Google, having heard anecdotally that hands-on use of its Chromebooks greatly enhanced users' understanding of what they did and why they might want to buy one, is following Apple's strategy of improving the frequency of that hands-on access by opening physical store locations in which to enable customer access to its products in a demo-ready, functional environment. Google will surely sell more ChromeOS this way: people will start to become aware it exists.
By contrast, Nokia is following Microsoft's lead by bribing developers to support "Windows Phone 7" (or whatever it's called these days). And I do mean bribe. Nokia goes beyond Microsoft's platroem-software-plus-development-software-plus-even-yes-the-phone-hardware offer and doesn't just make development access free, it buys development. What else is a "cash incentive"? What other platform's vendors are so desperate as to guarantee third-party developers a minimum return?
Between these two strategies, I'm betting on Google's.
Friday, September 30, 2011
Timing ACAS
I was looking at ACAS and hunting for relevant news that might explain the apparent panic afoot, and I noticed this:
Since ACAS was "downgraded" from "hold" to "reduce", it is (despite its recent precipitous fall) up by 46.52%. Apparently, timing ACAS isn't their specialty, either. Interestingly, the ratings folks seem to rate their own ratings, too. Let's see how that works:
It seems that the ratings specialists "upgraded" ACAS to hold, and it outperformed the index to which it was compared, the ratings specialists called that a "correct" rating. "Hold" for an index-beating return. The more recent period, the ratings specialists admit to be incorrect. Yet, the rating stands at "reduce".
If they stood by their rating, you'd expect a report that said "just you wait!" But, no. It's "incorrect" but it remains the rating :-)
I'm interested to hear anyone's take on the recent price action. Uncertainty and volatility both work against comparables pricing (thus against NAV), and doubt about the macro-economic environment weighs against performance of ACAS' broad-based portfolio (which one expects to behave as a leveraged proxy for the overall economy).
Buffett has bet long-term on the economy of the US. Is there reason to doubt ACAS can hold on for the long term?
Comments welcome.
Since ACAS was "downgraded" from "hold" to "reduce", it is (despite its recent precipitous fall) up by 46.52%. Apparently, timing ACAS isn't their specialty, either. Interestingly, the ratings folks seem to rate their own ratings, too. Let's see how that works:
It seems that the ratings specialists "upgraded" ACAS to hold, and it outperformed the index to which it was compared, the ratings specialists called that a "correct" rating. "Hold" for an index-beating return. The more recent period, the ratings specialists admit to be incorrect. Yet, the rating stands at "reduce".If they stood by their rating, you'd expect a report that said "just you wait!" But, no. It's "incorrect" but it remains the rating :-)
I'm interested to hear anyone's take on the recent price action. Uncertainty and volatility both work against comparables pricing (thus against NAV), and doubt about the macro-economic environment weighs against performance of ACAS' broad-based portfolio (which one expects to behave as a leveraged proxy for the overall economy).
Buffett has bet long-term on the economy of the US. Is there reason to doubt ACAS can hold on for the long term?
Comments welcome.
Motley Fool Notices Apple Owns Its OS
In this video, the Motley Fool reveals that Apple has a competitive advantage in not having to pay Microsoft a licensing fee, which results in value and pricing advantages.
Gee, who would have guessed that by acquiring the IP it wanted to deliver to customers, Apple would differentiate itself from beige-box makers not only on product but on price-per-value and ultimately on raw price? And that Apple's multi-language-in-each-installation OS would allow it to sell one version of a product worldwide?
The Motley Fool neglects something worth thinking about: Apple might not need to license the OS, but it needs to license things it bundles with the OS, like Microsoft ActiveSync (at least on iOS devices) and a rich selection of high-quality fonts (particularly on PCs; the reason Apple's font selection on phones is so thin is certainly the margins impact of font licensing for fonts of the quality Apple ships).
The next thing the Motley Fool didn't reach is the hardware: Apple, owning its own OS and providing its developers all the developer tools free-of-charge, is free to swap hardware underneath its software stack with virtually complete transparency to its customers. Sure, developers may have to click a button to build software for multiple platforms, but Apple has made it easy to deliver one software package for multiple hardware architectures. So when Apple decides that it wants to ship ARM chips in some segment of its product lineup in order to obtain a price/value advantage over competitors, Apple is free to do what Lenovo cannot.
The flexibility Apple obtains through its own OS isn't just the price of the OS: it includes flexibility in OEM hardware sourcing, architecture, launch geography, and other concerns that impact margins, supply-chain-management, and addressable market. Apple's control of the intellectual property driving its products is a critical part of Apple's competitive advantage.
Gee, who would have guessed that by acquiring the IP it wanted to deliver to customers, Apple would differentiate itself from beige-box makers not only on product but on price-per-value and ultimately on raw price? And that Apple's multi-language-in-each-installation OS would allow it to sell one version of a product worldwide?
The Motley Fool neglects something worth thinking about: Apple might not need to license the OS, but it needs to license things it bundles with the OS, like Microsoft ActiveSync (at least on iOS devices) and a rich selection of high-quality fonts (particularly on PCs; the reason Apple's font selection on phones is so thin is certainly the margins impact of font licensing for fonts of the quality Apple ships).
The next thing the Motley Fool didn't reach is the hardware: Apple, owning its own OS and providing its developers all the developer tools free-of-charge, is free to swap hardware underneath its software stack with virtually complete transparency to its customers. Sure, developers may have to click a button to build software for multiple platforms, but Apple has made it easy to deliver one software package for multiple hardware architectures. So when Apple decides that it wants to ship ARM chips in some segment of its product lineup in order to obtain a price/value advantage over competitors, Apple is free to do what Lenovo cannot.
