Is American Capital a Risky Investment?

With shares of American Capital (NASDAQ:ACAS) trading at around $14.49, is ACAS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

After restructuring, American Capital is primarily focused on reducing risk and debt. This should be looked at as good news by investors. The returns might be more limited over the long haul, but capital preservation is always the number one priority. Savvy investors have no interest in being exposed to a company that’s at risk to fail during a severe economic slowdown. American Capital flirted with failure in late 2008, but she wasn’t interested. American Capital has since settled down and put itself on a more responsible path. Let’s take a look at some positives for American Capital:

  • Renewed revenue and EPS growth
  • Excellent valuation
  • Exceptional margins
  • Decreased operating expenses
  • Reduction in debt
  • Able to fund entire capital structure in middle-market transactions
  • History of buying back shares
  • Better-than-expected Q4 results
  • Efficiency likely to improve

However, it’s not all peaches and cream (or apple pie) for American Capital. The company itself seems to be making all the correct decisions, but it’s impossible to control the weather. In other words, the economic environment is unstable. While we might be flying high at the moment, is growth in an easy-money sustainable? Unfortunately, that’s unpredictable, but we do know that this recovery is not a natural one. Therefore, there might be considerable risks for American Capital down the road. The good news is that this firm has made excellent decisions to prepare itself for any type of environment.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Overall decision making has been excellent at American Capital, but what about individual decision making? Over two million shares have been sold by insiders over the past six months. It’s understood that insiders sell for many reasons, but this is a significant number, and there has been a lack of insider purchases. This might not be of significance, but it should at least be mentioned.

The chart below compares fundamentals for American Capital, Apollo Investment Corporation (NASDAQ:AINV), and Fortress Investment Group (NYSE:FIG). American Capital has a market cap of $4.40 billion, Apollo Investment has a market cap of $1.68 billion, and Fortress Investment Group has a market cap of $1.38 billion.

ACAS

AINV

FIG

Trailing   P/E

4.20

10.71

23.24

Forward   P/E

12.47

9.73

8.66

Profit   Margin

175.85%

46.87%

10.03%

ROE

22.74%

9.57%

19.20%

Operating   Cash Flow

$164.00 Million

$370.65 Million

$141.95 Million

Dividend   Yield

N/A

9.60%

3.80%

Short   Position

1.50%

2.80%

1.90%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong    

The debt-to-equity ratio for American Capital is stronger than the industry average of 0.50.

Debt-To-Equity

Cash

Long-Term Debt

ACAS

0.15

$341.60 Million

$812.70 Million

AINV

0.63

$43.69 Million

$1.04 Billion

FIG

0.12

$104.24 Million

$149.45 Million

 

T = Technicals on the Stock Chart Are Strong

American Capital has outperformed Apollo Investment and Fortress Investment Group over the past three years. However, American Capital is the only one that doesn’t offer any yield.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

1 Month

Year-To-Date

1 Year

3 Year

ACAS

3.50%

20.63%

67.05%

174.60%

AINV

-2.29%

1.45%

27.61%

-9.21%

FIG

0.43%

46.19%

87.33%

60.53%

 

At $14.49, American Capital is trading above all its averages.

50-Day   SMA

13.94

100-Day   SMA

13.04

200-Day   SMA

11.94

 

E = Earnings Have Been Improved               

Based on the numbers below, it looks as though restructuring has been successful.

2008

2009

2010

2011

2012

Revenue   ($)in   millions

1.05B

697.00

600.00

591.00

646.00

Diluted   EPS ($)

-15.29

-3.77

3.02

2.74

3.44

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and decline in earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

160.00

149.00

163.00

154.00

180.00

Diluted   EPS ($)

1.74

1.71

0.71

0.60

0.42

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Everything depends on the health of the credit markets. Credit looks good at the moment, but in this unpredictable economic environment, that has the potential to change quickly.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Conclusion

American Capital’s stock was smashed during the financial crisis of 2008/2009. This firm is in much better shape now, but if the market suffered another steep correction, the industry would still bring American Capital down with it. For now, American Capital is doing everything correctly. As long as the market holds, the stock should continue to rise. Therefore, American Capital is an OUTPERFORM. That said, anyone investing should strongly consider a trailing stop for protection.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.