On ACAS' Earnings Announcement (3Q2009)

ACAS' earnings announcement scheduled for November 3 and the conference call on the 4th should not contain many surprises. The economy is in crummy shape, which is why Rug Doctor and these holdings make such sense, and why ACAS has continued to trim expenses. The likelihood that portfolio companies continue to suffer as a result of macro-economic factors should come as no surprise to shareholders.

Interestingly, I didn't see Rug Doctor in the last 10-Q. Anyone know if it's a subsidiary of another company? Why would it not show up? Was it recently (and silently, like NPC Inc.) exited? At the time Rug Doctor was bought, some other good investments were being made, including the New England Confectionary Company (it's Halloween, which is one of North America's busy candy seasons). Some of those have already been profitably exited, and some are still (like NECCO) making money for ACAS.

What to expect? Announcements about the total exit proceeds. ACAS wants to project that it's able not only to do deals, but is able to achieve exits for cash money today. Management will drive this point home with a tally of cash proceeds since either the beginning of the year or the beginning of the recession, or the like. The number of exits isn't the headliner here, but the amount of liquidity ACAS generates. ACAS will also comment on deal flow, so folks reading the tea leaves for ACAS' future will be able to answer the question how close things are now to business-as-usual. ACAS will comment -- for good or ill, it can't help but comment since it made the metric a keystone of its solvency argument earlier in the year -- on its interest coverage (that is, its ability to fund interest from its ordinary business, without being reduced to running a fire sale).

Critics will again ask how investors can't know ACAS is selling the good companies and sticking investors with a portfolio of pigs for the future, and management will repeat its mantra about reclaiming unproductive funds for better purposes, and making exits that aren't newsworthy gains. Whether anyone believes ACAS' management this time is up for grabs, but it's the story we've heard before and the same question we've gotten virtually every quarter I can recall. Expect to hear people ask questions about the value of ACAS' holdings. To understand the value of the holdings, one needs both a more sophisticated discussion of various portfolio companies than ACAS has ever ventured in a conference call and the ability to look at the world without reference to FAS 157. A medical billing company, for example, seems a strong candidate in this economy: medical services is a growing industry, physicians' interest in current funds rather than an inventory of recievebles is enduring so demand should remain high, and still-productive loans with 15% cupon should be a strong reason to like owning it. Medical Billing Holdings, Inc. is, however, given a FAS 157 value of $0 for its common stock, even while its sub debt was current and valued above cost at par. Why? Maybe because it's a "financial" and there's no market for small private financials just now. Perhaps FAS 157 cannot tell us much of interest about the long-term value of porfolio holdings. Since management can't dismiss FAS 157 without looking like a pack of loons, however, expect them to dance around the question what the holdings are really worth. What about the dental practice management company? What about still-productive commercial real estate CDOs nobody would buy today because CDOs have a stink after Merrill Lynch imploded over poorly-engineered "AAA" residential CDOs? Is keeping investments like this really a silly idea if they are still paying? Maybe these are just the duds we want management to stuff into the portfolio for good.

What I'd like to learn is likely not in the call at all: what new businesses has ACAS entered in the last few quarters while the markets were most pessimistic, most likely to offer the wildest bargains to buyers with cash. We know ACAS isn't using exit funds just to pay down debt or fund dividends; those expenses are modest in comparison to the size of ACAS' exits. ACAS is obviously doing deals.

What deals?

More even than this quarter's NOI number (which everyone will be watching as an indicator of financial strength), I want to know what ACAS has been doing with the opportunity presented by the crazy markets. I want to see what ACAS has planned for the future.

Although critics clearly have opposing views, I think ACAS will last long enough for those plans to matter.