|Shares Out. (in M):
|Market Cap (in $M):
|Net Debt (in $M):
|TEV (in $M):
Sign up for free guest access to view investment idea with a 45 days delay.
Back out the $8/share in net cash and American Physicians Service Group stock is cheap at a trailing P/E of 10x. Better yet, it’s set to merge with a related company in a highly EPS accretive transaction, which makes the P/E drop to 5x.
For further background, you can check out a timely previous post from another member two years ago. I’ll first discuss AMPH as it looks today, and then talk about the implications of the pending merger.
THE COMPANY TODAY
AMPH is an extraordinarily profitable $49 million market cap company based in
APS Insurance is the manager of
APS Financial is a small, fixed-income focused securities brokerage firm. AMPH entered this business in the early 1980s, hoping to cross-sell investment services to its doctor client base, but that strategy never panned out, and APS Financial eventually shifted its attention to institutional clients, which remain its bread and butter today. It’s been quite profitable, with ROEs I’ve been told in the 20-25% range historically (the company doesn’t provide enough information for an outsider to confirm this). However, the vast majority of its revenues are from bond trading commissions, which have been somewhat weak the past year or so. With the environment only getting tougher, they’ve begun diversifying into asset management and investment banking, though both are still quite small. In 2005, APS Financial reported $18.5 million in revenues and $2.3 million in segment operating income.
The quick financial summary using
THE PROPOSED MERGER
AMPH is proposing to acquire APIE, the medmal insurer that it manages, for about $39 million, mostly in AMPH stock. The purchase price is 0.9x surplus.
The deal’s strategic rationale makes sense. AMPH has excess capital, while APIE is capital-constrained. AMPH’s CEO Ken Shifrin is a smart and aggressive entrepreneur, and is reluctant to re-invest the excess cash in businesses he doesn’t know as well. APIE, meanwhile, because of its unusual reciprocal exchange structure, can’t raise capital easily. This combination solves both problems in one stroke. There is absolutely no integration risk. Not a single thing will change operationally after the deal closes – the same people will run it in the same way it’s been run before. All the deal does is collapse the reciprocal/attorney-in-fact dual firm structure.
The highlight of the deal, though, is that the profit accretion is enormous, both near-term and longer term. AMPH will report somewhere around $1/share in earnings for the full year 2006. Pro forma of the APIE merger, that will be more like $3.30/share of earnings! Below are earnings before and pro forma the merger, excluding one-time gains.
2005 2006e 2007e
Net Income $3.5 mil $2.7 mil $2.4 mil
Shares Outst. 2.9 mil 2.9 mil 2.9 mil
The big pro forma accretion reflects the benefit of owning all of APIE’s profits, rather than just receiving a portion of it as a profit-sharing fee. Under the current agreement, AMPH receives 50% of APIE’s net income, but it’s capped as a percentage of APIE’s gross earned premiums. So in highly profitable years like 2005, 2006, and most likely 2007, AMPH caps out on the profit-sharing fee and misses out on the upside. The total annual revenue AMPH has received from APIE has been flat at $11 million since 2004, even though APIE’s net income has tripled in that span, because APIE’s earned premium revenue has been flat. In effect, AMPH has left multiple dollars of EPS on the table. This deal should double AMPH’s normalized nearing power over a full cycle from $0.80-1.00/share to $1.50-2.00/share.
There is one noteworthy negative to the deal for AMPH shareholders: AMPH will own an actual insurance company, so it’ll be exposed to all the capital needs and claims liabilities like any other insurer, nullifying its superb financial profile as an attorney-in-fact. So all else equal, one should pay a lot lower multiple for a dollar of earnings from the new AMPH than for a dollar of earnings from the old AMPH. However, this significant negative is offset, at least partially if not wholly, by three considerations: 1) APIE will have more flexibility and strategic opportunities to pursue growth, 2) the Texas medmal industry is structurally more favorable than in the past and AMPH will now reap the full benefits, and 3) the aforementioned financial accretion to AMPH shareholders.
The first two points are qualitative, but very important points. APIE, because of the reciprocal structure, can't raise capital easily, restricting its growth opportunities. For example, after an industry shakeout a few years ago in Texas medmal, pricing turned very favorable; while APIE benefited enormously, it couldn’t write as much business as it wanted to because it was capital-constrained. As an incorporated subsidiary of AMPH, the insurance company will now be able to transfer capital in and out a lot easier. The structural industry change is that
The shareholder vote on the merger is on March 22, and AMPH will release 4Q earnings right after the vote date. The stock popped on the merger announcement and has retained its gains, but I still don’t think that investors fully understand the accretion to current and long term earnings. As the merged company reports its earnings, the stepped-up earning power should become clear.
After the merger, AMPH will have about $5/share in cash and still no debt. It will have earned about $3.30 in 2006, or $2.40/share excluding favorable reserve development. So the pro forma trailing P/E, backing out the cash and favorable reserve development is 5.4x. Given current trends in medmal in
|show sort by
Are you sure you want to close this position American Physicians Service Gr?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Are you sure you want to Flag this idea American Physicians Service Gr for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You currently do not have message posting privilages, there are 1 way you can get the privilage.
Apply for or reactivate your full membership
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.
What is wrong with message, "".