Sunday, March 6, 2011
Libyan Tyrant Attracts Likeminded Fan Praise
Beleaguered Gaddafi, longstanding strongman of a state sponsor of international terror, is attracting supportive comments from other heads of state equally out of touch with the civilized world. The quotes can't be done justice; read them yourself.
On ACAS' Recent Reporting Period (Q42010 and full-year 2010)
American Capital Ltd. recently posted an improved quarterly result. Net Operating Income was up to $0.19 per share in 4Q2010, and net earnings reached $1.08 per share. Return on equity in the quarter was at an annualized rate of 44%. Not bad. Over the quarter, ACAS increased net asset value (NAV) by $1.12 (12%) to $10.71. Compared to a year ago, ACAS' NAV is up 29%. Remember a couple years ago when ACAS traded under a buck?
At its 25th anniversary, American Capital was able to look back on a pretty good year. ACAS' full-year 2010 result included over a billion in net earnings ($3.02/sh) reportable under the SEC rules. (The SEC-reportable income isn't the same as IRS-reportable income, which is what drives ACAS' dividend-paying obligation. One major difference is that under FAS 157, ACAS is required to call capital appreciation "income" which private investors are not required to do in their own portfolios, because the tax rules call for recognition of income on disposition rather than on change in value. This factor – the difference between earnings based on valuation change and earnings based on recognition at disposition – is likely to make SEC-reported income and taxable income rather different since ACAS' business is investments.)
Slide #10 of the investor presentation shows ACAS has continued to experience consistent (though "lumpy") liquidity. Some of the liquidity results from borrowers making repayments of obligations outside of ACAS' control, and some results from ACAS acting to dispose of a portfolio company. ACAS hasn't been trying to dump portfolio companies, but pursuing opportunities and consummating those that were good deals. The 2010 realizations may total $1.3B, but they don't represent ACAS bailing out of its equity investments: of the billion-plus in principal payments, $874m consists principal prepayments (e.g., principal returned on exit from entire investments in which ACAS held both debt and equity) and $36m resulted from scheduled principal amortization. $40m came back to ACAS from syndications and sales of debt. ACAS' equity sales of $266m aren't trivial, but that's not where ACAS seems to have been reclaiming cash. Slide #11 shows that ACAS has gotten for its investments what ACAS has reported the investments to be worth in its quarterly SEC filings. Slide 14 shows that ACAS' investment portfolio statistics haven't changed much with ACAS' realizations (i.e., ACAS isn't selling off its best investments and collecting dogs that will later bite investors; it's selling a fair cross-section of what it's got left). One thing that's worth noting is that as a percent of the fair value of ACAS' assets, equity has grown from 27% of the portfolio's value in 1Q2009 to 40% in 4Q2010, which may simply reflect that in 1Q2009 there was no market for the equity of illiquid portfolio companies and now there is.
Following the close of 2010, American Capital continued repaying debt, not satisfied to have hit its debt:equity target ratio of 0.6:1. Over the last 6 quarters, ROE has been 44% (so 4Q2010 wasn't a fluke). From ACAS' book-value nadir at the end of 2Q2009, debt repayments have exceeded $2.1B, book value is up $1.8B.
What's the future hold? ECAS alone offers $234M in further appreciation based on evaporation of internal discounts. Expected performance of debt currently bearing a FAS-157-compliant "fair value" below face value promises a further $237M in increases. Capital loss carryforward stood at $590M at the end of calendar 2010, protecting ACAS from future tax expense while that loss carryforward is eroded by future income. Loss carryforwards protect ACAS from tax expense this year or dividend obligation in 2012, so gross results and after-tax results will be the same and liquidity can be kept rather than drained in mandatory dividends. Management believes the reports that the economy is recovering, and offered Slide #6 to suggest an association between GDP and ACAS' net earnings. ACAS' pickiness in deal selection has paid off: despite the worst recession in decades, ACAS has over the last couple of years exited control companies at higher multiples than at the time of purchase (of course, if EBITDA sucks, a high multiple may not save price; the behavior of the market generally still matters ... still, having multiples go up over this period is quite a feat).
ACAS has continued to pay down debt following the close of the 2010 calendar year (to the tune of another $150M). This doesn't reduce ACAS' interest rate, as it's as low as its current debt facility permits. Debt retirement presently provides ACAS a risk-free 9% return while strengthening ACAS' balance sheet toward the ability to borrow at more favorable rates. ACAS' management made it very clear that it didn't think its existing cost of borrowing was attractive: ACAS prefers to borrow at AAA rates, and will repay debt to get there. Share buyback, by contrast, constitutes a leverage-increasing transaction that impairs liquidity without improving the balance sheet: don't expect share buyback soon. ACAS would rather improve its portfolio and balance sheet than shrink the company with share buybacks. Refinancing would occur following the expiration of the August, 2012, yield maintenance provisions of its current debt agreements. Prepayment is available without fees, however.
