This is another update on recent news and results for some of my current stock holdings, following the theme from my post on first quarter results.

To be efficient, I’m once again going to combine several short blurbs into a single post.

Access Plans Inc (APNC)

APNC continues its amazing growth trajectory, recently reporting a 155% increase in fiscal second quarter earnings (which follows a 69% increase in Q1 earnings).

Quarterly revenue increased 5%, as solid gains in the Wholesale Plans (+12%) and Retail Plans (+4%) segments were partially offset by a decrease in the Insurance Marketing (-6%) segment.

The company benefited from a large decrease in direct costs, fueling the large jump in earnings.

Consider: In the first six months of the fiscal year, APNC has already earned more net profits than in all of 2010.

APNC is throwing off a ton of excess cash, with the net cash balance growing to $8.89m this quarter. Despite this rapid growth, the stock continues to trade at less than 5x TTM EV/EBIT and less than 8x EV/FCF.

As a continued vote of confidence, one of APNC’s largest shareholders, Russell Cleveland of Renn Capital Management, increased his stake by over 350k shares to 10.1%.

While there has been no news, the assumption is that the company is still exploring strategic options for unlocking shareholder value, including a going private transaction – I see this has a strong potential catalyst.

Iteris (ITI)

On a pure numbers basis, ITI is out of place when compared to the majority of my portfolio (which is focused on companies trading at a discount to assets, such as Fuji Oozx or IBAL).

ITI recently reported fiscal fourth quarter fiscals for 2011, with revenues up 4% as compared to the same quarter last year, primarily driven by the recent acquisition of Meridian Environmental Technology (MET).

The company continues to see strong growth in its product businesses, but revenues were held back by weakness in the Transportation Systems segment.

Operating income for the quarter was $0.67m, down from $1.19m last year, primarily due to increased sales and marketing expenses and costs associated with the MET acquisition.

For the fiscal year, the numbers are not great, with the company reporting an operating loss of $4.7m due a large impairment charge taken in the third quarter – backing out the impairment charge shows operating income roughly flat when compared YoY.

This impairment charge also has no effect on cash flow, as the company reported almost $5m in FCF. ITI’s cash balance now sits at $11.8m, offset by roughly $3m in debt.

Despite a history of losses, Iteris reported its fifth consecutive year of profitability, and has paid down over $11m in debt since 2007.

Iteris is probably considered more of a growth stock rather than a true value play, but it’s a name where I believe in the industry trends that back  the company’s technology.

Consider these points from the latest conference call and recent investor presentation:

• Expect Global Intelligent Transportation System (ITS) Device Market to reach $65b by 2015, up from $24B in 2010, growing 22% CAGR
• Road and other infrastructure spending projects usually project $1.50 back as return for each $1.00 invested – comparatively, spending on management infrastructure (in ITI’s sweet spot) usually sees a 7x or more return for each $1 invested
• Next Federal Highway Bill will provide a ‘shot in the arm’ for growth – expected to pass this year
• EU mandate for LDW in commercial trucks will start boosting sales in 2013 ; by 2015, expect 10-20x increase in demand

ITI management sounded very bullish on the latest conference call, with the CEO saying that he expects Iteris to do $100m in sales within the next 18 months!

The stock has struggled, but it’s hard to come up with a valuation less than $2/shr based on current metrics – if the growth materializes, the stock could appreciate significantly from current levels.

New Frontier Media (NOOF)

As opposed to ITI, NOOF violates my rule to avoid investing in business facing industry headwinds. NOOF is not in a great industry, and is therefore ignored by many in the investing world.

But at some point, even unloved stocks in bad industries are just too cheap to ignore.

NOOF reported $48.7m in revenue for fiscal 2011, down 3.4% from 2010, continuing the string of slow but steady declines going back to 2007.

After taking a string of impairment charges over the past few years, operating and net income have both been ugly, but appear to be trending in the right direction – net losses have improved from $5.2m in 2009 to $1.7m in 2010 to only $0.8m in 2011.

The company will likely see continued pressure in the domestic Transactional TV business (the main source of profits). Growth is manifesting nicely however in international markets, where sales have increased 64% YoY to $5.9m.

Despite the GAAP losses, the company has enjoyed positive operating and free cash flow going all the way back to 2004.

The cash pile just keeps growing, and NOOF now sits on $18.8m in cash offset by no debt.

