Acmat: Quality at a discount
ACMT is an insurer. They provide surety bonds to the construction industry, specifically focusing on the niche of contractors who cannot meet the surety requirements of the major insurer competitors.
That’s almost (not quite) a direct quote from their annual report. And it set some serious bells off in my head. So I went back and read some of the other reports. And, lo and behold, the CEO describes the business as a “franchise” in the 2010 report (and also details some of the barriers to entry).
Remember, Buffett first started building Berkshire by buying up highly profitable, niche insurers. And those of you who have read The Davis Dynasty (highly recommended) will recall Davis turned himself into probably the second richest investor on the planet exclusively through insurance stocks.
In others words- this is an industry that can create a lot of value. And ACMT has a nice toehold in it.
ACMT provides surety bonds. Providing surety bonds depends on construction, and as their CEO points out in the most recent letter, construction spending has taken a big dive since 2006.
Despite the dive, ACMT has remained profitable throughout the recession. The only loss they posted in the years I reviewed came in 2009, when they took a big charge for a non-cash impairment charge of their company owned headquarters. Adjusting for this loss, EPS bottomed out at ~$0.80 per share in 2011 and look to come in around their this year.
However, I believe these are trough earnings, as the surety bond business should improve at somepoint. In the CEO’s 2011 letter, he said he believes the market should firm up sometime between 2013-215.
And when it does, boy could this stock look cheap. In 2006, the company earned $2.30 per share. Compared to today’s price of $20.50 or so per share, and considering that represents peak earnings, it looks cheap but not terribly so.
However, the company has bought back a massive amount of shares since then. If you took 2006 earnings ($5m) and applied to today’s shares outstanding (1.35m), that would represent an EPS of $3.70 per share.
Then consider that the company has a massive, massive amount of excess liquidity. The company holds $79m in cash and investments versus $53m in total liabilities and annual revenue running at $7m or so. I’m no expert in the industry, and I know an insurance company needs to maintain a strong liquidity position to stay in business / in regulators good graces, but there’s no way this company doesn’t have a ton of excess dry powder.
The company seems to know it too- they’ve retired 100k shares, or about 7% of shares outstanding so far this year (they’ve actually bought back way more, but some was offset by options exercise). Buying back this many shares of an insurer with a moat / niche should create a good deal of shareholder value given their current discount to book value (0.7x).
As I said in yesterday’s post, the thing that turned me off the most about BOLL was management (though several readers immediately pointed out some accting red flags). Contrary to BOLL, what immediately turned me on to ACMT was mgmt quality. Again, check out their annual report. The CEO message is clean, concise, and crisp. And management has shown strong capital allocation skills by buying back tons of stock while it trades at a discount- shares outstanding have reduced from 2m to 1.35m over the past five years.
Ok, so now that I’m done fawning all over this company…. why haven’t I invested in them?
The answer’s simple: they’re cheap, and I like the management team. As I said with Big Lots (BIG), I’d much rather have my money in ACMT than any index.
But I’m not confined to exclusively an index. An ACMT doesn’t appear to be a screaming “buy of the century” type investment to me at these prices. It just looks like a nice value investment. So I’d rather keep my powder dry for something a bit more interesting.
However, just cause I’m not buying doesn’t mean I don’t think it’s interesting. If you think the company can earn an 8% ROE (completely reasonable) for the next five years and buy in at today’s price of 0.7x, you should be able to earn an annual return well above 10%. That’s pretty incredible for a “buy and forget” type investment, and you’d probably do even better if the company continues buying back shares at these prices or the construction cycle really firms up.
As a side note- you’d better be comfortable with a “buy and hold” type mentality if you do want into ACMT. The stock rarely trades (the repurchases were likely done in private transactions), so be comfortable putting in a limit order, waiting to get filled, and then going to an island while you wait for the cycle to turn and the market to recognize the value here.