Last week, Access Plans (APNC) reported a 69% increase in first quarter 2011 earnings, with the market reacting very favorably to the news.

The company continues to show impressive growth in its core Wholesale Plans division, while investments in the Retail Plans division are finally starting the pay off, unlocking additional shareholder value.

Despite the rapid price increase, the stock remains undervalued as long as the company can sustain the new earnings power.

Financial Overview

Overall, net revenues were up 7% to $14.3m in the first quarter of 2011 compared to $13.3m in the same quarter last year.

Operating income jumped 53% to $2.5m, while net income surged to $1.5m, an increase of 69% compared to the first quarter of FY2010.

Diluted EPS came in at $0.08, an increase of 100% compared to the first quarter last year, and up 300% over the previous quarter’s results.

From a business segment perspective, the Wholesale Plans and Retail Plans division continue to turn in impressive results.

Wholesale Plans

Revenues within the Wholesale division increased 20% to $6.1m versus $5.1m in the prior period. The company added 49 new Rent-a-Center locations in Puerto Rico, which turned in better than expected results.

More importantly, gross margins improved significantly, which flowed down to help boost operating income by 156% to $1.8m for the quarter.

The margin improvement was partially explained by a reduction in the company’s involuntary unemployment waiver expense, which

“Assists members with their rental payments in the event that they are laid off, fired or lose their job due to a company strike or labor dispute.”

As the U.S. economy stabilizes and job cuts decline, margins in this segment should continue to be positively impacted.

Retail Plans

APNC has aggressively rolled out new programs in the Retail Plans division, with revenues increasing 18% to $4.6m versus $3.9m in the first quarter of FY2010.

In the third and fourth quarter of 2010, the company made significant investments in an inbound call center program for the Retail Plans – temporarily depressing earnings – a decision which is showing dividends going into the new fiscal year.

These positive results do not include the impact of APNC’s new Smart Solution Plus product, a roll-out on which management is very bullish.

The new product is approved in 22 states already, and could provide a nice boost towards operating profits throughout the rest of the year.

Insurance Marketing

The Insurance Marketing division remains profitable, but revenues have continued to decline due to negative effects of the Healthcare Reform Act.

Revenues decreased 7% to $5.1m versus $5.5m in the first quarter of FY2010, while operating profits dropped to $0.04m.

In the first quarter of 2010, two major carriers pulled out of the business, so this should be the last YoY comparison impacted by this change.

The company appears to be working hard to reposition the insurance division towards a mix of supplemental benefit offerings (more closely resembling the Retail Plans division).

Balance Sheet

APNC continues to stockpile cash, growing the cash balance to $8.5m, or $0.42/shr, offset by no debt.

Risks

With the recent price increase, the company is selling significantly above its current book value of $0.79 per share. APNC must keep up the current earnings level in order to justify such a premium.

In addition, the company is still embroiled in a lawsuit, Zermeno v Precis, Inc.

Under the case, the plaintiffs are arguing that APNC’s Care Entrée discount health program violates California law as it pertains to referring people to people to a physician, hospital, health-related facility, or dispensary for any form of medical care or treatment as part of a discount program.

On January 21, 2011, the Court ruled that the defendants must stop the program in California six months after the effective date. APNC has until March 25, 2011 to appeal.

According to the company,

“An adverse outcome in this case would have a material affect our financial condition and would limit our ability (and that of other healthcare discount programs) to do business in California.”

Lawsuits are notoriously unpredictable but it is certainly something to monitor.

Conclusion

The first calendar quarter is traditionally the slowest for the company, but results should be bolstered by a full quarter of sales for the Smart Solutions Plus program.

In addition, management still sees potential growth opportunities in the wholesale plans division, and continues to evaluate strategic alternatives (both a share buyback and possible dividend were mentioned on the conference call).

I trimmed some of my position in my personal portfolio, but will be holding on to the balance as I believe there remains significant upside in the stock, especially in a going private transaction or sale.

Management was bullish on the conference call, and it appears that a FY EPS of $0.30-$0.35 is not out of the question.

Despite the run-up, the stock still trades at 7.65 EV/EBIT and 10.26 EV/FCF.

A caller during the Q/A portion of the earnings call reiterated my thinking:

“You have a cheap stock here guys”

Management’s response:

“We think so as well.”

Disclosure

Long APNC.OB

In a very surprising move on the day of its 3rd quarter 2011 earnings release, AML Communications (AMLJ.OB) announced that it would be acquired by Anaren, Inc. (ANEN) for $2.15 in an all-cash transaction (press release link).

The deal is worth $29.3m and is expected to close by June 30, 2011. I’ve included an excerpt of the press release below:

Anaren, Inc. (Nasdaq:ANEN) and AML Communications, Inc. (OTCBB:AMLJ) today jointly announced the signing of a definitive merger agreement whereby Anaren, through a subsidiary, has agreed to acquire all of AML’s outstanding shares of common stock for $2.15 per share in an all-cash transaction, representing an equity value of approximately $29.3 million and an enterprise value of approximately $22.6 million.

And quotes from the respective management team:

Lawrence A. Sala, Chairman, President and CEO of Anaren said, “We are very pleased to have reached this agreement with AML and believe the acquisition is consistent with Anaren’s growth, profitability, and innovation strategies. AML’s leading microwave amplifier technology is an excellent fit for the Space & Defense Group’s strategy to expand its technology base in order to capture a broader array of subsystem opportunities at our defense OEM customers.”

