Access Plans Inc (APNC) continues to chug along with solid results after reporting fiscal third quarter earnings this week. The stock remains substantially undervalued based on company financials despite worries about broader healthcare reform.

Sales Highlights

Company-wide revenue for the fiscal third quarter climbed 3% to $14.4m compared to the same quarter last year. Both the Wholesale Plans and Retail Plans divisions reported organic growth in revenue, increasing 15% and 9% respectively.

At the bottom line, net income in the period increased 10% to $0.95m compared to $0.86m a year earlier.

The company’s balance sheet has steadily improved as well. Current Ratio has increased from 0.9 to 1.4 over the past year. The company paid down all of its long-term debt and FCF for the year is the highest on record.

APNC also bought back approx. 8% of shares outstanding under the stock repurchase program, bringing the total number of shares down to 19.8m.

Business Segment Analysis

The revenue increase in Wholesale Plans was especially solid as margins also improved significantly, building upon the 14.5% revenue increase in APNC’s previous quarter.

Although profits declined in the other two divisions, the company has several new initiatives underway for achieving growth targets.

The Retail Plans segment is rolling out a new offering while phasing out legacy programs. Meanwhile, Insurance Marketing is focusing its strategy on combining supplemental and life products with major medical sales:

“We believe this new approach, which was prompted by certain aspects of the Healthcare Reform Act, should maintain commission income for agents, while improving the division’s operating margins. We are in the final stages of designing this new supplemental offering, and rollout is scheduled for the first quarter of Fiscal 2011.”

Uncertainly Around Health Care Reform

In the broader market, healthcare stocks are suffering after the passing of the ‘Health Care and Education Affordability Reconciliation Act of 2010’. According to Standard & Poors, Health Care is the second worst-performing sector YTD with a loss of 6.24%.

Although many of the new rules are yet to be implemented or even agreed upon, the market has shied away from companies whose business could be affected by the new reforms.

APNC – Health Insurance Company in Appearance Only?

Looking through the financials, company revenues are almost evenly split between Wholesale Plans, Retail Plans, and Insurance Marketing.

The Wholesale Plans division contributed 40% of total sales through the first nine months of 2010 and 51% of total operating profits – it is the most important division and wouldn’t be affected by the new law.

The Retail Plans segment offers ‘insurance-like’ services outside the scope of traditional healthcare insurance regulation. While there is some risk in this area – i.e. potential customers moving to a government-sponsored health insurance program instead of APNC’s products – I think there will always remain a market for alternative offerings.

On the other hand, the Insurance Marketing segment is the one area that will immediately be affected by the new law. According to the company’s filings,

“As a result of the minimum loss ratio requirement in the Health Care Reform Law, it is likely that commissions on the sale of individual major medical insurance policies will be reduced in January 2011 and, if that happens, it could result in a significant reduction in our revenue.”

However, it is important to note that the changes will only affect the commissions ultimately paid to agents – the company’s real risk is that fewer policies will be sold under the lower commission structure:

“Most of our commission revenue is ultimately paid to our agents so the potential reduction in revenue will not necessarily cause a reduction in our profitability in the same proportion. “

Conclusion

APNC continues to report solid performance, and has solid potential for growth in each division.

Although risk certainly remains (it is often hard to predict the outcome of governmental decisions on such a testy subject as healthcare), a good portion of the business seems to be insulated by its niche focus on wholesale plans and supplementary ‘insurance-like’ products.

As the debate rages on, there doesn’t appear to be any reason why APNC should be trading so low based on the financial numbers – substantial upside to the stock remains.

Disclosure

Long APNC

Access Plans, Inc (see initial writeup on APNC) reported solid second quarter results but the stock has been on a steady downtrend since the announcement.  With no news, this is the type of market volatility that investors must ignore and is a great time to pick up additional shares.

Overview

Overall, second quarter revenue increased by 128%, due primarily to the company’s acquisition of Access Plans USA in April 2009.  This acquisition significantly expanded the scope of APNC’s Retail Plans division and created an entirely new business segment – Insurance Marketing.

Division Breakdown

With three distinct segments, it is important to take a look at each individually:

The highlight of the earnings report was that the Wholesale Plans division contributed 15% organic growth and improved margins significantly across the board.  Representing 42% of the Company’s revenue, this division is the most mature of the business units.