The recovery program at ACAS is being conducted in two phases: (1) growing book value, then (2) re-starting the dividend. While book can still be grown tax-free (due to loss carryforwards), current shareholders benefit. Dividend resumption will turn on taxable net income following complete erosion of the loss carryforward, and will when it appears will signify that ACAS has made enough money long enough that the government again wants it paying 90% of its taxable income. It will also put ACAS back on the map for income investors. If the dividend is attractive, income investors can be expected to bid ACAS back out of its discount-to-NAV share prices.
ACAS has gotten out of a few lines of business: (1) Credit opportunities, (2) early-stage technology investment, and (3) second-lien investing and trading. American Capital's financial services business hasn't been active, but management welcomes that business as it becomes available. ACAS continues to seek new investment opportunities.
ACAS has continued to increase its funds under management, reduce its operating expenses, improve its net income, and grow its asset value. The future promises more NAV discount evaporation within ACAS' investments, and when (after 2012) ACAS re-initiates its dividend (which will be required based on taxable income) its own NAV discount will be reduced by income investors seeking regular returns based on ACAS' trailing-year taxable income. Management is focused on near-term book-value-building enterprises based on sound financial theory rather than gimmicks designed to game per-share metrics.
I have only accumulated shares since the liquidity crisis in 2008, and I expect the shares to continue appreciating under the management that's helped ACAS to recover so well since the liquidity-related collapse in 2008-9. By the time ACAS resumes a dividend, I hope to have come up with some scheme to migrate those shares into an account in which the dividend – which I expect to become substantial once more – will be less painful than in a regular account. I don't think I'll manage to move it all, though ... ahh, well.
Paying taxes on a huge dividend isn't the most awful thing that ever happened at the Jaded Consumer :-)
At its 25th anniversary, American Capital was able to look back on a pretty good year. ACAS' full-year 2010 result included over a billion in net earnings ($3.02/sh) reportable under the SEC rules. (The SEC-reportable income isn't the same as IRS-reportable income, which is what drives ACAS' dividend-paying obligation. One major difference is that under FAS 157, ACAS is required to call capital appreciation "income" which private investors are not required to do in their own portfolios, because the tax rules call for recognition of income on disposition rather than on change in value. This factor – the difference between earnings based on valuation change and earnings based on recognition at disposition – is likely to make SEC-reported income and taxable income rather different since ACAS' business is investments.)
Slide #10 of the investor presentation shows ACAS has continued to experience consistent (though "lumpy") liquidity. Some of the liquidity results from borrowers making repayments of obligations outside of ACAS' control, and some results from ACAS acting to dispose of a portfolio company. ACAS hasn't been trying to dump portfolio companies, but pursuing opportunities and consummating those that were good deals. The 2010 realizations may total $1.3B, but they don't represent ACAS bailing out of its equity investments: of the billion-plus in principal payments, $874m consists principal prepayments (e.g., principal returned on exit from entire investments in which ACAS held both debt and equity) and $36m resulted from scheduled principal amortization. $40m came back to ACAS from syndications and sales of debt. ACAS' equity sales of $266m aren't trivial, but that's not where ACAS seems to have been reclaiming cash. Slide #11 shows that ACAS has gotten for its investments what ACAS has reported the investments to be worth in its quarterly SEC filings. Slide 14 shows that ACAS' investment portfolio statistics haven't changed much with ACAS' realizations (i.e., ACAS isn't selling off its best investments and collecting dogs that will later bite investors; it's selling a fair cross-section of what it's got left). One thing that's worth noting is that as a percent of the fair value of ACAS' assets, equity has grown from 27% of the portfolio's value in 1Q2009 to 40% in 4Q2010, which may simply reflect that in 1Q2009 there was no market for the equity of illiquid portfolio companies and now there is.
Following the close of 2010, American Capital continued repaying debt, not satisfied to have hit its debt:equity target ratio of 0.6:1. Over the last 6 quarters, ROE has been 44% (so 4Q2010 wasn't a fluke). From ACAS' book-value nadir at the end of 2Q2009, debt repayments have exceeded $2.1B, book value is up $1.8B.
What's the future hold? ECAS alone offers $234M in further appreciation based on evaporation of internal discounts. Expected performance of debt currently bearing a FAS-157-compliant "fair value" below face value promises a further $237M in increases. Capital loss carryforward stood at $590M at the end of calendar 2010, protecting ACAS from future tax expense while that loss carryforward is eroded by future income. Loss carryforwards protect ACAS from tax expense this year or dividend obligation in 2012, so gross results and after-tax results will be the same and liquidity can be kept rather than drained in mandatory dividends. Management believes the reports that the economy is recovering, and offered Slide #6 to suggest an association between GDP and ACAS' net earnings. ACAS' pickiness in deal selection has paid off: despite the worst recession in decades, ACAS has over the last couple of years exited control companies at higher multiples than at the time of purchase (of course, if EBITDA sucks, a high multiple may not save price; the behavior of the market generally still matters ... still, having multiples go up over this period is quite a feat).