The flexibility Apple obtains through its own OS isn't just the price of the OS: it includes flexibility in OEM hardware sourcing, architecture, launch geography, and other concerns that impact margins, supply-chain-management, and addressable market. Apple's control of the intellectual property driving its products is a critical part of Apple's competitive advantage.
MSFT To Earn More from Android Than WinPhone
Electronista has an interesting story. Samsung's licensing deal with Microsoft to avoid patent battles over IP that is part of Android, at something like $3-6 per handset, will yield Microsoft more revenue than it earns at $15 per Windows Phone 7 license on the 1.7m units that ship with Windows Phone 7.
One wonders what IP Microsoft has that's embedded in the Linux-based open-source phone software. Is there real MSFT innovation in there, or just patent trolling on old tech Samsung preferred not to be in court over?
One wonders what IP Microsoft has that's embedded in the Linux-based open-source phone software. Is there real MSFT innovation in there, or just patent trolling on old tech Samsung preferred not to be in court over?
Wednesday, September 28, 2011
On ACAS' Debt
At the end of June of 2010, ACAS announced that its long-running effort to arm-twist its many creditors into exchanging one family of debt instruments (under which ACAS was required to maintain asset levels that, under the combined effects of FAS 157 and the post-2008 liquidity crisis, were impossible for ACAS to meet, and led to default-rate interest, despite that ACAS had never missed a payment) for a different set of debt instruments (which granted creditors what they had long demanded: security) had finally succeeded. In the transaction, ACAS paid $1.03B of its loans back 100% in cash, and exchanged the remaining $1.31B for the new secured notes. The overview is here. At the close of the deal, ACAS owed $11m in unsecured old debt that didn't participate in the swap, and $1.31B of newly-issued secured debt.
I've recently been asked about ACAS' risk for being forced to liquidate its holdings in some kind of fire sale. According to the amortization schedule announced with the press release on the restructuring, ACAS didn't have any principal repayment obligation until December 31, 2011. At that time, if it didn't cough up about $70.4M, ACAS would suffer a higher interest rate. ACAS has further principal amortization requirements at the end of June 2012, December 2012, and June 2013 ($100m, $300m, and $350m respectively). Scary, eh? Shall we have a look at ACAS' outlook for meeting the schedule?
The next quarterly report following the debt restructuring was 2Q2010, which included the announcement that ACAS' total debt stood at $2.924B, placing the company at a debt:equity ratio of 0.9:1. Its interest expense in 2Q2010 was $56m, but that included time under the old debt regime. The total debt included the $1.31B in secured debt, and some securitized debt. The following quarter, 3Q2010, ACAS repaid $407m in debt, including $200m of the secured debt due in 2013. In 3Q2010, ACAS' interest expense had declined to $36m, and it foresaw a 4th-quarter secured debt repayment intended to lower its interest rate to the lowest available under its new debt facility. In 4Q2010, ACAS repaid $258m in debt. In that quarter, its interest receivable was $37m and its interest expense was $28m. (For those who cautiously ask about ACAS' actual income rather than its receivable number, its interest and dividend income in 4Q2010 was $133m.) In 1Q2011, ACAS repaid $517m in debt, including $300m of the secured debt due in 2013. (Interest expense was $29m, while interest and dividend income was $146m; fee income grew over the quarter from $10m to $13m.) The 1Q2011 repayment left ACAS with no principal repayment due under the amortization schedule until it owed $250m at the end of June 2013. ACAS' next quarter, 2Q2011, it repaid $100m of its securitization debt. This left ACAS (whose NAV had increased to $13.16 per share) with a debt:equity ratio of 0.4:1. In 2Q2011, ACAS' interest expense had decreased to $20m while its interest and dividend income stood at $131m.
Since ACAS plainly has the wherewithal to keep current on its interest payments, there is no basis for secured creditors (who aren't due any principal until mid-2013) to execute on the security. They're being paid in full. The whole point of the security was to free ACAS from maintaining specified asset levels; the value of ACAS is no longer the security, because the security is the security. Losing your job doesn't cause home foreclosure so long as you make your payments. ACAS' secured refinancing was designed to give it the flexibility to do what made sense without worrying about the market cap, net assets, etc. This is why ACAS was free to shrink the company by spending cold hard cash simply to retire shares. This raises per share value but it shrinks the company. Without a net asset covenant, it's no longer suicide. A few years ago, share buyback was impossible due to ACAS' ongoing concern about maintaining net asset levels to satisfy covenants under its old debt regime. If someone has a term sheet for the new secured debt, I'd love to see it to be sure I understand what else may be required, but as I understood the refinancing I think ACAS is in a great position based on its current earnings.
So, what happens if Paulson is forced to sell? Well, ACAS' capital is permanent capital: no-one can recall it. If Paulson has to dump shares, we may get a fire sale (if the sale isn't private and if there are no buyers lined up to absorb Paulson's block). Heck, with the share buyback plan in position – a share buyback plan which allows privately-negotiated purchases – ACAS itself might enjoy Paulson's fire sale, if there is one. I for one have no idea what Paulson's finances look like, and don't honestly care except that it may present a short-term buying opportunity.
So, why is ACAS' price in the toilet? We've re-entered a period of heightened uncertainty, ACAS' portfolio of small illiquid firms is viewed as vulnerable to turmoil, ACAS' management has couched positive guidance in terms of a continued favorable macro-economic environment, we don't know from day to day what effect market conditions of ACAS' portfolio's comparables has on ACAS' NAV, etc. With uncertainty comes perceived risk, and lower bids. And lower bids follow misinformation: I read a teaser for a new research report that referred to ACAS as having no dividend in the foreseeable future because of expected capital losses. Um, the dividend is expected to be zero for a while because ACAS' loss carryforwards will absorb taxable earnings (whetehr operating income or capital gains), and ACAS' dividend has historically been calculated on the basis of taxable income because it was regulated as a BDC. Claims of expected losses, even bogus ones, can't be good for share prices. Bogus analysis abounds. Anyone got a hard source for an actual forecast of losses? Didn't think so.
