AN is not necessarily as cheap as you think. I just took a quick peek at a recent 10-Q (for the quarter ended Mar-99 -- hmmm, shouldn't there be a more recent filing by now??)
Their market cap is about $4500M, their balance sheet book value (shareholders' equity) was $5400M in March, which gives the 0.83 P/B you suggest.
However this is a company that has grown through heavy acquisition, and their balance sheet shows it - $2800M of intangible assets. There's nothing necessarily wrong with what they have done (expand aggressively, paying large premiums in order to acquire new assets), however in order to be prudent one must at least examine what they have done and decide if you agree or disagree with their strategy, the amount of leverage they have employed, and the valuation they have attributed to the "intangible assets" they have acquired. IMHO one can treat intangible assets in one of two ways:
(1) re-value them to zero. In the event that the intangible assets actually have real value, then this would show up as the company being unusually profitable (very good ROE *and* ROIC *and* ROA). However one must include an accelerated (vs. GAAP) depreciation of the original intangibles, and this ought not to be schluffed off as a one-time charge.
(2) accept them as management states them, but insist that good returns (ROE ROIC and ROA) be earned on them.
If one removes the intangibles, you're left with a Tangible shareholders' equity of 5400-2800 = $2600M. Now the market cap of $4500M looks to be about 1.73X book -- it no longer looks like a "discount", now that the acquisition premiums have been backed out.
Their GAAP earnings are about $320M per year. I could perhaps be persuaded that their operating cash flow might be as high as $400M (though it is not easy to figure this from their financials). This would place their market cap at 4500/320 = 14X earnings or 4500/400 = 11.25X cash flow. Neither of these measures jumps out as particularly cheap, especially if you try to get a handle on how much leverage (debt) they use.
AN is also a company that seems to have a lot of debt on their balance sheet, but I found it hard to figure out though just exactly what should be fairly counted as long term debt capitalization. They show $977M of long term debt, plus $1853M of "Notes payable and current maturities of long-term debt", plus $2152M of "Revenue earning vehicle debt", plus $2615M of long term revenue earning vehicle debt. Depending on what you count as "debt" for the sake of determining total capitalization (==equity + debt), you could get a debt number as low as $977M or as high as $7597M. This would place their Debt/Equity ratio between 977/5400 = 0.18 and 7597/5400 = 1.40. If you look at Debt/Tangible Equity, the numbers are 977/2600 = 0.37 to 2.92X
One might argue that perhaps not all of the debt should be counted against them, however it does seem to me that they are employing financial leverage to at least a moderate extent, and if we accept that they are using a prudent amount we should at least expect that it is juicing up the ROE to exciting levels.
None of the numbers look particularly exciting. Unmodified ROE is 320/5400 = 5.9%. Return on Assets is 320/15168 = 2.1%. Return on Capital is (variously) 5.9%/(1.18..2.40) = 5.02% to 2.46%.
Return on Tangible equity is 320/2600 = 12.3%, which starts to look like a "real" business return, however one must also in all fairness charge off an increased amount of intangible depreciation against this figure, as well as acknowledge that they are leveraged to a certain extent too. The reality of it all is not as good as this 12.3% might suggest.
My take on AN at this point is that it is a business of mediocre profitability that seems to be selling at a premium to its replacement cost. I don't have a problem with buying a business which has mediocre profitability nor one that sells for a premium price -- I just don't think that one investment ought to combine these two features! ;-)
- Daniel |
