We have reaffirmed our Neutral recommendation on
Hercules Technology Growth Capital, Inc.
). Our decision is based on the company's better-than-expected
first quarter 2012 results.
Hercules reported first quarter 2012 distributable net operating
income (DNOI) of 26 cents per share, 3 cents ahead of the Zacks
Consensus Estimate. This also surpassed the prior quarter DNOI by a
Improved results were primarily driven by a remarkable growth in
total investment income coupled with lower operating expenses,
enhanced credit quality and adequate liquidity levels. However,
significant increases in interest expenses and loan fees were the
Hercules is a safe asset for yield-oriented investors. As it is
a Regulated Investment Company (RIC), it is bound to distribute
majority of its earnings to the shareholders. Besides the regular
dividend, the company is expected to declare a special dividend to
distribute any remaining earnings within the same year. This kind
of a dividend policy is highly valuable for maintaining investors'
confidence in the stock.
The emergence of numerous technology-related companies and their
significant reliance on unconventional sources of funding has led
to the growth of venture capital markets. Consequently, this has
provided companies, like Hercules, with opportunities to earn good
returns by offering investment capital to such companies.
Though, Hercules is a relatively young company, its credit
performance and investment origination activities reflect a
positive trend and are expected to continue in the long term.
Moreover, Hercules is well positioned to benefit from the improving
M&A scenario, as there could be material appreciation in its
warrants position. This will benefit its investment portfolio in
addition to the equity and debt issuance in the reported
We believe that such efforts will help the company to gain
substantial market share and enhance its profitability in the long
run. The extension of the share buyback program will further
enhance investors' confidence.
Yet, insufficient experience poses as a threat for Hercules as
it fails to provide records in support of its investment approach.
Concentration risk also seems to thwart its growth prospects.
The persistent low interest rate environment and stringent
regulatory requirements are a likely to affect the company's
performance. As a Business Development Company, Hercules is
required to invest mainly in domestic companies, which, of late are
experiencing financial crisis.
As a result, it fences its access to the capital market.
Moreover, most of its peers are not exposed to such specific
regulatory requirements, which would restrict them from making
optimum utilization of investment opportunities that come
As a result, we believe that the risk-reward profile for
Hercules is currently balanced, and therefore we reiterate our
Neutral recommendation on the stock.
Hercules currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating. One of its peers
American Capital, Ltd.
) also retains a Zacks #3 Rank.
AMER CAP LTD (ACAS): Free Stock Analysis Report
HERCULES TECH (HTGC): Free Stock Analysis
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