On Jun 14, 2013, we downgraded our long-term recommendation on
American Capital, Ltd.
) to Neutral from Outperform. This was based on the company's
first-quarter 2013 operating earnings, which lagged the Zacks
AMER CAP LTD (ACAS): Free Stock Analysis
GLADSTONE INVES (GAIN): Free Stock Analysis
ICG GROUP INC (ICGE): Free Stock Analysis
MCG CAPITAL (MCGC): Free Stock Analysis
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Why the Downgrade?
American Capital's declining top line remains a cause of concern.
The company's operating revenues are heavily skewed toward
interest and dividend income, which constitutes almost 92% of the
total operating revenue. With the recovery in interest rates
appearing bleak in the near term, we expect the company's top
line to remain under pressure.
Further, over the past 60 days, estimates have been declining.
The Zacks Consensus Estimate for 2013 fell by 11.3% to $1.02 per
share. The Zacks Consensus Estimate for 2014 also declined by
7.2% to $1.16 per share. American Capital currently carries a
Zacks Rank #3 (Hold).
Other Areas of Concern
American Capital was significantly impacted by the global
financial crisis, which limited the company's access to the debt
and equity capital markets. The market disruption and liquidity
crisis also dramatically reduced the volume of mergers and
acquisitions in the market, thereby affecting the company's
ability to continue generating additional liquidity.
Additionally, a persistent low interest rate environment can
adversely affect American Capital's growth. Moreover, American
Capital has investments in privately-held, middle-market
businesses that are more susceptible to general market declines,
resulting from narrower product lines, smaller market shares, and
highly-leveraged capital structures.
Stocks to Consider
Better performing stocks include
Gladstone Investment Corporation
ICG Group, Inc.
MCG Capital Corporation
). While Gladstone carries a Zacks Rank #1 (Strong Buy), the
other 2 companies have a Zacks Rank #2 (Buy).