I have never claimed to be able to time anything, and I won't try here. One of the more painful investing errors I made was to decide that the market wasn't going anywhere and lose a ton of AAPL to covered call exercises years ago when the stock hadn't moved in ages, and I don't think the shares ever saw that price again. I'm not keen to replicate the experience by trying to time purchase and sale near $7 of a company whose last-announced NAV was north of $13.
My last move in ACAS was to buy 200sh for a niece, which I put into an asset protection trust. Kid's going to need money when she grows up, I figure. And me too!
I've recently been asked about ACAS' risk for being forced to liquidate its holdings in some kind of fire sale. According to the amortization schedule announced with the press release on the restructuring, ACAS didn't have any principal repayment obligation until December 31, 2011. At that time, if it didn't cough up about $70.4M, ACAS would suffer a higher interest rate. ACAS has further principal amortization requirements at the end of June 2012, December 2012, and June 2013 ($100m, $300m, and $350m respectively). Scary, eh? Shall we have a look at ACAS' outlook for meeting the schedule?
The next quarterly report following the debt restructuring was 2Q2010, which included the announcement that ACAS' total debt stood at $2.924B, placing the company at a debt:equity ratio of 0.9:1. Its interest expense in 2Q2010 was $56m, but that included time under the old debt regime. The total debt included the $1.31B in secured debt, and some securitized debt. The following quarter, 3Q2010, ACAS repaid $407m in debt, including $200m of the secured debt due in 2013. In 3Q2010, ACAS' interest expense had declined to $36m, and it foresaw a 4th-quarter secured debt repayment intended to lower its interest rate to the lowest available under its new debt facility. In 4Q2010, ACAS repaid $258m in debt. In that quarter, its interest receivable was $37m and its interest expense was $28m. (For those who cautiously ask about ACAS' actual income rather than its receivable number, its interest and dividend income in 4Q2010 was $133m.) In 1Q2011, ACAS repaid $517m in debt, including $300m of the secured debt due in 2013. (Interest expense was $29m, while interest and dividend income was $146m; fee income grew over the quarter from $10m to $13m.) The 1Q2011 repayment left ACAS with no principal repayment due under the amortization schedule until it owed $250m at the end of June 2013. ACAS' next quarter, 2Q2011, it repaid $100m of its securitization debt. This left ACAS (whose NAV had increased to $13.16 per share) with a debt:equity ratio of 0.4:1. In 2Q2011, ACAS' interest expense had decreased to $20m while its interest and dividend income stood at $131m.
Since ACAS plainly has the wherewithal to keep current on its interest payments, there is no basis for secured creditors (who aren't due any principal until mid-2013) to execute on the security. They're being paid in full. The whole point of the security was to free ACAS from maintaining specified asset levels; the value of ACAS is no longer the security, because the security is the security. Losing your job doesn't cause home foreclosure so long as you make your payments. ACAS' secured refinancing was designed to give it the flexibility to do what made sense without worrying about the market cap, net assets, etc. This is why ACAS was free to shrink the company by spending cold hard cash simply to retire shares. This raises per share value but it shrinks the company. Without a net asset covenant, it's no longer suicide. A few years ago, share buyback was impossible due to ACAS' ongoing concern about maintaining net asset levels to satisfy covenants under its old debt regime. If someone has a term sheet for the new secured debt, I'd love to see it to be sure I understand what else may be required, but as I understood the refinancing I think ACAS is in a great position based on its current earnings.
So, what happens if Paulson is forced to sell? Well, ACAS' capital is permanent capital: no-one can recall it. If Paulson has to dump shares, we may get a fire sale (if the sale isn't private and if there are no buyers lined up to absorb Paulson's block). Heck, with the share buyback plan in position – a share buyback plan which allows privately-negotiated purchases – ACAS itself might enjoy Paulson's fire sale, if there is one. I for one have no idea what Paulson's finances look like, and don't honestly care except that it may present a short-term buying opportunity.
So, why is ACAS' price in the toilet? We've re-entered a period of heightened uncertainty, ACAS' portfolio of small illiquid firms is viewed as vulnerable to turmoil, ACAS' management has couched positive guidance in terms of a continued favorable macro-economic environment, we don't know from day to day what effect market conditions of ACAS' portfolio's comparables has on ACAS' NAV, etc. With uncertainty comes perceived risk, and lower bids. And lower bids follow misinformation: I read a teaser for a new research report that referred to ACAS as having no dividend in the foreseeable future because of expected capital losses. Um, the dividend is expected to be zero for a while because ACAS' loss carryforwards will absorb taxable earnings (whetehr operating income or capital gains), and ACAS' dividend has historically been calculated on the basis of taxable income because it was regulated as a BDC. Claims of expected losses, even bogus ones, can't be good for share prices. Bogus analysis abounds. Anyone got a hard source for an actual forecast of losses? Didn't think so.
I have never claimed to be able to time anything, and I won't try here. One of the more painful investing errors I made was to decide that the market wasn't going anywhere and lose a ton of AAPL to covered call exercises years ago when the stock hadn't moved in ages, and I don't think the shares ever saw that price again. I'm not keen to replicate the experience by trying to time purchase and sale near $7 of a company whose last-announced NAV was north of $13.
My last move in ACAS was to buy 200sh for a niece, which I put into an asset protection trust. Kid's going to need money when she grows up, I figure. And me too!
Tuesday, September 27, 2011
Active Internet Users Are 10% Macs (5% iOS)
Although Apple's sales share numbers are not yet in the double digits for PCs (desktops and notebooks), its share of active users appears to exceed 10%. According to Chitika's surveillance of users accessing its online advertising network, Apple's Macs gained share in the user base in September and hold 10.6%. Apple's iOS devices were slightly down in share, to 5.2%. By comparison, Linux distributions total 2.3% of users and Microsoft's operating systems stand at 77.7%.