ACAS has continued to pay down debt following the close of the 2010 calendar year (to the tune of another $150M). This doesn't reduce ACAS' interest rate, as it's as low as its current debt facility permits. Debt retirement presently provides ACAS a risk-free 9% return while strengthening ACAS' balance sheet toward the ability to borrow at more favorable rates. ACAS' management made it very clear that it didn't think its existing cost of borrowing was attractive: ACAS prefers to borrow at AAA rates, and will repay debt to get there. Share buyback, by contrast, constitutes a leverage-increasing transaction that impairs liquidity without improving the balance sheet: don't expect share buyback soon. ACAS would rather improve its portfolio and balance sheet than shrink the company with share buybacks. Refinancing would occur following the expiration of the August, 2012, yield maintenance provisions of its current debt agreements. Prepayment is available without fees, however.
The recovery program at ACAS is being conducted in two phases: (1) growing book value, then (2) re-starting the dividend. While book can still be grown tax-free (due to loss carryforwards), current shareholders benefit. Dividend resumption will turn on taxable net income following complete erosion of the loss carryforward, and will when it appears will signify that ACAS has made enough money long enough that the government again wants it paying 90% of its taxable income. It will also put ACAS back on the map for income investors. If the dividend is attractive, income investors can be expected to bid ACAS back out of its discount-to-NAV share prices.
ACAS has gotten out of a few lines of business: (1) Credit opportunities, (2) early-stage technology investment, and (3) second-lien investing and trading. American Capital's financial services business hasn't been active, but management welcomes that business as it becomes available. ACAS continues to seek new investment opportunities.
ACAS has continued to increase its funds under management, reduce its operating expenses, improve its net income, and grow its asset value. The future promises more NAV discount evaporation within ACAS' investments, and when (after 2012) ACAS re-initiates its dividend (which will be required based on taxable income) its own NAV discount will be reduced by income investors seeking regular returns based on ACAS' trailing-year taxable income. Management is focused on near-term book-value-building enterprises based on sound financial theory rather than gimmicks designed to game per-share metrics.
I have only accumulated shares since the liquidity crisis in 2008, and I expect the shares to continue appreciating under the management that's helped ACAS to recover so well since the liquidity-related collapse in 2008-9. By the time ACAS resumes a dividend, I hope to have come up with some scheme to migrate those shares into an account in which the dividend – which I expect to become substantial once more – will be less painful than in a regular account. I don't think I'll manage to move it all, though ... ahh, well.
Paying taxes on a huge dividend isn't the most awful thing that ever happened at the Jaded Consumer :-)
Sunday, February 6, 2011
Hollywood Mined for Chinese Propaganda
CNN posted a story about China getting caught faking video in a news broadcast about Chinese fighter pilots. The news compares the fake to the Iranian video fakes previously discussed here. The comparison is fair – the Jaded Consumer was thinking about it even before CNN drew the comparison.
There's something about despotic regimes' cheerleaders that seems to draw them to faked images and other distortions when illustrating their claims. Working hypothesis: they have no respect for the truth. Indeed, they may even have no respect for their own claims.
There's something about despotic regimes' cheerleaders that seems to draw them to faked images and other distortions when illustrating their claims. Working hypothesis: they have no respect for the truth. Indeed, they may even have no respect for their own claims.
Dell vs. WalMart: What "No Moat" Means
The Jaded Consumer published an article (republished a few days later on Seeking Alpha) a few years ago before the 2008 crash hit in September, and recently noticed that it had accumulated a series of comments. Seeking Alpha doesn't notify authors of comments, so the comments took some revisiting to notice. With the perspective of a few years, it's interesting to return and see how the post held up against the criticisms in the comments.
The most disagreeing commenter was Value Geek, who asserted on September 3, 2008, that Dell shared the kind of competitive moat that was enjoyed by WalMart:
First: check out the tale of the tape. Compare the performance of Dell and WalMart from early September 2008 through the present. Comparisons on Yahoo and Google are based on client-side tools that don't lend themselves to links. A static graph of September 2008 through January 2011 appears below:
Neither exactly boomed. Compare Apple, which has been described here as having a genuine and sustainable moat. Apple competes with Dell, and like it – but unlike WalMart – doesn't sell milk or eggs or anything people can't go years without buying:
But the difference between WalMart and Dell is significant. Dell is a commodity box maker in cutthroat competition with foreigners who can buy the same parts at the same prices and spend less money assembling them, assuming there's anyone interested in buying them. WalMart sells something that people need every month (soap, food, etc.) and has such buying power that it can get products for its shelves at prices few can touch; moreover, it has fequently negotiated payment terms that allow it to put off paying for the products until a month after WalMart has already sold the products. WalMart thus is in a position to make significant money on razor-thin margins by investing the float of retail prices prior to inventory payment. On WalMart's economics, it's actually possible to make a profit while selling below cost, because of float-period investment opportunity. Dell may have been a supply-chain pioneer, but it can't claim to sell a box before paying for the parts.
