock could rise over 70% based on current 2007 estimates.
Investors can get a substantial dividend and catch the private equity wave without the illiquidity of the PE market place. As the transformation to an asset manager takes place, much of the perceived risk and volatility of ACAS will decrease as well.
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