Is American Capital a Risky Investment?

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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.

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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.

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