Judy,
For anyone who didn't read the piece by Jonathan Mooreland (insidertrader.com) on PACC here it is. Read it over the weekend. We should all feel pretty good about buying into this gem before it has any analyst coverage.
Bye the way, Jonathan use to write for Individual Investor before venturing out on his own with his own web site.
Here is Jonathan's report:
Successful Pilgrimage
Over the past year-and-a-half, Pilgrim America Capital Corp. has remade itself--and made its shareholders a lot of money while doing so. The stock more than doubled in 1996, but more earnings growth and smart acquisitions could add another 30% to 80% capital appreciation in 1997.
Pilgrim manages over $2.1 billion in assets via two closed-end and six open-end funds. The stock of a money-management company is not the most obvious place to invest as the Dow sheds or gains 100 points daily and interest-rates seem set to rise. But both of these factors actually increase the attractiveness of Pilgrim's underfollowed shares.
One reason is that the majority of the company's assets under management, $1.3 billion, are in its Prime Rate Trust. This closed-end fund invests in the loan participations of banks, and acts as a kind of super-charged money-market investment that pays out more than the going short-term interest rate. Because it is a closed-end fund, there is no redemption risk should markets tank. And since the pay out of the fund is updated monthly to reflect changing interest rates, rising interest rates make Prime Rate Trust a more attractive investment. The indicated yield of the fund now stands at 8.2%, and the income generated is paid out monthly to investors.
The market's volatility makes a safe 8.2% return look pretty darn good, and people wanting to sit on the sidelines for a bit will be attracted to Prime Rate Trust and other short-term yield vehicles. But a volatile or falling equity market will also help Pilgrim expand its own small group of stock mutual funds.
"We're at an awkward size asset wise, and would like to get up to critical mass in the open-end fund side of the business," says Jim Reis, Pilgrim's CFO. "We want to buy equity funds with a track record, but at a decent price." That wasn't possible last year when the continuing bull market made every fund owner think they deserved the type of valuation Michael Price got for his outfit. But Pilgrim has noticed more flexibility from sellers since the Dow started to whipsaw. Says Mr. Reis: "After a couple more Dow corrections, I think it will be a bit easier to buy." Any purchase of another fund would likely be done with debt.
Pilgrim America's management has shown a knack for buying well, and actually purchased its way into the money-management business two years ago. In 1995, the company--then named Express America Holdings (Nasdaq: EXAM)--discontinued most of its mortgage-banking business, and bought two closed-end funds and three open-end funds from the Pilgrim Group. The Pilgrim Group was under some regulatory scrutiny at the time, and Express America was able to cherry pick the funds it wanted for a good price. Though a few investors were familiar with the troubles at the Pilgrim Group, the "Pilgrim" name was still well perceived in the marketplace. Express America decided to keep the moniker for the funds, but did stretch the names out to "Pilgrim America" to show that they were under a new umbrella. The actual managers of theses successful funds were kept.
Express America started its three open-end "Masters Series" equity funds to its family in at he end of 1995,and assets under management have grown 50% since then. Completing its makeover, Express America changed its name to Pilgrim America Capital Corporation on April 28, 1997. The new $40 million market cap company employs 14 portfolio managers, 19 sales and marketing people, and an administrative staff of 27.
Old Dog, New Tricks
Investing in this stock back in 1995 when the company was changing businesses would've taken a great leap of faith. It's not so obvious that mortgage bankers have what it takes to run a fund company. But Pilgrim's management has definitely proven that it knows how to make money in the money business. In its second quarter (ended March 31), Pilgrim earned $0.35 per share from operations compared to a loss of $0.13 per share a year earlier. Revenues, primarily management and administrative fees based on assets under management, were up 46% year-over-year to $5.1 million, and were the main spur to profits. Cutting costs also helped. Pilgrim's SG&A for the March quarter was $623,000 less than a year ago, and $89,000 less than just one quarter ago. Its operating margin now stands at 28.0% of revenues--excellent for a fund manager of Pilgrim's small size. The company is happy with this profitability, but continued cost controls should allow Pilgrim to increase this margin a little more if assets continue to increase.