Android was up by 0.045% to 2.3%.
Note that measuring users by examining online ads neglects the non-browsing segment of the market. Both Linux and Microsoft have substantial presence in servers, and many point-of-sale systems run Microsoft operating systems. Which numbers are worth watching depends on one's purpose. As an online advertiser, Chitika is of course interested in devices in a position to browse its ad network.
From Apple's perspective, a large share of installed base is valuable in the iPhone business because Apple shares some wireless subscription revenue and shares in App Store sales of content to users. By contrast, Apple's share of the PC installed base has historically only meant that its users haven't yet replaced their Macs. With Apple's launch of the App Store, Apple stands to benefit more from users who don't replace their machines often. The Safari browser probably doesn't generate substantial revenue for Apple, despite that Apple could stand to benefit from ad revenue sharing from searches conducted from a Safari search window. But then, some revenue is better than none.
The major benefit to Apple of controlling a meaningful segment of the devices in use on the Internet is that it makes Apple's ecosystem more valuable. A reliable population of quality (i.e., paying) customers who prefer quality products is attractive to developers inclined to create quality products to sell; quality products from developers make platforms more attractive to customers; large communities create network advantages over small groups (in case you like using video chat, which only works with people whose video chat software is designed to work together); and so on. But as Apple has learned with the App Store (and its Music Store before that), a large installed base also means a large group of customers capable of providing post-sales revenue opportunities. As Apple's installed base grows, the post-sale long tail of content revenue (software, music, books, etc.) may become a material part not only of Apple's ecosystem, but its revenue. (While Apple is in an explosive sales growth phase, the sales will likely continue to dwarf post-sales subscriptions, content, etc.; but the future of Apple platforms as cash cows in the event Apple's market share reaches a "steady state" is potentially attractive and worth thinking about, even if the hypothesis that a "steady state" can exist is a bit fanciful.)
Between Apple's market-topping satisfaction and its share growth, Apple's execution is a thing to behold. Congratulations.
Android was up by 0.045% to 2.3%.
Note that measuring users by examining online ads neglects the non-browsing segment of the market. Both Linux and Microsoft have substantial presence in servers, and many point-of-sale systems run Microsoft operating systems. Which numbers are worth watching depends on one's purpose. As an online advertiser, Chitika is of course interested in devices in a position to browse its ad network.
From Apple's perspective, a large share of installed base is valuable in the iPhone business because Apple shares some wireless subscription revenue and shares in App Store sales of content to users. By contrast, Apple's share of the PC installed base has historically only meant that its users haven't yet replaced their Macs. With Apple's launch of the App Store, Apple stands to benefit more from users who don't replace their machines often. The Safari browser probably doesn't generate substantial revenue for Apple, despite that Apple could stand to benefit from ad revenue sharing from searches conducted from a Safari search window. But then, some revenue is better than none.
The major benefit to Apple of controlling a meaningful segment of the devices in use on the Internet is that it makes Apple's ecosystem more valuable. A reliable population of quality (i.e., paying) customers who prefer quality products is attractive to developers inclined to create quality products to sell; quality products from developers make platforms more attractive to customers; large communities create network advantages over small groups (in case you like using video chat, which only works with people whose video chat software is designed to work together); and so on. But as Apple has learned with the App Store (and its Music Store before that), a large installed base also means a large group of customers capable of providing post-sales revenue opportunities. As Apple's installed base grows, the post-sale long tail of content revenue (software, music, books, etc.) may become a material part not only of Apple's ecosystem, but its revenue. (While Apple is in an explosive sales growth phase, the sales will likely continue to dwarf post-sales subscriptions, content, etc.; but the future of Apple platforms as cash cows in the event Apple's market share reaches a "steady state" is potentially attractive and worth thinking about, even if the hypothesis that a "steady state" can exist is a bit fanciful.)
Between Apple's market-topping satisfaction and its share growth, Apple's execution is a thing to behold. Congratulations.
Thursday, September 22, 2011
MTGE: the first dividend
American Capital Mortgage Investment Corp. (MTGE) recently announced that for the less-than-a-quarter period from August 9 through September 30 (about 54 days), it is declaring a $0.20 dividend payable October 27, 2011. (As after AGNC's first stub quarter, nitwits are already proclaiming MTGE to have a single-digit yield based on a quarterly dividend of $0.20. Yawn.) As with the 31¢ stub-period dividend initially paid by AGNC, this isn't a full quarter of revenue and doesn't reflect what the company will ultimately do over the duration of a fully-invested quarter.
And it's fair to conclude that MTGE is now fully invested:
Interpreting the 20¢ stub-quarter dividend in light of that math suggests that MTGE wasn't fully invested on IPO Day but took some time to ramp to full investment. In light of the market turmoil, this isn't hard to believe. AGNC's first stub quarter was 27 days, and it paid $0.31 – but there was no panic underway at the time. The real question facing investors seeking to read the tea leaves of the stub-quarter dividend is the fraction of the quarter in which MTGE was actually invested. The Jaded Consumer strongly suspects that becoming fully invested involved multiple parties and agreements and was slowed by the fact that everyone in the financial industry was distracted by the apparent meltdown underway in the marketplace.
As I previously wrote, I hoped to buy under $19 – and now I have bought under $17. Deutche Bank's target price of $22 doesn't impress me as much as the fact that MTGE is AGNC with an option to buy non-agency securities (thus improving the possibility of occasionally buying a more feared/hated, and thus potentially irrationally mispriced, mortgage bundle). Since AGNC has performed well and trades at a premium to NAV, the prospects of a similarly-managed MTGE for trading above its $19+ NAV appear favorable over the intermediate term.
