Thursday, September 24, 2009

From The Mailbag: American Claims Evaluation

American Claims Evaluation (AMCE) is a small cap company that trades for just over half of its cash balance, even after subtracting its minimal liabilities. Apart from its low liquidity, which isn't a huge issue from the viewpoint of a value investor who 1) buys as if the markets will be closed for the next five years and, 2) purchases stock from the point of view of a buyer of a private business, there are still some risks the value investor should consider.

While the company has been around since 1982, it only recently (fall of 2008) divested its main business and purchased a new one. As a result, the company's main business has changed from one which provides rehabilitation services for injured workers (PPI claims etc) to one which provides services to children that suffer from slow development. As such, its previous operating results mean very little, which makes it very difficult to estimate its earnings power.

Furthermore, of the short operating history with the new business line that is available, the company does not show any profits. As a result, investors may be buying into a company that will burn cash in the years to come. To be fair, however, the red ink posted in the last few quarters pales in comparison to the company's cash balance mentioned above. However, management does not appear to have any plans to return that cash to shareholders. Instead, it is quite possible management will instead embark on an acquisition binge. Taken from the annual report:

A key feature of our growth strategy is strategic acquisitions...We have never paid a cash dividend and do not presently anticipate doing so in the foreseeable future, but expect to retain earnings, if any, for use in our business.

When the company trades at a 50% discount to its cash position, this strategy does not appear to be the sign of a management that is friendly to shareholders. While the company is clearly trading at a discount to its assets, the deployment of those assets in a shareholder-friendly manner does not appear forthcoming. As such, despite the discount, this stock does not appear to represent a value investment.

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