Of course, WalMart doesn't sell below cost. WalMart sells at what the market will bear, and is happy to use its buying power to put competitors out of business. For an example of this kind of large-volume purchasing at work as an economic weapon, look at Bruno's in Gulf Breeze, Florida. There used to be a grocery store there. That is, an open one. Publix moved in a mile away, and Bruno's promptly failed. When this kind of competition succeeds, the bigger player becomes the major supplier in an area and develops local moat by being the supplier against which would-be incoming competitors are reluctant to risk capital. WalMart thus has both a financial moat (preferential pricing based on scale) and a moat based on being the sole source (in many cases) for staples one can't get on the Internet: milk, meat, toothpaste when you are in a hurry, toothbrushes the day of a big date, deodorant Sunday before the start of the work week, notebook paper the day before class starts, sugar/vanilla/flour/etc. when you are having a baking emergency, a candy bar when you are jonesing for a sugar fix while shopping ... you get the idea.
Dell is none of that. If you need it today, you go to a local vendor – which Dell is not, unless perhaps you are in Austin, Texas. Dell sells a product people can go years without buying again. Dell is no more accessible than any other Internet or catalog vendor. Value Geek's last paragraph seems a confession of the expectation that Dell will continue to explore the commodity vendor niche:
A compelling investment has some distinguishing characteristic that cannot readily be appropriated by competitors: it has a moat. WalMart may have a moat in its outrageous buying power or global product procurement program, which sets is apart from stores trying to make $0.20 on a $2 bag of sugar. Well, that's a bad example: sugar is often sold below cost to get people in the door for the rest of their groceries, meaning that vendors risk losing a few dimes on the sugar to get your business for wine, wrapping paper, bread, butter, fresh chicken (or, God forbid, frozen dinners), and all the spices that make your cooking palatable. WalMart puts all this stuff on its shelves cheaper so that when it sells at cutthroat prices it makes a bigger profit, allowing it to choke down on prices until competitors turn blue and expire, at which point prices can be re-inflated to a level that's tolerable to the market but frightens off would-be competitors (who can make more money risking their capital elsewhere).
And Dell? Dell is in head-to-head competition with HP which can buy all the exact same components at the exact same prices, and uses the exact same shipping companies to give customers their purchases. Dell is also in competition with the likes of Acer, which doesn't even have to pay US-based management US-level management salaries, much less pay local workers US rates for anything. And Dell can't charge more for most of its machines if it expects to sell any. It's stuck in a commodity trap. Even if Michael Dell manages to keep Dell in the black, the prospects for outsize profits seem pretty dismal. Check out Dell and WalMart against Hewlett-Packard over the period we're reviewing:
HPQ may not be an Apple, but it's got some competitive advantages (high-margin enterprise software and consulting businesses) Dell hasn't got any start on emulating. Over the period, it has at least not lost money. Maybe Michael Dell's rescue will be successful and Dell's future will be more reliably competitive in its commodity niche.
But why bother risking money for a result like that? The rest of the market hasn't.
The most disagreeing commenter was Value Geek, who asserted on September 3, 2008, that Dell shared the kind of competitive moat that was enjoyed by WalMart:
Dell DOES have a moat, and its the same moat that Walmart has. Dell doesn't need to diversify into software or services, it just needs to maintain and increase its market share in PCs and laptops. Walmart was derided by analysts for years while it pursued the strategy of using razor-thin margins to build market share. Have you taken a look at Walmart's stock price recently?Hence, the title of this article – and the time frame for the comparison graphs. A description of what constitutes WalMart's "moat" and how Dell differs follows. (A note: the Jaded Consumer never endorsed WalMart and never owned any; the comparison was Value Geek's idea. According to the Associated Press, WalMart has had its own share of difficulty keeping customers and competing. The Jaded Consumer simply doesn't agree that (a) Dell had a substantial moat or that (b) any moat it did have was the same moat that made WalMart a success.)
First: check out the tale of the tape. Compare the performance of Dell and WalMart from early September 2008 through the present. Comparisons on Yahoo and Google are based on client-side tools that don't lend themselves to links. A static graph of September 2008 through January 2011 appears below:
Neither exactly boomed. Compare Apple, which has been described here as having a genuine and sustainable moat. Apple competes with Dell, and like it – but unlike WalMart – doesn't sell milk or eggs or anything people can't go years without buying:
But the difference between WalMart and Dell is significant. Dell is a commodity box maker in cutthroat competition with foreigners who can buy the same parts at the same prices and spend less money assembling them, assuming there's anyone interested in buying them. WalMart sells something that people need every month (soap, food, etc.) and has such buying power that it can get products for its shelves at prices few can touch; moreover, it has fequently negotiated payment terms that allow it to put off paying for the products until a month after WalMart has already sold the products. WalMart thus is in a position to make significant money on razor-thin margins by investing the float of retail prices prior to inventory payment. On WalMart's economics, it's actually possible to make a profit while selling below cost, because of float-period investment opportunity. Dell may have been a supply-chain pioneer, but it can't claim to sell a box before paying for the parts.