On the Retail Plans side, the acquisition allowed the Company to almost double top-line revenue, but caused a slight hit to margins.  It will be important to keep an eye on these margin numbers to see if management can further streamline operations to return to pre-acquisition profitability.

The Insurance Marketing division runs a very tight ship, with average operating margins around 3% (1.35% for the 2nd quarter).  This division has no comparables available for 2009.  With the passage of the health care reform bill, the Company plans to transition their product mix towards association-based insurance products:

“…we are focusing our efforts on transitioning the Division’s mix from major medical insurance to emphasize more profitable supplemental insurance products.”

If there is a common theme among the business segments, it’s ‘associated-based’ products, so the Company should be comfortable making the transition.  If it occurs, the company should benefit from the higher margin offerings.

Other Financial Information

The Company has generated $2.12M in Owner’s Earnings during the first two quarters of the year, a 20% improvement over prior year numbers.  After paying off the final portion their $1M note payable, the Company has no long-term debt.   Tangible stockholder equity is positive and has steadily increased after several years with a negative balance.

Valuation

Based on the Company’s current stock price, the market is not pricing in any growth opportunity from the recent acquisition. With the most conservative estimates (0% growth, current owner’s earnings levels), APNC should be worth north of $1.70 per share.

Under modest growth assumptions, I calculate an intrinsic value between $2 and $2.50 per share.

Next quarter’s numbers will be the first to show relevant year-to-year comparisons on how APNC is shaping up as a combined entity.  I will be watching these numbers closely.

Disclosure

Long APNC

*Hat tip to OSV for the chart formatting.

To give some background on my investing decisions, I’ve included a sampling of my recent stock writeups:

CHDN / UBET – Churchill Downs & Youbet Merger – My first ‘special situation’ investment of the year, a merger arbitrage play. Still offering a 13% spread for a merger that will likely close in the next few weeks, although it has ran a bit the date I estimated for. Already received shareholder approval, both management teams are committed to making it work, and CHDN has sold off the necessary businesses – just need final approval from regulators.

TPCS – Techprecision Corp – A growth stock with potential that is too hard to ignore. Heavy dependence on the solar market. Stock took a huge hit after its largest customer, GT Solar, canceled a multi-million dollar order last year. Recent filings show the return of GT Solar’s business, and the company is trying to diversify and take advantage of other macro trends in medical devices and nuclear power. Cheap even if the other growth prospects don’t materialize. Value: $2 or more.

APNC – Access Plans, Inc – Went through a major acquisition last year that more than doubled the size of the company. Alternative insurance-like products in high demand as people lose their jobs and cancel traditional medical insurance. Market does not seem to be pricing in the potential of the combined entity. Insiders hold 71% of outstanding shares and have been buying more. Value is more than double the current price.

ITI – Iteris, Inc – Strong insider buying back in Feburary. Stock has dropped back after reporting tough Q4 results. Large NOL carryforwards, meaning the company won’t be paying income taxes for a long time. Upside potential once the heavy truck market picks back up and a very neat technology that has real potential. Value: $3 with upside north of $4.50

ADVC – Advant-e Corporation – Small software company with steady revenues throughout the recession. Management is paying out another $.02/share in dividends in 2010 – that’s an easy 12% return. Value: $.30

NOOF – New Frontier Media – Stock is down almost 20% from its March highs on no real news. Insiders were buying up stock at around this price back in late 2009. Large goodwill writedown in 2009 scared many investors away. Outstanding CROIC numbers >50% and very aggressive company repurchase program should drive help drive price upwards. Value: at least $4.

SPAN – Span-America Medical Systems – Company has been paying dividends for 82 consecutive quarters and just paid out a $1 special dividend, a great sign. Average CROIC of 26.5 over the past three years. Owner’s earnings of 5.2m in 2009 was the company’s highest ever despite slow sales during the recession. Value is $25+

ACU – Acme United Corporation – Maker of school supplies has been around since 1867. >5% ownership interest from two institutional investors and insiders hold 26.7% of outstanding stock. 2009 was rough but the company should bounce back and continue to deliver solid income and FCF.  Ultra conservative valuation of $13/share. Under normal growth scenarios, it should be trading between $17-$20.

Disclosure

*Long TPCS, APNC, ITI, ADVC, NOOF, SPAN, ACU, UBET. Short CHDN