American Capital Lags Estimates - Analyst Blog

American Capital Ltd’s (ACAS) second quarter operating income of 9 cents per share had fallen short of the Zacks Consensus Estimate by 5 cents. The results were negatively affected due to a rise in debt refinancing costs. Last year, the results were in line with the earnings.

 

Total interest and dividend income for the quarter was $138 million, up 9% from $127 million in the prior-year quarter. The increase in interest and dividend income resulted from a 40 basis point spike in the weighted average effective interest rate on debt investments from December 31, 2009. Total asset management and other fee income for the quarter was $13 million.

 

Total operating income in the second quarter of 2010 was $151 million, up 8.0% from $140 million in the prior-year quarter, attributed to higher interest and dividend income. However, operating income was below the Zacks Consensus Estimate of $162 million.

 

Operating expenses decreased 7% year over year to $122 million, attributing to the decline in interest expenses, general and administrative expenses and salaries, benefits and stock-based compensation expenses, partially offset by increased debt refinancing costs. Net realized investment loss was $291 million for the quarter, compared with a loss of $306 million in the prior-year quarter.

 

As of June 30, 2010, non-accrual loans were $308 million representing 8.5% of total loans at fair value, up from $263 million of non-accrual loans representing 7.0% of total loans at fair value as of March 31, 2010.

 

Net asset value increased 10% to $9.15 per share as of June 30, 2010 from $8.29 per share in the prior-year period. The return on equity in the reported quarter was 27% since the year-ago quarter. Strong book value growth is expected to continue in the upcoming quarters once the economy recovers.

 

In the latest quarter, $351 million of proceeds were received from realizations of portfolio investment repayments and exits. There was $52 million in new committed investments in the quarter.

 

The company’s leadership in providing broad-based financing for the U.S.-domiciled middle market companies, strategic focus on internal growth and one-stop shop strategy set it apart from other middle market lenders. Its successful investment history and well-developed investment infrastructure provides it with unique growth opportunities and financial flexibility in various market conditions. It is expected that American Capital will focus on new investments in the upcoming quarters based on improved performance in the portfolio.

 

The closest competitors of American Capital, Ares Capital Corporation (ARCC), Fortress Investment Group LLC (FIG), and MCG Capital Corporation (MCGC) are scheduled to release their earnings for the second quarter of 2010 on August 5.

 

American Capital currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we are maintaining a Neutral recommendation on the stock.