Of course, WalMart doesn't sell below cost. WalMart sells at what the market will bear, and is happy to use its buying power to put competitors out of business. For an example of this kind of large-volume purchasing at work as an economic weapon, look at Bruno's in Gulf Breeze, Florida. There used to be a grocery store there. That is, an open one. Publix moved in a mile away, and Bruno's promptly failed. When this kind of competition succeeds, the bigger player becomes the major supplier in an area and develops local moat by being the supplier against which would-be incoming competitors are reluctant to risk capital. WalMart thus has both a financial moat (preferential pricing based on scale) and a moat based on being the sole source (in many cases) for staples one can't get on the Internet: milk, meat, toothpaste when you are in a hurry, toothbrushes the day of a big date, deodorant Sunday before the start of the work week, notebook paper the day before class starts, sugar/vanilla/flour/etc. when you are having a baking emergency, a candy bar when you are jonesing for a sugar fix while shopping ... you get the idea.
Dell is none of that. If you need it today, you go to a local vendor – which Dell is not, unless perhaps you are in Austin, Texas. Dell sells a product people can go years without buying again. Dell is no more accessible than any other Internet or catalog vendor. Value Geek's last paragraph seems a confession of the expectation that Dell will continue to explore the commodity vendor niche:
In the past, Dell has imitated the Walmart strategy too aggressively, and has cut even essential expenditures like customer service and R&D, which resulted in a loss of market share. Michael Dell is in the midst of correcting these mistakes. I bet that 5 years from now, Dell will still be providing value computers to millions of customers around the globe at razor-thin margins, and will be making a decent profit doing so.The problem with hypothesizing "a decent profit" selling in volume "at razor-thin margins" is that investors aren't generally hoping to find a commodity vendor that can make "a decent profit" doing what a slew of competitors do, some of them much better and – due to advantages like lower labor costs or in-house software development – some of them do at a much higher profit. Why is Dell a compelling investment?
A compelling investment has some distinguishing characteristic that cannot readily be appropriated by competitors: it has a moat. WalMart may have a moat in its outrageous buying power or global product procurement program, which sets is apart from stores trying to make $0.20 on a $2 bag of sugar. Well, that's a bad example: sugar is often sold below cost to get people in the door for the rest of their groceries, meaning that vendors risk losing a few dimes on the sugar to get your business for wine, wrapping paper, bread, butter, fresh chicken (or, God forbid, frozen dinners), and all the spices that make your cooking palatable. WalMart puts all this stuff on its shelves cheaper so that when it sells at cutthroat prices it makes a bigger profit, allowing it to choke down on prices until competitors turn blue and expire, at which point prices can be re-inflated to a level that's tolerable to the market but frightens off would-be competitors (who can make more money risking their capital elsewhere).
And Dell? Dell is in head-to-head competition with HP which can buy all the exact same components at the exact same prices, and uses the exact same shipping companies to give customers their purchases. Dell is also in competition with the likes of Acer, which doesn't even have to pay US-based management US-level management salaries, much less pay local workers US rates for anything. And Dell can't charge more for most of its machines if it expects to sell any. It's stuck in a commodity trap. Even if Michael Dell manages to keep Dell in the black, the prospects for outsize profits seem pretty dismal. Check out Dell and WalMart against Hewlett-Packard over the period we're reviewing:
HPQ may not be an Apple, but it's got some competitive advantages (high-margin enterprise software and consulting businesses) Dell hasn't got any start on emulating. Over the period, it has at least not lost money. Maybe Michael Dell's rescue will be successful and Dell's future will be more reliably competitive in its commodity niche.
But why bother risking money for a result like that? The rest of the market hasn't.
Wednesday, February 2, 2011
ACAS Exits triVIN Above "Fair Value"
ACAS just announced the details of its sale for cash of its portfolio company triVIN Holdings, Inc. to DealerTrak Holdings. The exit netted ACAS $11m in realized gains and returned $72m of ACAS' capital for investment use. (Not just for ACAS: the results here are ACAS' fraction of an investment in which funds under management also participated. The aggregate proceeds received in Q1 from the transaction were $108m, including $19m of gain.)
Maybe "returned" is the wrong word here; ACAS never put $72m into the company. In fact, according to the immediately-prior 10-Q, the last FAS-157-compliant "Fair Value" ACAS was able to claim on the company was $56.8M. ACAS realized 41% more than that "fair value" – $15m more than the SEC's yardstick allowed ACAS to claim the thing was worth. In other words, FAS 157 had the investment pegged as a loser when it was, in fact, a winner.
Imagine that.