At the moment, I expect MTGE's price represents a discount of over $2 to NAV. At today's price of about $16.75, this represents over 12% upside just retracing to NAV – and AGNC's experience suggests normalcy will represent trading at a premium to NAV. Now that the misinformation and uncertainty about MTGE is high, investment is much more interesting than immediately following the IPO.
And it's fair to conclude that MTGE is now fully invested:
During the course of the stub period MTGE's investment team has invested these proceeds, along with proceeds from borrowings under the Company's repurchase agreements, to purchase a portfolio of approximately $1.5 billion of agency, non-agency and other mortgage-related investments.Not only is its equity fully invested, but it's used $200m of equity to invest in approximately $1.5b worth of investments. One concludes that with investment approximating 7.5x equity, the investment is one part equity and 6.5 parts borrowings. Leverage of 6.5:1 may have been a result of the recent marketplace uncertainty – MTGE was first issued during the first day of a marketplace bloodbath, after all. If MTGE's rate spread is like AGNC's was last quarter – above 2% – then MTGE should be making something above 15% on its equity of more than $19/share. ACAS has managed AGNC with leverage that varies with market conditions, and using leverage less than 7:1 is conservative in comparison to the 8x leverage with which AGNC launched.
from MTGE's Press Release
Interpreting the 20¢ stub-quarter dividend in light of that math suggests that MTGE wasn't fully invested on IPO Day but took some time to ramp to full investment. In light of the market turmoil, this isn't hard to believe. AGNC's first stub quarter was 27 days, and it paid $0.31 – but there was no panic underway at the time. The real question facing investors seeking to read the tea leaves of the stub-quarter dividend is the fraction of the quarter in which MTGE was actually invested. The Jaded Consumer strongly suspects that becoming fully invested involved multiple parties and agreements and was slowed by the fact that everyone in the financial industry was distracted by the apparent meltdown underway in the marketplace.
As I previously wrote, I hoped to buy under $19 – and now I have bought under $17. Deutche Bank's target price of $22 doesn't impress me as much as the fact that MTGE is AGNC with an option to buy non-agency securities (thus improving the possibility of occasionally buying a more feared/hated, and thus potentially irrationally mispriced, mortgage bundle). Since AGNC has performed well and trades at a premium to NAV, the prospects of a similarly-managed MTGE for trading above its $19+ NAV appear favorable over the intermediate term.
At the moment, I expect MTGE's price represents a discount of over $2 to NAV. At today's price of about $16.75, this represents over 12% upside just retracing to NAV – and AGNC's experience suggests normalcy will represent trading at a premium to NAV. Now that the misinformation and uncertainty about MTGE is high, investment is much more interesting than immediately following the IPO.
Tuesday, September 20, 2011
MSFT: Another Partner Skewered
Microsoft's recent news – that its billion-per-quarter losing streak with Bing has continued another quarter and is set to keep the same path – is highlighted by another report that partnering with Microsoft is bad for your health. Microsoft's share gain against Google has not only not been at Google's expense, but it has been at the expense of Yahoo! – the search function of which is ... drumroll please ... provided by Microsoft's Bing.
The theory that partnering with Microsoft is bad for the health of a technology enterprise is not novel. The recent "MSFT kills its search partner" sounds a lot like the company's earlier hit, "MSFT kills its music-store partner".
This isn't to say MSFT is doomed: it's finally figured out how to make money on its once laughably-losing XBox, and it's got a huge cash flow based on operating system and productivity software that is fully capable of sustaining it through the effort to succeed at other things. The question at Microsoft is whether top management will allow Microsoft's smart folks to do things successfully, or whether good ideas will be killed to protect legacy business.
Only the shadow knows.
The theory that partnering with Microsoft is bad for the health of a technology enterprise is not novel. The recent "MSFT kills its search partner" sounds a lot like the company's earlier hit, "MSFT kills its music-store partner".
This isn't to say MSFT is doomed: it's finally figured out how to make money on its once laughably-losing XBox, and it's got a huge cash flow based on operating system and productivity software that is fully capable of sustaining it through the effort to succeed at other things. The question at Microsoft is whether top management will allow Microsoft's smart folks to do things successfully, or whether good ideas will be killed to protect legacy business.
Only the shadow knows.
Saturday, September 17, 2011
ACAS Buys ... ACAS!
American Capital Ltd. announced this week that in August it began buying back shares of its own stock on the open market. August purchases totaled 4.9m shares at an average price of $8.12, and September purchases through the 15th of the month had reached 4.23m shares at an average price of $8.31. In all, ACAS has spent $75m on share buybacks, and is still buying. Share retirement at the time of the announcement reached 9.13m shares.
The headline of the press release delivers the punch line: ACAS, which at the moment isn't subject to BDC dividend-paying requirements because of its failed RIC test, has a policy governing share repurchase that's based on factors like operational issues and debt servicing. In the past, ACAS could not spend a material portion of profits on share buybacks because it was obliged to make dividend distributions based on its corporate taxable income (not its per-share taxable income). Now that ACAS is free from BDC-related dividend-paying obligations, it's freer to do things like share repurchases.
In the past, the Jaded Consumer's take on ACAS share repurchases was: don't hold your breath. The recent announcement suggests that the "really slick" idea for cash I'd hoped for is actually pretty simple. Based on the $13+ NAV ACAS announced having at the end of last quarter, ACAS' share repurchases were made at nearly $5 below the value behind each share purchased. (Realize that although the theoretical value of ACAS' holdings logically vacillates with the global and local economic and competitive environments that also impact all the comparable investments trading in liquid markets, ACAS only calculates fair-value estimates for public consumption on a quarterly basis; the recent economic turmoil naturally creates increased uncertainty regarding the value of ACAS' portfolio components, and likely impact on the value of target comparables. Thus, the average of $8.21 spent per share doesn't result in $4.95 per share in recaptured NAV to distribute across the remaining shares, because the NAV was moving independently of the share purchases.) But think about ACAS' management: it's been showing consistent NAV improvement for a nice string of about 8 quarters, and it doesn't want to lose its streak. What does the buyback do for it?
