UPDATE: J.P. Morgan Reiterates Overweight Rating, Raises PT on American Capital

In a report published Monday, J.P. Morgan & Co. reiterated its Overweight rating on American Capital ACAS, and raised its price target from $12.00 to $14.00. J.P. Morgan noted, “We are reiterating our Overweight rating on ACAS and establish a December 2013 price target of $14 (replaces prior December 2012 price target of $12). We project price appreciation to be driven by both multiple expansion (0.84x from current 0.8x) and NAV accretion ($16.67 from $14.92 in 2Q). Because ACAS does not pay a dividend, we use a forward NAV multiple to value the company. We exclude deferred tax assets in our price target calculation to focus our valuation on tangible assets. While ACAS has historically traded at an average 1.1x NAV, this multiple incorporates a pre-crisis (through Q408) average 1.4x NAV and post-crisis average 0.5x NAV. Given our thesis of steady NAV accretion through 2013, we believe a 0.84x multiple is reasonable. ACAS currently trades at 0.8x, representing a 30% rise from an average 0.6x NAV over 2Q12 (excluding DTA). Our multiple reflects the turnaround nature of investing in ACAS where earnings are predominantly generated through discount accretion. Earnings growth is driven by the unwinding of the discounts in the portfolio as debt is repaid.” American Capital closed on Friday at $11.82.