This isn't the first time ACAS has announced a result that suggests that FAS 157 understates its ability to generate results from investments. ACAS might do better to improve the transparency of exited investments' returns, as previously mentioned here. After all, if ACAS' list isn't updated regularly, people will suspect that it's because it's ashamed of those results.
Maybe "returned" is the wrong word here; ACAS never put $72m into the company. In fact, according to the immediately-prior 10-Q, the last FAS-157-compliant "Fair Value" ACAS was able to claim on the company was $56.8M. ACAS realized 41% more than that "fair value" – $15m more than the SEC's yardstick allowed ACAS to claim the thing was worth. In other words, FAS 157 had the investment pegged as a loser when it was, in fact, a winner.
Imagine that.
This isn't the first time ACAS has announced a result that suggests that FAS 157 understates its ability to generate results from investments. ACAS might do better to improve the transparency of exited investments' returns, as previously mentioned here. After all, if ACAS' list isn't updated regularly, people will suspect that it's because it's ashamed of those results.
Sunday, January 23, 2011
Competition Hurting AAPL?
With the advent of cell phones based on Google's Android, and the report that Android devices have sold like hotcakes, one wondered what this meant to Apple.
Far from resulting in pricing pressure and lowered profits, the new competition hasn't affected prices in an apparently negative way: since their launch Apple's average device's sales price has increased.
Apple's integrated hardware/software system has caused emulators some grief: Microsoft has advanced a challenge to Apple's "App Store" trademark as generic (this, from the holder of the "Windows" mark for interfaces that depict windows). The name of Microsoft's own software portal? "Marketplace". No, really. Does anyone think the name of these stores is really at the heart of their value to their owners? Who do they think they are fooling?
Discount manufacturers might not seem vulnerable to attack by Apple's high-margin line-up, but apparently Acer's sales have been clobbered by iPads.
I think the day I hoped for when I heard Apple had bought NeXT is upon us: we are finally seeing the Unix money I bought in to ride. Virtually everything Apple sells is a Unix tool (everything material outside music and some music players). 65% of Apple revenue may be iOS devices, but 85% comes from something running NeXT-derived Unix. The hardware is definitely slick, but as Apple repeats, the secret is in making everything all work together – and that's not just about the box, it's about the software performing as expected.
Apple's expected performance is to sell iPads in more and more countries while rolling out improved phones and computers, all in an era in which file-format lock-in means increasingly less to users, who are more accepting of Apple's brand. Even as competition pursues Apple in the marketplace, things are looking good.
Far from resulting in pricing pressure and lowered profits, the new competition hasn't affected prices in an apparently negative way: since their launch Apple's average device's sales price has increased.
Apple's integrated hardware/software system has caused emulators some grief: Microsoft has advanced a challenge to Apple's "App Store" trademark as generic (this, from the holder of the "Windows" mark for interfaces that depict windows). The name of Microsoft's own software portal? "Marketplace". No, really. Does anyone think the name of these stores is really at the heart of their value to their owners? Who do they think they are fooling?
Discount manufacturers might not seem vulnerable to attack by Apple's high-margin line-up, but apparently Acer's sales have been clobbered by iPads.
I think the day I hoped for when I heard Apple had bought NeXT is upon us: we are finally seeing the Unix money I bought in to ride. Virtually everything Apple sells is a Unix tool (everything material outside music and some music players). 65% of Apple revenue may be iOS devices, but 85% comes from something running NeXT-derived Unix. The hardware is definitely slick, but as Apple repeats, the secret is in making everything all work together – and that's not just about the box, it's about the software performing as expected.
Apple's expected performance is to sell iPads in more and more countries while rolling out improved phones and computers, all in an era in which file-format lock-in means increasingly less to users, who are more accepting of Apple's brand. Even as competition pursues Apple in the marketplace, things are looking good.
Friday, January 21, 2011
ACAS Raises Monthly AGNC-based Revenues
ACAS' ability to grow revenue has been evidenced a bit more with its pricing of more AGNC shares earlier this week. AGNC shares were priced at $28, which is a premium to its NAV (which is closer to $23). This drove down AGNC's price from above $29, at least momentarily. You can track it here to see how it plays out over the longer term, but earlier issuances in the lower $20s didn't hold prices down or dilute value: they were at or above NAV and were neutral to accretive.
What's this mean for ACAS? In the immediate term, it means that its client AGNC is set to increase its assets by a net of $625,000,000. Since AGNC pays ACAS 1.25% of its assets as an annual management fee, and pays in monthly installments, this means that ACAS' monthly income is set to increase by over $650,000 (almost $2m/q), and its annual revenue is heading up by $7.8m. Not bad, considering the revenue is likely obtained on the same investment analysis infrastructure, and involves primarily ramping up deal sizes in an existing stream of transactions in a marketplace for government-backed securities that is so liquid that AGNC is able to use derivatives to hedge risk, and use repurchase agreements to finance purchases. Considering that ACAS' 3Q2010 pre-tax NOI was $59m, little projects to increase revenues $2m a quarter without committing any additional capital are pretty nifty. At 341m shares outstanding at the end of Q32010, the ACAS income boost from this issuance amounts to over half a penny a share per quarter in earnings. (The total AGNC management fee is more, and AGNC also pays ACAS dividends on, if I recall, 2.5m shares; the 5.7¢ per share is the impact of just this newest-priced issuance.)