First, $4.95 per share on 9.13m shares is not the same as $4.95 per share on all ACAS' remaining shares; it's like getting $45m to allocate across the shares ACAS has remaining. At the close of 2Q2011, ACAS had an outstanding share count of 345.1m. Now, let's revisit what I wrote the last time I opined on share buybacks:
The fact that ACAS can do this same trick again before the close of the quarter (it's got another $75m, after all) is interesting. The fact that ACAS could turn unproductive assets into share-buyback fodder is also interesting. Since ACAS hasn't been exactly setting acquisition records, the lost opportunities in not buying new portfolio companies while on sale may not be a big deal. And this makes sense: many people who'd be trying to sell their company under these conditions would be doing so out of conviction that the company won't last until conditions are better. Why would ACAS take a chance like that when there's a sure thing in-hand?
Mind you, I feel strongly that ACAS should be doing great things with its distressed-situations analysts – and strongly want to see outstanding purchases that will pay off in spades as the market normalizes – but perhaps the biggest contribution they've added is to keep ACAS out of deals on the basis that they're just not worth the risk.
The headline of the press release delivers the punch line: ACAS, which at the moment isn't subject to BDC dividend-paying requirements because of its failed RIC test, has a policy governing share repurchase that's based on factors like operational issues and debt servicing. In the past, ACAS could not spend a material portion of profits on share buybacks because it was obliged to make dividend distributions based on its corporate taxable income (not its per-share taxable income). Now that ACAS is free from BDC-related dividend-paying obligations, it's freer to do things like share repurchases.
In the past, the Jaded Consumer's take on ACAS share repurchases was: don't hold your breath. The recent announcement suggests that the "really slick" idea for cash I'd hoped for is actually pretty simple. Based on the $13+ NAV ACAS announced having at the end of last quarter, ACAS' share repurchases were made at nearly $5 below the value behind each share purchased. (Realize that although the theoretical value of ACAS' holdings logically vacillates with the global and local economic and competitive environments that also impact all the comparable investments trading in liquid markets, ACAS only calculates fair-value estimates for public consumption on a quarterly basis; the recent economic turmoil naturally creates increased uncertainty regarding the value of ACAS' portfolio components, and likely impact on the value of target comparables. Thus, the average of $8.21 spent per share doesn't result in $4.95 per share in recaptured NAV to distribute across the remaining shares, because the NAV was moving independently of the share purchases.) But think about ACAS' management: it's been showing consistent NAV improvement for a nice string of about 8 quarters, and it doesn't want to lose its streak. What does the buyback do for it?
First, $4.95 per share on 9.13m shares is not the same as $4.95 per share on all ACAS' remaining shares; it's like getting $45m to allocate across the shares ACAS has remaining. At the close of 2Q2011, ACAS had an outstanding share count of 345.1m. Now, let's revisit what I wrote the last time I opined on share buybacks:
Buying shares doesn't lead to realized gains (imagine if it could treat issuance as a short, and close the positions it opened north of $40!), and offers no benefit to the bottom line.This means that the "profit" of 18.36¢ per share (that is, remaining outstanding share) has just been made, tax-free. Yes, I realize that ACAS has loss carryforwards and wouldn't pay tax this year, but this is a "profit" that has several attractive features:
- Doesn't lead to reduction or loss of ACAS' valuable loss carryforward (in other words, the lack of a tax payment isn't just temporary; it's real)
- Doesn't push ACAS closer to being required to pay a dividend
- Doesn't cause confusing one-time impacts likely to be misread or dismissed by those reading the next quarterly report, but instead has a long-term impact on the per-share NOI, NAV, and other interesting metrics because it reduces the denominator by which the company's metrics are divided into per-share metrics.
- Did I mention that since the effect isn't taxable, neither ACAS nor shareholders bear a tax burden for the transaction even though it raises NAV 18¢? Which at a 35% tax rate, means it's identical to having earned and paid tax on 28.25¢?
The fact that ACAS can do this same trick again before the close of the quarter (it's got another $75m, after all) is interesting. The fact that ACAS could turn unproductive assets into share-buyback fodder is also interesting. Since ACAS hasn't been exactly setting acquisition records, the lost opportunities in not buying new portfolio companies while on sale may not be a big deal. And this makes sense: many people who'd be trying to sell their company under these conditions would be doing so out of conviction that the company won't last until conditions are better. Why would ACAS take a chance like that when there's a sure thing in-hand?
Mind you, I feel strongly that ACAS should be doing great things with its distressed-situations analysts – and strongly want to see outstanding purchases that will pay off in spades as the market normalizes – but perhaps the biggest contribution they've added is to keep ACAS out of deals on the basis that they're just not worth the risk.
Tuesday, September 6, 2011
Re ACAS -- To Peter
In reply to Peter's comment, I offer:
Thanks for reading, and for the kind words. Unfortunately, I started buying ACAS north of 40, so even though I (approximately) doubled at $1.80, I'm still not in the black yet on ACAS.