Management made a number of strong moves during 2011, including consolidating facilities and investing in new storage equipment.

These measures caused capex to jump to over $5m during the year.

In 2012, the capex figure should drop significantly, as the business only requires a normal ongoing capex of $0.3m per year.

While the business may be in decline, it’s hard to see a future where NOOF disappears overnight – the business should continue to throw off cash for the medium-term.

At these prices, the stock is selling at a 45% discount to book value and only 2x FCF, for a FCF yield of almost 50%.

That’s just too cheap in my book, and I expect to see management return some of the excess cash to shareholders once the business stabilizes.

Disclosure

Long APNC, ITI, & NOOF

Last week, Access Plans (APNC) reported a 69% increase in first quarter 2011 earnings, with the market reacting very favorably to the news.

The company continues to show impressive growth in its core Wholesale Plans division, while investments in the Retail Plans division are finally starting the pay off, unlocking additional shareholder value.

Despite the rapid price increase, the stock remains undervalued as long as the company can sustain the new earnings power.

Financial Overview

Overall, net revenues were up 7% to $14.3m in the first quarter of 2011 compared to $13.3m in the same quarter last year.

Operating income jumped 53% to $2.5m, while net income surged to $1.5m, an increase of 69% compared to the first quarter of FY2010.

Diluted EPS came in at $0.08, an increase of 100% compared to the first quarter last year, and up 300% over the previous quarter’s results.

From a business segment perspective, the Wholesale Plans and Retail Plans division continue to turn in impressive results.

Wholesale Plans

Revenues within the Wholesale division increased 20% to $6.1m versus $5.1m in the prior period. The company added 49 new Rent-a-Center locations in Puerto Rico, which turned in better than expected results.

More importantly, gross margins improved significantly, which flowed down to help boost operating income by 156% to $1.8m for the quarter.

The margin improvement was partially explained by a reduction in the company’s involuntary unemployment waiver expense, which

“Assists members with their rental payments in the event that they are laid off, fired or lose their job due to a company strike or labor dispute.”

As the U.S. economy stabilizes and job cuts decline, margins in this segment should continue to be positively impacted.

Retail Plans

APNC has aggressively rolled out new programs in the Retail Plans division, with revenues increasing 18% to $4.6m versus $3.9m in the first quarter of FY2010.

In the third and fourth quarter of 2010, the company made significant investments in an inbound call center program for the Retail Plans – temporarily depressing earnings – a decision which is showing dividends going into the new fiscal year.

These positive results do not include the impact of APNC’s new Smart Solution Plus product, a roll-out on which management is very bullish.

The new product is approved in 22 states already, and could provide a nice boost towards operating profits throughout the rest of the year.

Insurance Marketing

The Insurance Marketing division remains profitable, but revenues have continued to decline due to negative effects of the Healthcare Reform Act.

Revenues decreased 7% to $5.1m versus $5.5m in the first quarter of FY2010, while operating profits dropped to $0.04m.

In the first quarter of 2010, two major carriers pulled out of the business, so this should be the last YoY comparison impacted by this change.

The company appears to be working hard to reposition the insurance division towards a mix of supplemental benefit offerings (more closely resembling the Retail Plans division).

Balance Sheet

APNC continues to stockpile cash, growing the cash balance to $8.5m, or $0.42/shr, offset by no debt.

Risks

With the recent price increase, the company is selling significantly above its current book value of $0.79 per share. APNC must keep up the current earnings level in order to justify such a premium.

In addition, the company is still embroiled in a lawsuit, Zermeno v Precis, Inc.

Under the case, the plaintiffs are arguing that APNC’s Care Entrée discount health program violates California law as it pertains to referring people to people to a physician, hospital, health-related facility, or dispensary for any form of medical care or treatment as part of a discount program.

On January 21, 2011, the Court ruled that the defendants must stop the program in California six months after the effective date. APNC has until March 25, 2011 to appeal.

According to the company,

“An adverse outcome in this case would have a material affect our financial condition and would limit our ability (and that of other healthcare discount programs) to do business in California.”

Lawsuits are notoriously unpredictable but it is certainly something to monitor.

Conclusion

The first calendar quarter is traditionally the slowest for the company, but results should be bolstered by a full quarter of sales for the Smart Solutions Plus program.

In addition, management still sees potential growth opportunities in the wholesale plans division, and continues to evaluate strategic alternatives (both a share buyback and possible dividend were mentioned on the conference call).