In the long term, this suggests that ACAS' business as an asset manager isn't dead. As the marketplace begins to value asset management better, ACAS' ability to create cash by growing asset pools it doesn't own and which don't create any capital risk to ACAS (other than its risk as an owner of a couple million dividend-paying shares) should make for more ACAS shareholder value. The major placement of ACAS' "funds under management" box on the Q32010 investor fact sheet suggests that ACAS' management is really trying to draw attention to this, too. AGNC may be a nice source of dividends, and covers several salaries at ACAS, but perhaps its true value is to advertise to the world what ACAS can do as an asset manager.
In theory, the AGNC deal signals something else: when ACAS' management is able to show stable dividends, its performance supports a NAV premium. That is, after the liquidity panic and once the markets had begun normalizing, ACAS has been able to issue AGNC shares at and above NAV and AGNC shares have traded at and above NAV. The ability to issue half a billion bucks' worth of shares – and to do so over $4 above NAV – isn't some mystical property of AGNC but is a result of the management team provided by ACAS. Give ACAS a year to be stuck with taxable net income (*sob*) and its BDC obligation to issue dividends of 90% or more of that income will place ACAS back on the radar of dividend stocks (though it'll take a little while for people to view the income stream as stable; cutting the dividend burned people who just earlier the year of the cut had heard management say it never planned issuing a dividend it would have to lower).
So, what dividend will ACAS pay? Hard to say. The NAV of ACAS by that time will likely be different, though how different is still speculative. The number of $0-valued assets that turn out to be valuable will not be infinite. And the recovery (however it happens to materialize) will impact portfolio company revenues, which all turn up on ACAS' consolidated balance sheet. It's still speculative, but consider that ECAS' listed value (the FAS-157-compliant value) on ACAS' SEC filings is about 5/8 of its NAV, and as the market conditions for ACAS' NAV discount evaporation occur so too will conditions affecting the "fair value" and thus NAV discount of ECAS. That's hundreds of millions in assets right there, subjected to a double NAV discount (once in ECAS, then once in ACAS). What return is likely? What value will be "fair" in a year and a half? There's a lot to consider in terms of upside, and the existing NAV discount offers some insurance – particularly in light of the current trend toward increasing NAV. Despite that ACAS has had a wild ride up from its trading price nadir of $0.59 per share, its current price north of $8 leaves it over a dollar is NAV discount.
ACAS' report for the 2010 calendar year will be interesting reading, as it will embrace results from an enormously changing set of circumstances: ACAS entered 2010 in default of all its debt (due not from missed interest payments but to net asset covenant breach) and paying (timely, mind you) default-rate interest on a ten-figure debt, while paying its attorneys and its lenders' attorneys to haggle over ACAS' debt restructuring while maintaining a credible threat of bankruptcy to ensure that negotiations went its way (at a cost of tens of millions of dollars) ... and it exited 2010 with a nine-figure debt that was not in default and which had been lowered in interest rate to the most favorable rate available under its refinanced debt agreements due to prepayments (while ditching its crazy bankruptcy-related and debt-renegotiation-related legal overhead). Looking at the difference between the entry and the exit of 2010 should be quite an eye-opener. The first quarter of 2011 will be the first chance to see a whole quarter of what are presumably "normal" results for the refinanced ACAS.
As long as NAV and NOI continue to trend in the right direction, ACAS' future is headed toward mandatory dividends and toward the re-attraction of those who invest for dividends. Increasing the demand for the shares is a significant part of shucking ACAS' NAV discount, so the dividend issuance, while a drain on cash, is actually a boon to share price. (It's also the price of ACAS' nearly-tax-exempt status.)
My take on ACAS hasn't changed much, just ACAS' position in its turnaround. My lack of posting isn't from lack of interest in ACAS, but from extreme busy-ness in my "real work" that now involves lots of time at a client's site solving problems that don't leave me with the time I once had to think about ACAS as a break from work. I expect continued improvement with ACAS, and I also expect continued improvement in my free time as I transition from my "old work" to the new tasks I'm currently undertaking for my new (4Q2010) client.
Which client may be in a position to offer me a regular job, which could be interesting. Buying health insurance as a self-employed person is an adventure not for the faint of heart.