As to ACAS' sensitivity to the impact of 150 basis points' move on the performance of AGNC, it looks like this has two (or three) parts. First, AGNC uses some hedging techniques and I'm not sure what their impact will be. Back in 2008, when liquidity was tight, AGNC's hedges made more money than its investments. The other side of the AGNC performance is that AGNC's profits aren't based on rates, but rate spreads. AGNC finances its portfolio with repurchase agreements. Since its portfolio is liquid – that is, the portfolio is full of government-backed investments for which there is a ready market and pretty clear valuation – ACAS has (as AGNC's manager) been able to leverage the portfolio, and change the debt:equity ratio as it pleased based on the environment. So, the first part of the equation – the impact of a 150-basis-point increase on AGNC's profitability – is something that is both non-trivial and outside my realm of knowledge. What are the odds of a rate-spread inversion? I'm not really the right person to ask. The last (either second or third, depending how you are counting) part of the question asks: what is the impact of AGNC's fortunes on ACAS. Now that ACAS isn't a big shareholder of AGNC (it's sold its stake, largely at a gain; the latest 10-Q shows no unrealized AGNC-related gains and no AGNC holdings), the real impact is in its monthly management fee. This management fee is based on AGNC's assets under management. Based on the math here (more than half a penny per share per quarter added to ACAS' management fees due to the described issuance) and here (another issuance adds $0.07 per share per quarter to ACAS' revenues), it seems ACAS' revenues from AGNC are likely more sensitive to issuances than to revenues. The three months ended June 30 showed AGNC paying over $12.4m in management fees to ACAS, which based on the nearly 354m shares outstanding at the end of the last quarter reported amounts to over 3.5¢ per share (annualizing to over 14¢ per share). Profits of REITs must be distributed, so they don't generally boost assets much – and ACAS' management fee is based on assets under management, not profits. AGNC must avoid losses to protect its assets under management, but if management is as nimble in reacting to changes in the macro-environment as it has been in the past, the probability is against being stuck for a long time in a money-losing environment.
The dividend historically was paid based on BDC requirements. ACAS deliberately failed a RIC test so that its loss carryforward would not be lost (BDCs can't carry forward all the kinds of losses that C-corps can). ACAS at present has no dividend requirement. By the time ACAS has a taxable profit, I expect it'll arrange to pass RIC tests again. The question is, when will that be? Since the answer depends in part on when ACAS realizes gains and when it realizes losses, it's possible that management controls this much more than would be predicted based on projections based on the macro-environment. Essentially, I wonder what management's preference is, and whether management makes a priority out of any particular tax status. Without that knowledge, I don't think dividend timing projections will mean much.
I think the best place to mine for insight into the future of dividends may be the statements of management on quarterly calls. Still, developments since the time of the calls are likely to impact management's current thinking.
As the market is hit, ACAS' portfolio's comparables will be hit, and with it theoretically ACAS' NAV. This is an interesting time: ACAS announces another great quarter of NAV increase, and its share value is punished. Does the punishment fit the market, or is it excessive? We can't know until next quarter's announcements. Will NAV still move in the right direction? NOI?
ACAS will continue to be volatile. I still view its below-NAV pricing as a value opportunity. I think ACAS' solvency makes it appropriate to consider as a long-term investment, and long-term investments in things so diverse as to represent the broader economy are theoretically a bet on the broader economy itself. The question is, when is it appropriate to make big bets on the broader economy? Buffett has said that's what he's done, so his view is now public. For those of us with a shorter time frame, might we be better able to time entry? I certainly have very limited success timing buys and sells.
I'm much better at spotting long-term opportunity: Apple in 1998, for example. For most of the time from then on most of my assets were in Apple -- my best bet. But as volatile as that's been, there's as much opportunity to have lost money with bad timing as in ACAS. The reason I own much less now than I did was that I got bored with price stagnation during a plateau and lost shares to the exercise of covered calls when the shares started moving again. Heightening exposure to volatility risk might not be the best strategy for the long-term investor. Assuming the underlying thesis is good, the only safety may be adopting a Buffett-like investment horizon.
Best wishes!
Thanks for reading, and for the kind words. Unfortunately, I started buying ACAS north of 40, so even though I (approximately) doubled at $1.80, I'm still not in the black yet on ACAS.
As to ACAS' sensitivity to the impact of 150 basis points' move on the performance of AGNC, it looks like this has two (or three) parts. First, AGNC uses some hedging techniques and I'm not sure what their impact will be. Back in 2008, when liquidity was tight, AGNC's hedges made more money than its investments. The other side of the AGNC performance is that AGNC's profits aren't based on rates, but rate spreads. AGNC finances its portfolio with repurchase agreements. Since its portfolio is liquid – that is, the portfolio is full of government-backed investments for which there is a ready market and pretty clear valuation – ACAS has (as AGNC's manager) been able to leverage the portfolio, and change the debt:equity ratio as it pleased based on the environment. So, the first part of the equation – the impact of a 150-basis-point increase on AGNC's profitability – is something that is both non-trivial and outside my realm of knowledge. What are the odds of a rate-spread inversion? I'm not really the right person to ask. The last (either second or third, depending how you are counting) part of the question asks: what is the impact of AGNC's fortunes on ACAS. Now that ACAS isn't a big shareholder of AGNC (it's sold its stake, largely at a gain; the latest 10-Q shows no unrealized AGNC-related gains and no AGNC holdings), the real impact is in its monthly management fee. This management fee is based on AGNC's assets under management. Based on the math here (more than half a penny per share per quarter added to ACAS' management fees due to the described issuance) and here (another issuance adds $0.07 per share per quarter to ACAS' revenues), it seems ACAS' revenues from AGNC are likely more sensitive to issuances than to revenues. The three months ended June 30 showed AGNC paying over $12.4m in management fees to ACAS, which based on the nearly 354m shares outstanding at the end of the last quarter reported amounts to over 3.5¢ per share (annualizing to over 14¢ per share). Profits of REITs must be distributed, so they don't generally boost assets much – and ACAS' management fee is based on assets under management, not profits. AGNC must avoid losses to protect its assets under management, but if management is as nimble in reacting to changes in the macro-environment as it has been in the past, the probability is against being stuck for a long time in a money-losing environment.
