We have reiterated our 'Neutral' recommendation on
American Capital Ltd.
), following a detailed analysis of the company's fundamentals in
light of the current economic environment. Also, the restructuring
efforts by the company have contributed to this stance.
AMER CAP LTD (ACAS): Free Stock Analysis Report
ARES CAP CP (ARCC): Free Stock Analysis Report
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In February 2012, American Capital announced the divesture of its
portfolio company Aptara Inc., following the divesture of another
portfolio company - CIBT Solutions Inc. in January. In addition to
this, the company continues to lessen risks from its balance sheet
through a number of initiatives like repayment and restructuring of
debt. We expect these restructuring initiatives to significantly
improve the company's financials over time.
Moreover, American Capital continues to see strong liquidity in its
investment portfolio and is focused on maximizing shareholder value
through organic growth besides originating new and attractive
investments. Further, the company looks forward to utilize
opportunities in Europe as the latter goes through some
difficulties, particularly in the capital markets and with respect
to sovereign debt. Also, new investment opportunities in U.S. are
expected to continue along with the economic recovery.
American Capital remains an attractive pick for yield-seeking
investors. During the second-quarter, the company repurchased 9.1
million shares of its common stock at an average purchase price of
$9.34 per share. Earlier in the first-quarter, the company extended
the program, initiated in 2011, for stock repurchases or dividend
payments through December 2013. Moreover, Fitch Ratings lifted its
outlook on American Capital to 'Positive' from 'Stable' as part of
its review of six Business Development Companies based on the
company's steady earnings performance.
The capital deployment efforts and the authorization of the new
share buyback program as well as the rating upgrade by Fitch raise
our hopes for an enhanced investor confidence in the company.
On the flip side, we believe that American Capital's earnings
continue to be affected by the spread between the interest rate on
investments and the interest rate at which it has borrowed funds.
An increase or decrease in interest rates could reduce the spread
between the investment rate and the borrowing rate, thereby
adversely affecting the overall profitability.
American Capital was significantly impacted by the negative
developments in the financial markets worldwide over the past
years. The global financial crisis limited the company's access to
the debt and equity markets and resulted in significant
depreciation of its investment portfolio and overleveraging of
The reduced volume of mergers and acquisitions in the market place
affected American Capital's ability to continue generating
additional liquidity through the sale of portfolio investments. The
company also witnessed several payment defaults on its financial
obligations. Though situations are slowly easing off, we don't
expect stability in the near future.
We believe that the risk-reward profile of American Capital is
currently balanced and hence, we have reiterated our 'Neutral'
recommendation on its shares.
American Capital currently retains its Zacks #3 Rank, which
translates into a short-term Hold rating. One of American Capital's
Ares Capital Corporation
) retains a Zacks #2 Rank (a short-term Buy rating).