What's this mean for ACAS? In the immediate term, it means that its client AGNC is set to increase its assets by a net of $625,000,000. Since AGNC pays ACAS 1.25% of its assets as an annual management fee, and pays in monthly installments, this means that ACAS' monthly income is set to increase by over $650,000 (almost $2m/q), and its annual revenue is heading up by $7.8m. Not bad, considering the revenue is likely obtained on the same investment analysis infrastructure, and involves primarily ramping up deal sizes in an existing stream of transactions in a marketplace for government-backed securities that is so liquid that AGNC is able to use derivatives to hedge risk, and use repurchase agreements to finance purchases. Considering that ACAS' 3Q2010 pre-tax NOI was $59m, little projects to increase revenues $2m a quarter without committing any additional capital are pretty nifty. At 341m shares outstanding at the end of Q32010, the ACAS income boost from this issuance amounts to over half a penny a share per quarter in earnings. (The total AGNC management fee is more, and AGNC also pays ACAS dividends on, if I recall, 2.5m shares; the 5.7¢ per share is the impact of just this newest-priced issuance.)
In the long term, this suggests that ACAS' business as an asset manager isn't dead. As the marketplace begins to value asset management better, ACAS' ability to create cash by growing asset pools it doesn't own and which don't create any capital risk to ACAS (other than its risk as an owner of a couple million dividend-paying shares) should make for more ACAS shareholder value. The major placement of ACAS' "funds under management" box on the Q32010 investor fact sheet suggests that ACAS' management is really trying to draw attention to this, too. AGNC may be a nice source of dividends, and covers several salaries at ACAS, but perhaps its true value is to advertise to the world what ACAS can do as an asset manager.
In theory, the AGNC deal signals something else: when ACAS' management is able to show stable dividends, its performance supports a NAV premium. That is, after the liquidity panic and once the markets had begun normalizing, ACAS has been able to issue AGNC shares at and above NAV and AGNC shares have traded at and above NAV. The ability to issue half a billion bucks' worth of shares – and to do so over $4 above NAV – isn't some mystical property of AGNC but is a result of the management team provided by ACAS. Give ACAS a year to be stuck with taxable net income (*sob*) and its BDC obligation to issue dividends of 90% or more of that income will place ACAS back on the radar of dividend stocks (though it'll take a little while for people to view the income stream as stable; cutting the dividend burned people who just earlier the year of the cut had heard management say it never planned issuing a dividend it would have to lower).
So, what dividend will ACAS pay? Hard to say. The NAV of ACAS by that time will likely be different, though how different is still speculative. The number of $0-valued assets that turn out to be valuable will not be infinite. And the recovery (however it happens to materialize) will impact portfolio company revenues, which all turn up on ACAS' consolidated balance sheet. It's still speculative, but consider that ECAS' listed value (the FAS-157-compliant value) on ACAS' SEC filings is about 5/8 of its NAV, and as the market conditions for ACAS' NAV discount evaporation occur so too will conditions affecting the "fair value" and thus NAV discount of ECAS. That's hundreds of millions in assets right there, subjected to a double NAV discount (once in ECAS, then once in ACAS). What return is likely? What value will be "fair" in a year and a half? There's a lot to consider in terms of upside, and the existing NAV discount offers some insurance – particularly in light of the current trend toward increasing NAV. Despite that ACAS has had a wild ride up from its trading price nadir of $0.59 per share, its current price north of $8 leaves it over a dollar is NAV discount.
ACAS' report for the 2010 calendar year will be interesting reading, as it will embrace results from an enormously changing set of circumstances: ACAS entered 2010 in default of all its debt (due not from missed interest payments but to net asset covenant breach) and paying (timely, mind you) default-rate interest on a ten-figure debt, while paying its attorneys and its lenders' attorneys to haggle over ACAS' debt restructuring while maintaining a credible threat of bankruptcy to ensure that negotiations went its way (at a cost of tens of millions of dollars) ... and it exited 2010 with a nine-figure debt that was not in default and which had been lowered in interest rate to the most favorable rate available under its refinanced debt agreements due to prepayments (while ditching its crazy bankruptcy-related and debt-renegotiation-related legal overhead). Looking at the difference between the entry and the exit of 2010 should be quite an eye-opener. The first quarter of 2011 will be the first chance to see a whole quarter of what are presumably "normal" results for the refinanced ACAS.
As long as NAV and NOI continue to trend in the right direction, ACAS' future is headed toward mandatory dividends and toward the re-attraction of those who invest for dividends. Increasing the demand for the shares is a significant part of shucking ACAS' NAV discount, so the dividend issuance, while a drain on cash, is actually a boon to share price. (It's also the price of ACAS' nearly-tax-exempt status.)
My take on ACAS hasn't changed much, just ACAS' position in its turnaround. My lack of posting isn't from lack of interest in ACAS, but from extreme busy-ness in my "real work" that now involves lots of time at a client's site solving problems that don't leave me with the time I once had to think about ACAS as a break from work. I expect continued improvement with ACAS, and I also expect continued improvement in my free time as I transition from my "old work" to the new tasks I'm currently undertaking for my new (4Q2010) client.
Which client may be in a position to offer me a regular job, which could be interesting. Buying health insurance as a self-employed person is an adventure not for the faint of heart.
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