I trimmed some of my position in my personal portfolio, but will be holding on to the balance as I believe there remains significant upside in the stock, especially in a going private transaction or sale.

Management was bullish on the conference call, and it appears that a FY EPS of $0.30-$0.35 is not out of the question.

Despite the run-up, the stock still trades at 7.65 EV/EBIT and 10.26 EV/FCF.

A caller during the Q/A portion of the earnings call reiterated my thinking:

“You have a cheap stock here guys”

Management’s response:

“We think so as well.”

Disclosure

Long APNC.OB

Access Plans (APNC.OB) has been featured on Value Uncovered several times before (see here and here).

The company continues to put up record results and is on pace for its best year ever, yet the stock has languished below $1 for most of 2010.

Strategic Alternatives

Based on recent news, it appears that management agrees with my analysis.

On November 11, APNC announced that it will pursue a broad range of strategic alternatives to enhance shareholder value.

These alternatives include a possible going private transaction or raising money for future acquisitions.

For many micro-cap stocks, especially those quoted outside of the major exchanges, it is often difficult to rise above the crowd.

The market hasn’t responded to APNC’s latest acquisition, nor its growth prospects going forward, so it appears to be in the company’s best interests to strongly consider taking the company private.

The stock market has at least responded favorably to this news, as the stock is up over 12% in the past few days.

Research Report

On the heels of this strategic announcement, a research report was also published by RJ Falkner & Company, describing APNC as a “diamond in the rough” type of investment opportunity.

While the report is certainly biased (RJ Falkner is compensated for their services), I think it echoes a number of valid points that I have brought up before.

I have grouped together a few excerpts:

Efficient Operations

“Access Plans should require minimal capital to execute its business strategy, since it does not have to inventory products and services. This suggests that the Company should generate a significant and growing stream of “free” cash flow from operations that could be available for acquisitions, future cash dividends, and/or stock repurchases.”

Management is in the process of transitioning its new Insurance Marketing division (a very low margin business) to its more lucrative membership plan options, which should provide a significant boost to how much cash hits the bottom line.

“APNC now has an opportunity to increase sales of high-margin healthcare benefit programs through its national network of health insurance agents and through other non-affiliated health insurance agencies.”

And management has done it before with the Retail Plans division:

“This division has replicated many of the features that have allowed the Wholesale Plans Division to be highly successful in the rent-to-own industry in the development of plans for other retailers and direct marketing channels”

Macro Trends

The number of businesses offering health insurance coverage is shrinking:

“As the number of uninsured individuals has increased, the market potential for APNC’s non-insurance healthcare savings programs has expanded significantly.”

In addition, baby boomers are starting to retire, increasing the demand for healthcare services – and Medicare doesn’t cover everything:

“While the federal Medicare program covers a portion of healthcare expenses for senior Americans, gaps in coverage provide a significant market for APNC’s supplemental healthcare savings programs.”

Financials & Valuation

“For the year ended September 30, 2010, we expect the Company to report net income of over $3.0 million, or $0.15 per diluted share, on revenues of approximately $54 million, representing an after-tax return on beginning shareholders’ equity of approximately 26.2%.”

The company has paid down nearly all of its long-term debt, is buying back shares, and will likely have a record year in cash flow and profits.

“Based upon a generally accepted “rule of thumb” that growth stocks should command a P/E ratio of approximately 1X their earnings growth rate, we believe APNC shares should sell for at least 13X-15X earnings as the success of the Company’s business model becomes apparent to investors. Based upon our EPS estimate ($0.21-$0.22) for the upcoming fiscal year, this suggests the potential for capital appreciation of 215%-290% in APNC shares (to the $2.70-$3.30 area) over the next 12-18 months.”

While this forecast is very optimistic, my own estimates peg an intrinsic value of $1.70 under the most conservative estimates (no growth, current FCF levels), and a more likely valuation scenario of $2-$2.50.

Conclusion

As I’ve said in my previous write-up, investors seem to be concerned that the financial reform bill will negatively impact APNC ‘s operations – in truth, the net result is probably the opposite.

I’m encouraged to see that management is willing to explore options to reward existing shareholders.

It remains to be seen how the story plays out, but it appears that APNC’s future could yield substantial upside.

Disclosure

Long APNC. No affiliation with RJ Falkner & Company.