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

In a very surprising move on the day of its 3rd quarter 2011 earnings release, AML Communications (AMLJ.OB) announced that it would be acquired by Anaren, Inc. (ANEN) for $2.15 in an all-cash transaction (press release link).

The deal is worth $29.3m and is expected to close by June 30, 2011. I’ve included an excerpt of the press release below:

Anaren, Inc. (Nasdaq:ANEN) and AML Communications, Inc. (OTCBB:AMLJ) today jointly announced the signing of a definitive merger agreement whereby Anaren, through a subsidiary, has agreed to acquire all of AML’s outstanding shares of common stock for $2.15 per share in an all-cash transaction, representing an equity value of approximately $29.3 million and an enterprise value of approximately $22.6 million.

And quotes from the respective management team:

Lawrence A. Sala, Chairman, President and CEO of Anaren said, “We are very pleased to have reached this agreement with AML and believe the acquisition is consistent with Anaren’s growth, profitability, and innovation strategies. AML’s leading microwave amplifier technology is an excellent fit for the Space & Defense Group’s strategy to expand its technology base in order to capture a broader array of subsystem opportunities at our defense OEM customers.”

Jacob Inbar, Chairman, President and CEO of AML said, “We are excited about joining the Anaren team and the many new business and technology opportunities we can jointly pursue as a result. Moreover, the transaction provides our shareholders a significant premium to the recent trading price of their common stock. Being part of a larger organization will offer new and exciting opportunities for our employees; and we are confident AML’s current customers will benefit from our combined broader technology portfolio and manufacturing capabilities made possible by the acquisition.”

3rd Quarter Earnings

Before examining the transaction, a quick note on the 3rd quarter earnings.

The company reported revenues of $4.06m, down 4% from $4.26m in the same quarter last year. Net income was $333k, translating into $0.03 EPS, down one penny from the $0.04 per share last year.

The company’s cash balance grew to $4.7m compared to $3.3m in the prior-year quarter, and up sequentially from $4.5m in the quarter before.

The conference call was surprisingly brief, but Inbar did mentioned that they are still ramping up for a large order which affected this quarter’s results.

Conclusions

However, with the buyout offer on the table, the earnings become less important for the common shareholder.

The company had originally hired C.K. Cooper & Co back in July of 2010 to evaluate strategic alternatives.

After reading the press releases and listening to management on the conference calls, I thought that the talks were mostly around AMLJ acquiring another company (a viewpoint which I believe was shared by most investors).

This was confirmed in the earnings call yesterday, with Inbar explaining that the company had signed several LOIs and had explored (and documented) a wide range of possible transactions.

Either way, the news was certainly a pleasant surprise!

The deal represents a significant premium over the recent trading price of the stock, falling within the valuation range in my original writeup on AMLJ.

Using the EV number from the press release and AMLJ’s most recent EBIT and FCF figures (ttm), I calculate an EV/EBIT and EV/FCF ratio of 12x and 13.5x respectively, which seems fair.

I’m closing out my position in AMLJ in the ValueUncovered portfolio based on yesterday’s closing price of $2.08, for a gain of 64%.

Disclosure

No positions.

As usual, a few of the best value investing links from the past two weeks:

Noble Corp. (NE)

Thesis Overview. When the Deepwater Horizon disaster occurred back in April of last year, the stock prices of BP and RIG were obviously hit very hard.

Other offshore drillers in the industry were affected as well, whether or not they had exposure to the GoM. It was a classic case of an extreme event that provided a buying opportunity for value investors.

Rational Walk does a great job of describing the evolution of his investment thesis in NE.

Since the buying opportunity back in May/June, the business has went through several major changes including a large acquisition and near-term industry headwinds that caused a re-examination of the thesis (and eventual sale).

Apex Minerals (AXM:Australia)

Thesis Overview. One of the best blogs for reading about obscure stocks all over the globe, AdventuresInCapitalism does a good job of explaining his sale rationale for a small miner in Australia. The original investment thesis showcases some very detailed due diligence, and the thesis seems to have played out along the proposed lines.

However, the company announced a rights offering at only one penny, which would cause significant dilution for existing shareholders unless they participate.

Mining is a very tough business (both to operate and to invest).

Netflix (NFLX)

Thesis Overview. Netflix has been one of the most popular stocks in our weekend values series, due to the fascinating amount of research and back and forth among management, long investors, and hedge fund managers.

Throughout the back and forth, the stock has kept rising, causing a painful situation for many of the shorts.

Whitney Tilson, the famous hedge fund manager, posted his rationale for closing out his short position. Overall, I think the entire saga shows the danger of valuation-based shorts.

C-Com Satellite Systems (CMI.V)

Long Thesis. C-Com is a satellite broadband company trading on the Toronto Stock Exchange. The company went public in 2000 and has been profitable since 2005, earning very high returns on capital.

The company is trading around 25% higher than book value, with EV/EBITDA of 2.8x and EV/FCF of 4x, both extremely cheap. Even better, the stock has $0.17 in net cash on the balance sheet. Insiders own approx. 35% of shares outstanding.

However, as pointed out in the article, technology can change extremely quickly and obsolescence is a big risk. Investor relations are also less-than friendly.

Macquarie Infrastructure Company (MIC)

Long Thesis. Macquarie is a holding company with a diverse set of operating businesses with high barriers to entry. The holding company is highly leveraged, but enjoys a FCF yield of 13%.

Part of the company’s covenant agreement limits the amount of cash flow that can be returned to shareholders. As operating results continue to improve, Macquarie will be able to pay out significantly more in dividends, potentially starting in the 1H of 2011.

Using a sum of parts valuation, the current share price reflects the valuation of only one of the operating businesses (IMTT), potentially throwing in the other 3 significant business units for free.

It is a complicated but well laid out thesis.

Suggestions

If you have links or suggestions to detailed analysis from other value investors, please drop me a line using the Contact Form.

I’m always open to ideas from other investors, especially for a thoughtful and well-researched investment articles.

Disclosure

No positions.