Wednesday, August 8, 2012 (ACOM) - Rumors of Private Equity Takeover Change Vol Term Structure

ACOM is trading $32.65, up 1.0% with IV30™ up 2.5%. The LIVEVOL® Pro Summary is below.


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------------------------------------------------------------------- Inc. (Ancestry) is an online family history resource, with approximately 1.7 million paying subscribers worldwide as of December 31, 2011. The Company’s subscribers use its Web-based services and content collection to research their family histories, build their family trees, collaborate with other subscribers, upload their own records and publish and share their stories.

This is a stock and vol note in a company that just released impressive earnings and may be looking to private equity firms for a buyout. The vol now demonstrates an interesting phenomenon where the front is elevated to the next earnings month in a firm that has a history of gapping off of earnings news. The stock came up on the real-time custom scan that hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Let's start with the Skew Tab, below

We can see a pretty skew with normal shapes across the front expiries and most notably, a vol diff that has opened up with a monotonic vol increase from the back to the front by expiry. It's that elevated front month vol relative to the second and third months that triggered the scan and caught my attention. But there's a lot going on with this firm. Let's turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see a bunch of gaps up and down over the last six months. Three of the most notable ones came in a reaction to earnings. I've highlighted the most recent earnings move, on 7-25-2012 (earnings were released 7-24-2012 AMC).

The one day move off of earnings was $27.23 to $31.42 or 15.4%. But even after that day, the stock moved higher, closing at $33.47 on 7-31-2012, or a total of 22.9% above the closing price the day of the earnings announcement. One great oddity here, ACOM is an internet company with positive net income. Yeah, the company makes money and has a P/E of ~22.

I've included a news snippet from the last earnings release which also focuses on the rumors of a private equity exit:

--- is back up on reports the company is shopping itself to a private equity firm. This move makes tons of sense, as there's a lot of potential in the company to continue to drive its tremendous subscription service and boost the all-important average revenue per user. So, looking at the first quarter, we see a 20% growth in subscriptions, which is not a big surprise. The company had pre-announced hitting 2 million subscribers, and this number might rise in the future.

Better yet, the test of a great subscription model is being able to test out new strategies, and I did like seeing that Ancestry has increased subscriber lifetime value 10% with some longer-term packaging. The company mentioned 27% of subscriptions are month-to-month, while that number was 33% a year ago. The 52 wk range in stock price is [$20.67, $36.56], so it's nearing an annual high.

The company launched its DNA initiative in May, which is still in the testing stage. Eric thinks either that, or another high-end service like it, could be huge for the company both in terms of retention and possibly opening up higher-end subscriptions.

Finally, the company continued to grow international revenue faster than U.S. revenue [...]

Source: The Motely Fool via Yahoo! Finance; Rocks Earnings; Bigger Gains Ahead?, written by Eric Bleeker.

On the vol side we can see the drop in the implied off of earnings (which is normal), and a slow trend back up of late. In fact, as I'm writing this, IV30™ is up 6.4% to 56.09% as the stock continues to rise -- now at $32.89. The 52 wk range in IV30™ is [40.47%, 91.50%], putting the current level in the 30th percentile. In English, while the vol has risen a bit after earnings, it's still low relative to the firm's annual history (again, that's normal after earnings).

Finally, let's look to the Options Tab (below).

We can see the monthly vols are priced to 59.81%, 50.10% and 42.33% for Aug, Sep and Nov, respectively. With the next earnings release due out in late Oct, it seems as though the private equity rumor / news is keeping the front month elevated relative to the back months (in particular relative to Nov). Again, it's certainly interesting that Aug vol is nearly 50% higher than Nov which has earnings in a company that has a history of gapping off of earnings releases. Hmm....

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