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Beaten down PMA Capital Corp. shares surged by more than 10% yesterday after the company announced it will sell its run-off operations and record an after-tax impairment loss of $40 million. The deal is expected to close by the end of the quarter (PR Release).
While the impairment charge is unwelcome and proves that the company’s run-off operations were not as ‘overcapitalized’ as management believed, the sale could nonetheless remove a great deal of uncertainty from the stock. Moreover, with short interest (as of Jan 31, 08) almost double what it was a year ago there is the possibility that a positive earnings release/call next week will push PMACA shares higher as many shorts simply give up.
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Question is, will the run-off sale, which is currently backed only be a ‘non-binding letter of intent with a third party’, go ahead as exactly as planned? Also, another question worth considering is exactly why does the company deserve a price/book ratio approaching 1 if their previous assumptions relating to run-off operations were seriously flawed and current operations, while positive, are not very attractive?
We see no reason to remove PMACA from the Wish List at this time. However, given that the ‘blow-up’ potential for the company could be reduced next week, it may be prudent to closely monitor the company’s stock price over the near-term, as well as revitalize the expected return profile for the company. Our original platform for investment was built around the idea that once the uncertainty relating to the company’s run-off operations was removed from the equation shares would trade higher. What we did not anticipate is the amount of balance sheet destruction and/or untimely stock repurchases that would be made before the run-off issue was resolved. In light of these events, our original target of $12/share is no longer in place. We await next weeks results.
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