Jacob Inbar, Chairman, President and CEO of AML said, “We are excited about joining the Anaren team and the many new business and technology opportunities we can jointly pursue as a result. Moreover, the transaction provides our shareholders a significant premium to the recent trading price of their common stock. Being part of a larger organization will offer new and exciting opportunities for our employees; and we are confident AML’s current customers will benefit from our combined broader technology portfolio and manufacturing capabilities made possible by the acquisition.”

3rd Quarter Earnings

Before examining the transaction, a quick note on the 3rd quarter earnings.

The company reported revenues of $4.06m, down 4% from $4.26m in the same quarter last year. Net income was $333k, translating into $0.03 EPS, down one penny from the $0.04 per share last year.

The company’s cash balance grew to $4.7m compared to $3.3m in the prior-year quarter, and up sequentially from $4.5m in the quarter before.

The conference call was surprisingly brief, but Inbar did mentioned that they are still ramping up for a large order which affected this quarter’s results.

Conclusions

However, with the buyout offer on the table, the earnings become less important for the common shareholder.

The company had originally hired C.K. Cooper & Co back in July of 2010 to evaluate strategic alternatives.

After reading the press releases and listening to management on the conference calls, I thought that the talks were mostly around AMLJ acquiring another company (a viewpoint which I believe was shared by most investors).

This was confirmed in the earnings call yesterday, with Inbar explaining that the company had signed several LOIs and had explored (and documented) a wide range of possible transactions.

Either way, the news was certainly a pleasant surprise!

The deal represents a significant premium over the recent trading price of the stock, falling within the valuation range in my original writeup on AMLJ.

Using the EV number from the press release and AMLJ’s most recent EBIT and FCF figures (ttm), I calculate an EV/EBIT and EV/FCF ratio of 12x and 13.5x respectively, which seems fair.

I’m closing out my position in AMLJ in the ValueUncovered portfolio based on yesterday’s closing price of $2.08, for a gain of 64%.

Disclosure

No positions.

Last week, NOOF reported earnings for the Q3 2011 fiscal quarter. Despite mixed results, the stock responded positively to the news, ending up 2.44% on the day.

The stock had run-up almost 17% leading up to the announcement, and the momentum has continued since then.

I think most of the bad news has already been priced into the current stock price.

Going forward, domestic results should continue to show signs of stabilization and the balance sheet should continue to beef up via margin improvement and cost savings from the upcoming move.

Financial Results

Revenues for the quarter jumped 23% to $14.2m from $11.5m in the same quarter last year. This is the first quarter in quite a while that has shown a measurable increase (last quarter’s results showed mostly flat revenue figures)

The majority of the increase was in the Film Production Segment, as the company completed one of its producer-for-hire arrangements. However, the increase in revenue was not without costs, as the company’s COGS increased by approx $3m, leading to much lower margins.

The segment did manage to return to profitability in the quarter, reporting an operating profit of $0.3m to draw almost break-even through the first 9 months of fiscal 2011.

The Transactional TV segment continues to stabilize, with revenues down 3% compared to the prior year quarter. NOOF’s international expansion is progressing in both the VOD and PPV channels and will continue to be the key source of growth.

Through the first 9 months of 2011, revenues were $37.8m compared to $35.3m in the same prior year period. International sales now make up 15% of total revenues compared to an 11% share last year, growing 51%.

Operating income through the first 9 months was $0.6m compared to $3.7m in 2010. The decrease was primarily due to an asset impairment charge of $0.6m, increased costs associated with the upcoming location move, and a shift in sales towards the lower margin segments.

The balance sheet remains rock solid, with $14.7m in cash and working capital of $21.3m. The company extended its $5m line of credit until Dec 2011.

Due to the large D&A expense, the company continues to generate solid FCF.

Conference Call

On the international expansion:

“Within this transactional TV segment, we continue to have success with our international expansion. We are now distributing content in over 28 countries”

“we are continuing to experience a growth trend within our international distribution, and are currently generating approximately $1.5 million per quarter from this international revenue.”

On the profitability of the Film Production segment:

“We’re focusing our efforts within this segment on the profitable components of the business, which has allowed us to take advantage of reducing the segment’s overhead and improve margins, which should become visible in fiscal 2012.”

On the upcoming location move and equipment upgrades:

“By executing our equipment upgrades to current with the relocation, we expect to realize cost savings and minimize the operating risk that goes with such major upgrades. We originally expected to begin construction in fiscal year 2012, but due to timing and additional cost saving opportunities, we are beginning the relocation in Q4 fiscal 2011.”

Conclusion

There is no doubt that the company has run into some problems outside of the main business segment, leading to the writedowns over the past 2 years. However, it looks like management is now focused on profitability headed into fiscal 2012.

(The financial statement notes also show that the co-Presidents of the Film Production segment were let go in September/October last year. Hopefully this means that the bad decision making and poor results are behind them)

Going forward, management is very bullish on the cost saving potential of the new facility. There are upfront costs for such a move, and the company expects to realize those costs in the next two quarters.

Combined with the heavy equipment investments (which were needed anyways), these costs will continue to depress profitability for the next two quarters but should pay off in the long-run.

This faith is reflected in continued institutional support, with Baker Street Capital continuing to buy up shares at a rapid pace.

Since disclosing an initial 6.3% position on Dec. 21, 2010, Baker’s recent 13D/A filing shows that the stake has grown to 7.9%, with almost 200k shares recently purchased north of $2.00.

Despite the recent run-up in price, the stock still trades at very low multiples (EV/EBIT – 4.01 or EV/FCF – 2.7 based on 5yr averages).

Disclosure

Long NOOF