Surprisingly, Pilgrim has been able to maintain a high level of service despite slashing costs. In a survey of smaller financial advisors by Dalbar, a Boston-based industry research firm, Pilgrim America ranked at or near the top of its class in the categories of overall marketing support, effectiveness of sales literature, and ease of doing business with the firm.
Pilgrim's balance sheet has a couple of lines that need explaining. The company's main asset is a $30 million entry termed "costs assigned to management contracts acquired." These are the rights the company purchased from the Pilgrim Group in 1995 to take ownership of the five funds, and can be seen as a type of "goodwill." The amortization of this intangible asset accounts for the relatively large "amortization & depreciation" expense on Pilgrim's income statement. (Remember that "depreciation & amortization" is an accounting gyration, and that no cash actually leaves the company. See a financial analysis text if you need more details.)
On the liability side of Pilgrim's balance sheet, an entry called "net liabilities of discontinued operations" will cause a furrowed brow. And rightly so. Most of the $3.7 million listed there is a reserve for a two-year-old lawsuit against Pilgrim, Smith Barney, and a few others by the Resolution Trust Company (RTC). Express America acquired its old mortgage banking business from the RTC in May 1991 through a competitive bidding process. On December 8, 1995, however, the RTC charged that there were "various irregularities in the bidding process and closing" of that acquisition. The lawsuit asks for $20 million in actual damages, and $60 million in punitive damages. After the RTC was dissolved on December 31, 1995, the Federal Deposit Insurance Corporation assumed responsibility for the case. Pilgrim's reserves are just a fraction of what the lawsuit asks for, but the company believes it is fully reserved given the precedent of RTC-related settlements. This litigation is obviously a risk, however.
Clusters, Clusters Everywhere
But Pilgrim's management has been more than willing to take the risk. Insider's have been steady buyers of their company's stock throughout its price rise. The latest purchases by management came from the chairman, CFO, and a director last February as the stock traded between $8.63 and $9.88. Altogether the three added 23,130 shares to their holdings. That buying cluster appeared on the 3/21/97 weekly summary of Form 4 purchases on InsiderTrader, but users should also have noticed buying clusters in January, and even last June. The company itself was a huge buyer of shares as well. Pilgrim bought back one million shares last September, shrinking the fully-diluted shares outstanding in its latest quarter by 20% to 3.9 million. Nearly 34% of Pilgrims shares are now closely held.
The kind of "averaging up" seen by Pilgrim America's insiders is uncommon, and a good indicator that a hot stock is still a good investment. It's important to remember, however, that such a signal does not indicate that you should blindly buy a stock. It is merely the "flashing light" that draws attention to a company. Due diligence must follow. You don't buy a stock just because insiders do, you buy a stock because it has great value in terms of its underlying assets, future earnings prospects, etc. Insiders are not a technical indicator, just a first screen.
Future earnings prospects and possible multiple expansion are what make Pilgrim America a good bet now. If its assets under management and operating margin just stay flat, the company would earn $1.30 per share in in fiscal 1997 (ending September 30.) Its stock trades at just 7.7 times that estimate, a heavy discount to the 13 to 18 forward multiple that other money-management companies garner.
The assumption that earnings stay flat is not realistic, however. Even though most of the cost cutting is past and the operating margin may not increase by much more, the company has steadily increased assets under management in each quarter it has been in the business. Pilgrim even purports to never having had a day when redemptions from its funds exceeded new investments. Continued marketing to broker/dealers, and another rights offering to its closed-end fund holders should keep assets under management on the rise.
InsiderTrader's 1997 target price range for PACC is $13 to $20. The bottom end of the range assumes fiscal 1997 earnings of $1.30 per share, and a trailing p/e of 10. The top range target assumes that management fees continue to increase marginally, expenses stay flat, and the stock is afforded a trailing p/e of 13 on the $1.52 earnings per share that would result. (Please note that estimates refer to "earnings from operations." Pilgrim had substantial one-time gains from tax benefits in the fourth quarter of 1996 and the second quarter of 1997 relating to its large tax-loss carryforwards.)
There is currently no Wall Street coverage of tiny PACC. But if Pilgrim continues to build its newfound business, it won't stay undiscovered for long. |
