Impacted by lower top line,
American Capital Ltd.
) reported first-quarter 2014 operating income of 2 cents per
share, significantly lagging the Zacks Consensus Estimate of 22
cents. Moreover, results compared unfavorably with the
prior-quarter earnings of 14 cents per share.
Lower-than-expected results were attributable to a disappointing
top-line performance and elevated expenses. Further, the low
interest environment during the quarter was a negative. However,
new investments and realization from portfolios were the positives.
Net operating income for the quarter came in at $5 million,
substantially down from $38 million reported in the prior quarter.
Net income was reported at $70 million or 25 cents per share,
against a net loss of $182 million or 66 cents per share in the
Performance in Detail
Total operating revenue was $84 million in the final quarter, down
29% from $118 million in the prior quarter, due to lower interest
and dividend income and reduced fee income. Additionally, operating
revenue lagged the Zacks Consensus Estimate of $132 million.
In the quarter under review, total interest and dividend income was
$71 million, down 23% sequentially. The weighted average effective
interest rate on the company's debt investments as of Mar 31, 2014,
was 9.1%, decreasing 90 basis points from the end of the prior
quarter. Moreover, fee income decreased 50% sequentially to $13
Operating expenses increased 3% sequentially to $68 million. The
rise in interest expenses was primarily due to elevated salaries,
benefits and stock-based compensation along with higher general and
As of Mar 31, 2014, non-accrual loans were $165 million,
representing 9.2% of total loans at fair value, up from $154
million of non-accrual loans, indicating 9.7% of total loans at
fair value, as of Dec 31, 2013. Net asset value (NAV) per share
came in at $19.29, up 7.0% annualized or 32 cents per share from
$18.97 as of Dec 31, 2013.
In spite of the volatile capital markets affecting valuations of
the investment portfolio in the quarter, the overall underlying
performance of American Capital's portfolio companies continue to
remain a positive. Management not only anticipates an improvement
in the portfolio along with an economic recovery but also expects
to post a better book value.
American Capital's asset coverage ratio declined to 528% in the
quarter from 588% in the prior quarter. The company made new
investments of $321 million in the first quarter while
strengthening its balance sheet. Moreover, the company recorded
$442 million of cash proceeds from the realization of portfolio
Share Repurchase Update
During first-quarter 2014, American Capital repurchased 8.9 million
shares for $137 million at an average price of $15.38 per share.
Since the beginning of the new repurchase program, adopted in Aug
2011, the company repurchased 101.6 million shares of common stock
for $1.2 billion at an average price of $11.74 per share.
Notably, in Mar 2014, American Capital's board of directors
suspended the repurchase program for an indefinite period.
American Capital's successful restructuring of debt empowered it
with sufficient operating flexibility. The company is also capable
of providing flexible financing solutions ranging from a variety of
senior debt and uni-tranche to mezzanine and equity co-investments.
Further, American Capital provides multi-currency funding with
underwriting platform globally, thereby boosting growth of its
Such benefits provided by the company compel private equity clients
to consider it as an investment partner, which in turn, helps it
diversify. The company formed ACE III, the fifth company investing
in private equity with $1.1 billion of assets and capital. Such a
move will bring in more institutional investors and expand the
asset management business.
Though the improved portfolio performance is expected to continue
with the economic recovery, we believe the low interest rate
environment and global cues might act as headwinds in the upcoming
quarters. Moreover, the capital deployment by the company is
expected to impact investors' confidence negatively.
Currently, American Capital carries a Zacks Rank #3 (Hold). Some
better-ranked companies in the same sector worth considering
PennantPark Investment Corporation
Old Second Bancorp
). All the 3 companies carry a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
AMER CAP LTD (ACAS): Free Stock Analysis Report
BANCFIRST OKLA (BANF): Free Stock Analysis
OLD SECOND BCP (OSBC): Free Stock Analysis
PENNANTPARK INV (PNNT): Free Stock Analysis
To read this article on Zacks.com click here.