Monday, February 18, 2008

* Stock Analysis: American Capital Strategies, Ltd. (ACAS)

Linked here is a PDF copy of my analysis of American Capital Strategies, Ltd. (ACAS) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: American Capital Strategies, Ltd. is a principal investment firm specializing in management and employee buyouts, recapitalization, special situations, middle market, and growth capital investments.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. ACAS is trading at a discount to 2.) and 4.) above. If I exclude the high and low valuation, and average the remaining two valuations, ACAS is trading at a 2.0% premium. ACAS gets a Star for being fair valued.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. ACAS earned Stars in 3.) and 4.) above.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. ACAS earned a Stars for 1.) and 2.) above. The NPV MMA Diff. of $129, 403 is astounding.

Other: As noted in ACAS's February 13, 2008 news release, the company is forecasting a 13% dividend increase in 2008. I used my D4L-PreScreen.xls model to run some sensitivities. By dropping the dividend growth rate to 0.5%, the NPV MMA Diff. decreased to $24,771, which is still quite robust. Using the company's projected dividend of $4.19 for 2008, the NPV MMA Diff. increased to a jaw-dropping $156,128.

Conclusion: ACAS earned one Star in the Fair Value section, two Stars in the Dividend Analytical Data section and two Stars in the Dividend Income vs. MMA section for a total of Five Stars which rates it as a 5-Star Strong Buy. In the near-term, I will continue to add to my position in ACAS.

Disclaimer: As always this is only my opinion and you should not rely on it. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I own shares of ACAS (2.5% of my Income Portfolio).

What are your thoughts on ACAS?

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