Post of the Day
February 3, 1998
From our AOL Anchor Gaming Board
Subject: WHY ANCHOR DOESN'T BUY STOCK MORE AGGRESSIVELY
I believe that, for now, investors holding out hope for a major stock buyback will be dissapointed. True, the company is awash with cash, has no debt, and is trading at 15 times trailing and most likely 11 times forward EPS. And, yes, Anchor's pipeline of new games will probably help it achieve 25-30% EPS growth over the next several years. And, yes again, the company can leverage up and make highly accretive purchases at prices much higher than the currently pathetic price the company is trading at today.
So why doesn't management get more aggessive with its stock buyback? I believe management's lack of aggression has to do with concerns over spoiling its ability to do pooling transactions. I believe that if a company purchases 10% or more of its stock back in a 12-month period, it cannot do a pooling transaction for some defined period of time. With nearly a million shares bought over the past 12 months, Anchor is hitting against the 10% rule (I think there are about 14 million shares outstanding).
As most Fools know, a pooling transaction allows a company to do an all-stock purchase without triggering goodwill for the amount paid over book value. THis goodwill, in turn, would have to be amortized over a prescribed period, which in turn triggers an expense against earnings. The expense is non-cash, and has no affect on a company's economic (read: Real World) value, but many companies hate goodwill because it deflates reported earnings, which in the short run is what often affects stock prices.
But what of companies, such as Wells Fargo or Berkshire Hathaway, that manage their company with an eye toward building "intrinsic value." They will forego poolings, because they want to maintain their ability to buy stock back (pooling also impedes companies ability to sell certain assets, but I won't go into that). These are not bad companies, by the way.
So what does this have to do with Anchor? Well, their stock is cheap, they could grow EPS much faster if they bought it back, and yet they won't, all because (this is my opinion only, actually) they want to maintain their ability to do a pooling transaction. This is from a company that has never (to my knowledge, again) done a pooling in its corporate life!
There are only two conclusions one can draw here. First, either the company is very naive and underestimates the power of buying its own stock back when it's cheap. Second, the company is planning to do a pooling transaction that could involve a merger. THis is pure conjecture on my part, but this reluctance to preserve its right to do poolings, could point to a possible transaction up the road with its joint venture partner IGT.
Either way, Anchor's stock is clearly undervalued, and management should be more aggressive with its stock buyback. Just food for thought.