The dividend historically was paid based on BDC requirements. ACAS deliberately failed a RIC test so that its loss carryforward would not be lost (BDCs can't carry forward all the kinds of losses that C-corps can). ACAS at present has no dividend requirement. By the time ACAS has a taxable profit, I expect it'll arrange to pass RIC tests again. The question is, when will that be? Since the answer depends in part on when ACAS realizes gains and when it realizes losses, it's possible that management controls this much more than would be predicted based on projections based on the macro-environment. Essentially, I wonder what management's preference is, and whether management makes a priority out of any particular tax status. Without that knowledge, I don't think dividend timing projections will mean much.
I think the best place to mine for insight into the future of dividends may be the statements of management on quarterly calls. Still, developments since the time of the calls are likely to impact management's current thinking.
As the market is hit, ACAS' portfolio's comparables will be hit, and with it theoretically ACAS' NAV. This is an interesting time: ACAS announces another great quarter of NAV increase, and its share value is punished. Does the punishment fit the market, or is it excessive? We can't know until next quarter's announcements. Will NAV still move in the right direction? NOI?
ACAS will continue to be volatile. I still view its below-NAV pricing as a value opportunity. I think ACAS' solvency makes it appropriate to consider as a long-term investment, and long-term investments in things so diverse as to represent the broader economy are theoretically a bet on the broader economy itself. The question is, when is it appropriate to make big bets on the broader economy? Buffett has said that's what he's done, so his view is now public. For those of us with a shorter time frame, might we be better able to time entry? I certainly have very limited success timing buys and sells.
I'm much better at spotting long-term opportunity: Apple in 1998, for example. For most of the time from then on most of my assets were in Apple -- my best bet. But as volatile as that's been, there's as much opportunity to have lost money with bad timing as in ACAS. The reason I own much less now than I did was that I got bored with price stagnation during a plateau and lost shares to the exercise of covered calls when the shares started moving again. Heightening exposure to volatility risk might not be the best strategy for the long-term investor. Assuming the underlying thesis is good, the only safety may be adopting a Buffett-like investment horizon.
Best wishes!
Friday, September 2, 2011
ACAS: Nice Gain Selling Another Portfolio Company
Today, American Capital Ltd. announced the August 26 closing of the sale of its portfolio company VP Acquisition Holdings Inc. ("Value Plastics") for a quarter of a billion dollars. Because some of the company's equity was held in funds under management, ACAS' own proceeds received were $138m – for a recognized gain of $93m, subject to post-closing adjustments.
Value Plastics was founded in 1968; ACAS first invested in it in October of 2005 when it invested $89m in a recapitalization. Over the life of ACAS' investment, ACAS realized a compounded annual return of 29%. The proceeds received in the third quarter of 2011 were $33m greater than the FAS-157-compliant "fair value" reported at the close of the second quarter of 2011. This resulted in a realization of 31% greater proceeds than would have been projected from the prior-quarter valuation.
Although many of ACAS' portfolio company liquidations result in a realization that is within a few percent of prior-listed values, some of the portfolio can be marketed for significantly more. The inability of investors to divine which is which is a concern that bears some thinking. Assuming that management can tell the difference (else, above-valuation sale would not occur), this suggests a certain degree of upside surprise in connection with those portfolio companies that – for whatever reason – are not accurately valued using the methodology ACAS is obliged to apply to its portfolio.
This issue – whether ACAS' management has superior insight into the value of certain illiquid investments – is in play when considering ACAS' publicly-traded managed funds (e.g., AGNC and MTGE). Is ACAS able to buy below real value? Is it able to detect misvalued risks, and underpay for guaranteed loan packages? The fact that AGNC has mostly traded at a premium to NAV suggests that the market is placing a premium on ACAS' investment acumen. Whether MTGE's performance rates such a valuation has yet to be determined. If ACAS is using MTGE to purchase loan packages whose guarantors are not the U.S. government, it may be using perceived risk to obtain a "discount" to real risks it is able to assess through its experience with loan bundle performance.
Whatever the fate of MTGE may be, ACAS has demonstrated continued ability both to raise cash and to realize gains, both of which will be important to remaining atop its debt concerns and placing itself in a position to resume mandatory dividends based on taxable gains.
Value Plastics was founded in 1968; ACAS first invested in it in October of 2005 when it invested $89m in a recapitalization. Over the life of ACAS' investment, ACAS realized a compounded annual return of 29%. The proceeds received in the third quarter of 2011 were $33m greater than the FAS-157-compliant "fair value" reported at the close of the second quarter of 2011. This resulted in a realization of 31% greater proceeds than would have been projected from the prior-quarter valuation.
Although many of ACAS' portfolio company liquidations result in a realization that is within a few percent of prior-listed values, some of the portfolio can be marketed for significantly more. The inability of investors to divine which is which is a concern that bears some thinking. Assuming that management can tell the difference (else, above-valuation sale would not occur), this suggests a certain degree of upside surprise in connection with those portfolio companies that – for whatever reason – are not accurately valued using the methodology ACAS is obliged to apply to its portfolio.
This issue – whether ACAS' management has superior insight into the value of certain illiquid investments – is in play when considering ACAS' publicly-traded managed funds (e.g., AGNC and MTGE). Is ACAS able to buy below real value? Is it able to detect misvalued risks, and underpay for guaranteed loan packages? The fact that AGNC has mostly traded at a premium to NAV suggests that the market is placing a premium on ACAS' investment acumen. Whether MTGE's performance rates such a valuation has yet to be determined. If ACAS is using MTGE to purchase loan packages whose guarantors are not the U.S. government, it may be using perceived risk to obtain a "discount" to real risks it is able to assess through its experience with loan bundle performance.
Whatever the fate of MTGE may be, ACAS has demonstrated continued ability both to raise cash and to realize gains, both of which will be important to remaining atop its debt concerns and placing itself in a position to resume mandatory dividends based on taxable gains.
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